Corporate strategies in R&D in financial services

Transcription

1 Corporate strategies in R&D in financial services Harpreet Khurana Columbia Business School Columbia University Geneva, Switzerland January 24 th, 2005

2 R&D in Financial Services Industry (FSI) - Definition 2 Classic R&D definition Systematic use of existing knowledge to produce new products or services and/or increase efficiency of existing products and services Our definition of R&D in Financial Services Systematic use of existing process knowledge to produce new products or services and/or increase efficiency of existing products and services

3 R&D examples across industries 3 Telecom Financial services Conduct both R&D on physical devices and systems integration R&D targeted mostly at provision of telecommunication services Transaction cost to FSI Reduction in transaction execution time Customization of existing products, introduction of new products/services Enablers Customer service and support software Technologies to support data mining and warehousing Computer systems design and related services Scientific Research and Development Services Systems integration part of the services Integrates physical products and devices Solves interoperability issues R&D is the service However, very little is related to product or process improvements related to services Source: Michael P. Gallaher, RTI International, Presented at Panel to Review Research and Development Statistics at the National Science Foundation, July 24, 2003

4 Parameters to measure impact of process driven R&D in FSI 4 Transaction cost to FSI Reduction in transaction execution time Customization of existing products, introduction of new products/services

5 5 Financial services - Landscape Retail Retail banking, credit card companies, retail brokerage, Insurance, Loans (home, auto), Mutual funds Institutional Investment Banking, Hedge funds (Prime brokers), Mutual funds (institutional), Clearing houses (stock trades) Venture Capital (VC)/ Private Equity (PE) (Investors) Buyout and Growth funds

6 6 Process Driven R&D in FSI - (1 of 4) Enabler and Drivers (Retail, Institutional) Enablers Lower costs and skill set availability in global locations Cheap telecom infrastructure Skill set clusters available in certain countries Drivers Increasing adoption of global sourcing by FSI firms Constant need to customize financial services products

7 7 Process Driven R&D in FSI - (2 of 4) Drivers (Investors VC/PE) Drop in exit valuations is changing return dynamics Investors prefer much lower funding ratios - efficient use of the capital VCs insist that companies should breakeven much faster, less emphasis on top line growth

8 8 Process Driven R&D in FSI - (3 of 4) Challenges Cost arbitrage focus can spell doom Intellectual Property Rights (IPR) issues Business Continuity Planning (BCP) issues High attrition rates loss of key knowledge Expected shortage of skilled manpower Issues of cultural sensitivity and communication

9 9 Process Driven R&D in FSI - (4 of 4) Organization Structure Key management team based in global locations Team members with global operational experience, willingness to work across borders Develop middle management, encourage decision making closer to ground

10 Process globalization - Framework 10 Source: IBM Institute for Business Value analysis Source: Adapted from IBM Institute for Business Value analysis Processes plotted in the lower two quadrants are the most likely candidates for globalization is R&D in Financial Services in one of these quadrants?

11 Dynamic nature forces firms to periodically evaluate their standing 11 1 Continual, internal process improvement projects will drive efficiencies into sub optimally performed processes until no further performance gains can be realized through internal means 2 Processes will gravitate downward due to market competition, and to the right as firms implement transformational initiatives to enhance performance Source: Adapted from IBM Institute for Business Value analysis 3 Competitor strategic moves will over time decrease the comparative advantage of differentiating competitors; firms have to find new ways to differentiate

12 Is R&D in Financial Services in one of these quadrants? 12 Where does process R&D presently reside on the axis of strategic criticality? Does the proposed location provide the firm with the greatest value proposition? Source: Adapted from IBM Institute for Business Value analysis Is the existing governance model still feasible?

13 13 Q&A Harpreet Khurana Columbia Business School, Columbia University (001) Rohit Arora School of International and Policy Administration Columbia University (001)

14 Case Studies and appendix slides 14

15 15 Case Study: Retail (1 of 4) Company Description Leading US credit card company with 3rd party global service centers in India, Costa Rica, Philippines Timeline Second service center planned with new service provider Oct 00 June 01 Sep 01 July 02 Nov 02 July 03 Hired VP to study feasibility of service centers in India in anticipation of increased business Launched pilot with Indian service provider Two months of pilots completed SLA s were met decided to ramp up Customer satisfaction scores down by 12-15% from domestic levels Customer satisfaction scores back at par with domestic levels through increased management focus Both service centers have stabilized. Performance is 5-7% below domestic levels. Firm deems this acceptable due to economics of operations - opens service center in Latin America

16 Case Study: Retail (2 of 4) 16 Drivers Streamline processes - service from single point Projected US CapEx investment high (~100 M USD) Manpower availability in US Risk factors Compliance and information security risk Leader hazard (process innovation can be risky), laggard loss (competitive pressure to innovate) Lack of standardized ratings for vendor management Drop in customer satisfaction

17 17 Case Study: Retail (3 of 4) Representative list of processes Customer support Early bucket collections, inbound telesales Collections Telemarketing Data entry Fraud Detection Recovery Dispute resolution Data Analysis

18 18 Case Study: Retail (4 of 4) Lessons Different processes at different points of readiness to offshore In-house processes not codified, move towards global service centers forces codification Decision making needs to be closer to the action

19 Case Study: Institutional 19 OfficeTiger, a Chennai, India-based, business outsourcing provider, is one of several firms that are enabling foreign investment banks to maintain a 24- hour equity research function It originally launched to provide document and presentation support for harried investment bankers The firm extended its offering line to include financial and valuation analysis, business intelligence support and a host of finance and accounting tasks OfficeTiger s securities research and analysis staff has increased from in 2002 to 150 professionals The company supports its investment banking clients by undertaking custom research projects, rapid turnaround financial model creating and analysis and other junior investment banking level work One-third of its work involves deadlines of less than one hour Source: IBM Institute for Business Value analysis

20 20 Case Study: Venture Capital (1 of 3) Company Description Leading US based buyout fund focused on improving the efficiencies of acquired companies Timeline Acquired a US based firm providing information platform for corporate jet owners, managing fleet maintenance information and providing web based technical support

21 Case Study: Venture Capital (2 of 3) 21 Drivers Cut operational costs as fixed cost needed to go down Extra money allowed firm to offer value added services Data collection work for new business by proactively calling clients Risk factors Managing of cross border operations Locating some senior management in India Drop in customer satisfaction due to global services centers Bottom line Year 2000 Sales: USD 20 M Free Cash Flow: USD 5 M Year 2004 Sales: USD 20 M Free Cash Flow: USD 10 M Even though sales were flat from 2000 to 2004, firm survived due to improved cash flow situation leading to better exit valuation

22 22 Case Study: Venture Capital (3 of 3) Lessons In-house processes not codified, move towards global service centers forces codification Rise in valuation multiples as global sourcing matures Limited partners (LPs) expect better returns through globalization of R&D processes

23 Global Sourcing is no longer cutting edge; FSIs have been employing the strategy for nearly a decade 23 Source: IBM BTO, company web sites

24 As global sourcing becomes mainstream, firms are targeting components further up the value chain 24 Source: Rediff News, 12 Sept 03; Bloomberg News, 08 Aug 03; EIU ebusiness forum, 18 Aug 2003; The Telegraph, 25 April, 2003

25 Global sourcing is evolving, as countries develop and market their strong competencies in niche areas 25 Source: The Gartner Group, 06 Oct 2002

26 Economics of global service centers (1 of 3) 26

27 Economics of global service centers (2 of 3) 27

28 Economics of global service centers (3 of 3) 28