Capital markets industrialization 2.0

Finding a path to sustainable return on equity (ROE) performance

The capital markets and investment banking (CMIB) industry is in a period of unusual strife. Internal cost pressures and external regulatory demands have created a unique tension that traditional transformation efforts (industrialization 1.0) can no longer address. The need to pivot from marginal operational improvements to wholesale operating model shifts and dramatic increases in agility, requires a new set of tools and practices to achieve long-term sustainable growth. As such, an innovative and more comprehensive approach to achieving sustainable cost efficiency, scale, and operating leverage is emerging: Industrialization 2.0 (IZ). IZ 2.0 is composed of five change levers that allow CMIB firms to address the current tension and set themselves up for future success.

Five industrialization 2.0 levers

Explore each of the five industrialization 2.0 levers and how they can be implemented to realize substantial cost savings:

Service management: We find the lack of metrics to assess process performance to be particularly troubling. Without the ability to measure performance, process "drift" alone can eliminate hard-won reengineering gains in just a few years. Furthermore, the entropy created by rapidly changing systems and organizational constructs can both increase and accelerate that loss.

Lower cost of change: We find that the investments CMIB firms are making for transformation efforts are all directed at reducing run the bank costs—that is, toward the smaller cost pool. Many banks are also experiencing difficulty in realizing expected cost efficiencies through these transformation investments.

Cost mutualization: Our analysis suggests that based on CMIB firms' average performance the industry still needs to reduce operating expenses by an additional 10-15 percent to deliver "desirable" levels of return to the market. After enduring repeated cost-cutting over the past few years this seems difficult for any bank to achieve organically, increasing the pressure to create new commercial and utility structures.

Digital client interface: As employees, they are frustrated by the need to work with ancient and highly fractured applications, the incessant need to "reconcile" between disparate systems to get a simple view of status, the manual effort required to feed data from one technology environment into another to successfully process trades, and, in general, the experience of spending a large portion of their time serving as a "human logic gate."

Bottom-up transformation: Bottom-up transformation can be achieved very effectively through Kaizen–like process improvement tools and skills. Some more adventurous firms are also successfully investing in a suite of other capabilities.

The current stress in the CMIB industry is pushing it to the brink of a radical transformation (industrialization 2.0) that may:

  • Help banks acquire service management discipline in line with their suppliers
  • Give birth to a new and efficient supply chain
  • Drastically lower the cost and increase the speed of change
  • Reconfigure banking operating models for success in a commoditized future
  • Reinvent the client interface
  • Rebuild the employee value proposition

Through this process, we believe the industry will emerge leaner, more agile, and better able to achieve and sustain a competitive ROE.

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