Financial Institutions Reimagined: A Disciplined Approach to DisruptionPartner at Oliver Wyman Partner at Oliver Wyman
Walk into the boardroom or executive suite of any large financial institution these days and you are bound to hear a discussion of the company’s digital strategy. Behind much of the motion and activity, though, is the reality that the technological transformation of financial services all too often involves an ad-hoc, haphazard and compartmentalized approach.
As the stakes of disruption rise, we see many companies exploring all kinds of digital initiatives, from automating routine practices to strengthening their bench of software developers and digital marketers. Yet, many of these ventures are viewed as one-off IT or marketing projects. And that’s not counting the many “random acts of digital” that are scattered across the organization and only loosely tied to the company’s overall strategic goals.
The most innovative financial leaders recognize that it’s no longer about their institution having a digital strategy. It’s about having their business digitized—rethinking how the combination of new technologies and ever-evolving customer needs will transform their core operations and fuel their growth.
What do we mean? Instead of creating a to-do list of tactics, today’s most digitally savvy executives are taking a comprehensive and disciplined approach. They are looking closely at where their clients are going—not where they are today—and developing a clear point of view of how they might capture those emerging and underserved customer needs, even if it means entering an industry they had never been in before. They are investing in new capabilities, such as design-based thinking, data analytics, behavioral science and partnership development. In addition, they are looking at how technology will affect every aspect of their company, from the products and services they sell to the number and types of people they hire to the management structures and governance policies necessary to speed decision-making and innovation.
Looking Over the Horizon
Some of these changes may start off small. Consider a credit card issuer. Today, it has teams of risk managers who are responsible for combing through transaction data to detect and mitigate fraud. Going forward, much of this work will be tackled by computers using sophisticated algorithms and machine learning. This will require significant changes to its human capital model, from reskilling work to focus on tasks that require judgment or reallocating people to entirely new activities and jobs.
Transformational change is always hard. What steps can a company take to begin charting a new, digital course?
Other efforts may be more far-reaching. Only a short time ago, the prospect that a white-shoe investment bank would enter the rough-and-tumble world of retail banking would have been unthinkable. Yet, in less than a year, one major Wall Street firm—by redeploying risk assessment algorithms from its existing businesses and recruiting talent from both inside and outside the company—is now offering personal loans that serve an entirely new customer base. The digitization of finance, in other words, is giving rise to the same kind of plug-and-play flexibility that has been standard practice in the technology sector for years.
Of course, transformational change is always hard. So, what steps can a company take to begin charting a new, digital course?
First, take a staged approach to a digitized future. You must clearly understand how you are delivering value today and the competitive forces reshaping your industry. At the same time, try to envision what your customers will value—and what they won’t—roughly five years or so from now. Not too far out, not too close in. Then, looking backward from that point, imagine a “halfway stage” and milestones that you will pass as you move from the present to the future. What are the day-to-day needs these customers will have? Are they current or new customers? What kinds of companies are best-positioned to fulfill those needs? And what new capabilities—technologies, operating approaches, metrics—must be developed internally or acquired to get there? We call this process choosing an archetype, or developing a clear perspective on where their business is headed and its implications for creating value.
Second, invest in the future. Digitizing a business can help realize dramatic cost reductions, but much of those savings will ultimately be whittled away by competitive pressure and passed along to customers. To truly reap those benefits, companies must first sculpt their businesses by doubling-down on existing capabilities that will drive a competitive advantage, and perhaps, shedding some parts of the business altogether that may not be as relevant in the future. It also means acquiring new capabilities by plugging into partnerships or making a few carefully chosen investments in areas very different from your current operating business today—and applying new metrics, governance structures and a different management mindset to these efforts. It’s OK, even advisable, to start small. The focus, at least at first, should be on systematic and accelerated learning.
Finally, de-risking the future. For example, some companies have set up business incubation units within their existing corporate structure to develop new organizational muscles. After identifying the most critical corporate initiatives, you can jump-start their success by ring fencing the resources and giving these efforts the autonomy and flexibility to grow. Shower them with senior leadership attention. Give them privileged access to sales and marketing support. Remove any organizational barriers that might impede their success, while making sure that rigorous transparency, accountability and governance standards are in place. This sustained commitment to onboarding the talent and skills required for incubation is different than making a few venture capital bets. It also requires significant management discipline. All too often, incumbents stick with initiatives when customers and competitors have marched on. Today’s leaders must actively manage a portfolio of initiatives, accelerating some and divesting of others, dispassionately and quickly.
As digital technologies change how people live and work, financial leaders will need to determine how their institutions adapt to this broadly reordered marketplace. Instead of overanalyzing or over-investing in the face of an uncertainty, we believe the most successful executives will articulate a clear view of where they believe their business is headed and embark on a deliberate, systematic approach to getting there.