A Wide World of Risk

For example, large banks must figure out how to simultaneously expand internationally, strengthen their "local, Main Street" appeal among U.S. customers, and cut costs, without reducing head count. All financial services companies must strengthen regulatory compliance capabilities while greatly reducing the costs and inefficiencies that bloat those efforts. And institutions must strengthen their cross-selling efforts to goose revenue, but without ticking off customers by pitching the wrong offer, selecting the wrong communications channel, or cross-selling at an inopportune time.

These and other demands appear at a time when a relatively stable 24-month period seems to have neared an end. "Given the electronic nature of markets today as well as the number of hedge funds and shorter-term strategies that exist, global markets can move and shift very quickly, which places a much higher emphasis on risk and risk management than ever before," says Stephen Reiser, associate partner, financial markets strategy, with IBM Global Business Services. "While we've seen some relatively stable periods in the past couple of years and bullish market sentiment, that type of dynamic can change very rapidly."

Those twin complications require greater innovation — within financial services companies and the consulting firms that assist them. In his 2006 research paper "The Financial Services Survival Guide," Forrester Inc. Vice President and Principal Analyst Bruce Temkin directed the industry to the garage. That's where Whirlpool hatched its $30 million Gladiator Garage Works product line of workbenches, appliances, and storage "solutions." The new products — developed by Whirlpool anthropologists and designers who visited men in their garages — represented a concerted effort to move beyond products into customer-centric solutions. Financial services firms, Temkin suggests, should pursue a similar transformation.

They might start by hiring demographers; Temkin reports that the needs of the "mass affluent" — U.S. consumers who possess greater wealth and financial needs than average consumers but not enough to garner country-club treatment from banks and investment firms — are largely neglected. So, too, are other demographic slices.

When Bravard visited the head of a large insurance company, he joked that life insurance must be booming: Customers purchase policies and then outlive them as life expectancy elongates. "He replied, 'That's not funny at all — people don't die, and because they're smart, they don't buy life insurance anymore. What people need is death insurance — insurance you collect in case you live longer than you thought — but we don't know how to build that yet.'"

Consulting firms will need to inject that sort of creativity into the services they deliver to financial services companies. Doing so may require a new approach for some firms: Veteran financial services consultants say that their clients expect deeper subject matter expertise (but expertise that is clearly linked to strategy), smaller teams, and more targeted solutions.

"They don't want someone who has done expense reduction at Toyota," notes Eddie Niestat, who heads PA Consulting's U.S. financial services practice, "when they can just as easily find someone who has done expense reduction at Chase."

Manage Risk More Effectively and Efficiently

Many banks, Reiser notes, are "moving beyond traditional areas of risk management to a broader view across a range of instruments and then trying to tie that perspective back to enterprise risk. … The level of analysis has ratcheted up. I don't think that any firms really have the complete risk management model in place, but they are working toward it."

That work requires assistance, and a deep level of risk-management expertise within consulting firms. Consulting firms who serve the industry, Reiser says, "need to develop strong expertise in operational risk, market risk, and liquidity risk."

In the regulatory risk arena, the notion that the Sarbanes-Oxley Act, anti–money laundering rules, Basel II, new privacy and identity theft rules in the U.S., and the Markets in Financial Instruments Directive (MiFID) in Europe, among other new regulations, represented a fleeting "perfect storm" of compliance demands has given way to a more sobering realization.

"Most of my clients agree that the current degree and pace of regulatory change is not going to go away," Bravard notes. MiFID, in particular, represents a new breed of business regulation that affects not only the way companies account for and report revenue, but also how they actually generate revenue. MiFID, which creates a single market and regulatory authority overseeing investment services in 25 European Union countries, creates "tremendous challenges" much deeper into the workforce hierarchy of financial services companies, Bravard notes.

Financial services firms desperately need to figure out how to handle numerous compliance demands with greater effectiveness and efficiency. Different firms refer to that need, which is also one of the objectives of the U.S. nonprofit Open Compliance and Ethics Group (OCEG), as compliance "rationalization" or "optimization."

PA Consulting recently scrutinized a U.K-based financial services firm's entire regulatory and compliance regime and discovered that some frontline employees were being "compliance-checked" by eight to 10 different colleagues. Niestat and his team redesigned the company's governance, risk management, and compliance (or "GRC," an acronym coined by OCEG and embraced by a growing number of software and services firms) processes. "We reduced costs by 30 percent while also adding to the overall effectiveness of the compliance processes," he reports.

Those sorts of engagements should be plentiful during the next two years. "There is a major opportunity here to figure out how to more effectively and efficiently comply with regulations," Kocjan agrees. "I think that this is a way for clients to save a lot of money and at the same time reduce risk."

Foster Future Growth

Deloitte Consulting recently "acquisition adjusted" the growth of several larger financial institutions and concluded that "growth is rather modest or even in decline," Kocjan explains. "Some life insurance companies, for example, are growing at 1 percent a year. … I think that the biggest challenge organizations face is: How do we grow organically?"

Mortgages and home equity loans will soon be less popular answers to that question than they have been during the past two years. Instead, many financial services institutions want to revamp cross-selling and customer segmentation programs. "One of the areas that continually crops up is the need to better share customers across lines of business," says Reiser. This requires better performance-management frameworks, more agile and flexible IT systems, and new management models. Those improvements can help financial services firms target the right prospects through the right channels at the right time — and then retain them.

"Cross-selling has always been the holy grail of financial services," Kocjan notes, "but we need more thoughtful cross-selling. Surveys point to a decline in customer satisfaction among many large financial institutions. And one of the problems the institutions have is that they don't think through whom to cross-sell to — or how. For example, when a customer walks into a branch and asks for a home equity loan, the customer should not be put through pain and suffering. There should be an almost immediate turnaround and a close on that loan, particularly if the customer is credit-worthy."

Cut Costs, Carefully

"In the past, efficiency gains usually meant, 'Let's cut heads,'" Niestat explains. "That's no longer the case." For good reason: Evidence suggests a strong relationship between the experience and satisfaction of customer-facing employees and customer retention. A few years ago, First Horizon National Corporation, a Memphis, TN–based regional bank, enlisted Mercer Human Resources Consulting to help mine its workforce data to make a compelling connection: The resulting analysis suggested that the company could increase revenue per customer by $15 million per year by boosting the average tenure of customer-facing employees by one year.

Kocjan says that his firm's research shows a similar link between customer attrition and employee turnover. "The cost of losing good staff is enormous," he says. "A top priority for financial services institutions really will be targeting, training, managing, and nurturing their people in new and creative ways. … In a way, it boils down to thinking about employees almost as you would think about your customers: What is the right employee experience? How do you get emotional engagement between employee and employers?"

One way is by focusing efficiency efforts more on processes. IBM has conducted a fair amount of projects involving the consolidation of several discrete clearing and settlement processing centers within a company. Kocjan reports that clients are more interested in reducing costs through process redesign and the development, for example, of more sophisticated procurement techniques (which reduces the cost of purchased goods without touching head count).

Many financial services firms have been loathe to lay a finger on their underlying IT infrastructure. "This big mess of inflexible technologies behind the scenes has been a problem," says Temkin, "but it has not been as big of a problem as we think it's going to be."

That's because Temkin and his Forrester colleagues, among others, expect a significant change in customer needs and expectations to take root in the coming years. And no matter how many state-of-the-art CRM applications financial services firms implement, those applications will fail to deliver if the technology architecture they sit upon collapses.

"When we go deep into some clients' IT architecture and then ask them specific questions about their technology environment, their average error rate in responding to those questions often hits 100 percent," says Bravard. "For example, they tend to have twice the amount of code that they think they have. This is scary."

Frightful situations present opportunities for consulting firms, but the same sales pitches and consulting projects may not do much good. In the past, Bravard says that many consulting and technology firms presented financial services clients with the same beautiful picture of what their ideal technology environment should look like. Rather, clients need an accurate and thorough snapshot of what their IT architecture looks like right now, in all of its nonglory. This reality check ought to serve as the foundation for meaningful technology projects, Bravard stresses.

Customer — and Client —Service

Those answers will also help financial services companies decide what sort of consulting services to invest in. Many of those decisions will involve projects that include significant customer experience facets.