SECTOR STRATEGIES: CREATING SUSTAINABLE COMPETITIVE ADVANTAGE THROUGH ECOSYSTEM SOLUTIONS

Transcription

1 Financial Services POINT OF VIEW SECTOR STRATEGIES: CREATING SUSTAINABLE COMPETITIVE ADVANTAGE THROUGH ECOSYSTEM SOLUTIONS AUTHORS Jason Ekberg, Partner Reet Chowdhuri, Principal Ajit Raikar, Senior Advisor

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3 INTRODUCTION Most banks would like to believe that they have a sector strategy. The reality, however, is that these claims are too often wide of the mark. In our experience, standard sector strategies are owned by the wholesale banking division, and are used solely as a means of allocating credit or organizing teams. What we define as a sector-led strategy is very different, indeed: It consists of an integrated ecosystem approach towards targeting sectors, one that entails tailoring products and coverage at a bank-wide level for the sector ecosystem in other words, working across corporate, commercial, small and medium-sized enterprises (SME), and retail to serve clients. Those banks that get sector strategies right outperform their peers by a significant margin. An integrated sector approach should appeal most to any bank that has an existing wholesale and/ or retail franchise but is thinking through how to leverage this platform to drive growth. This need not be only applicable to global universal banks, which are looking to get more out of their existing franchise, but is equally relevant to local and regional banks looking to build out an attacker strategy. Clearly, however, the starting points will be different, as well as the ability to move quickly to capture the opportunity. The key point is to understand how a more integrated approach can help the bank unlock new value by focusing on the sector ecosystem over the client pipeline. What is an integrated sector strategy? How, in practice, do banks realize the benefits of the strategy? This Oliver Wyman Point-of-View lays out the strategic and operating model requirements to deliver. Exhibit 1: How sector solutions compare to other bank strategies ACCOUNT PLANNING Anchor clients Focus: Largely anchor client Large Corp/Wholesale led Banking products requited by Actor Anchor SOW focus VALUE CHAIN SOLUTIONS Anchor client s value chain Anchor clients Focus: Value chain of anchor GTB led (+ Large Corp and SME/ Micro for supplier/distributor) GTB led solutions (trade + cash) Anchor + captive value chain players (suppliers/distributors) Rest of ecosystem participants SECTOR SOLUTIONS Anchor client s value chain Multiple anchor clients Focus: Entire ecosystem All BUs, bank-wide CCT led by Sector Head All Group products incl. wealth, insurance, multifinance digital enabled All players in ecosystem; Multiple anchors Focus of each approach Bank s BU Products Client coverage Copyright 2016 Oliver Wyman 3

4 HOW CAN A TRUE SECTOR STRATEGY DRIVE IMPROVED RETURNS? Exhibit 2 shows how one of our clients boosted its financial performance from implementing an integrated sector strategy. Return on risk-weighted assets (RoRWA) increased by 20 percent, while low cost operating account balances (CASA) 1 increased by 35 percent and acquisition costs declined by 25 percent. We see five key factors that drove this improvement in performance: Go to bank reputation: Deeper relationships are generated as the bank brings the full range of their sector knowledge and expertise Increased customer loyalty: The bank is able to support the client across their value chain, generating a true partnership Cross-selling culture: Targeted investments, planning and coverage, reinforced by shared KPIs, generates a cross-selling culture, and ongoing identification of revenue opportunities Improved economics: A sector strategy sharpens the bank s own understanding of the sector, helping identify the most profitable opportunities across segments and products Sharper risk management: Greater familiarity with the sector ecosystem helps banks to identify clients, hone pricing, and manage sector risk Essentially it comes down to creating stickier relationships that tap transaction-rich ecosystems to capture new value. Exhibit 2: Example client impact after successful sector strategy RoRWA (%) +20% 3.4 CASA ratio (indexed) +35% 135 Acquisition cost per retail customer (indexed) % Traditional approach Sector strategy approach Traditional approach Sector strategy approach Traditional approach Sector strategy approach Source: Oliver Wyman 1 CASA stands for Current Account Savings Account and it is the primary transaction account a client will use with a bank 4 Copyright 2016 Oliver Wyman

5 WHY DO CURRENT SECTOR STRATEGIES FAIL? Despite insisting that they have adopted a sector strategy, most banks tend to focus on too many sectors in a bid to achieve portfolio diversification. Meanwhile, risk exposures for each sector are almost entirely decided by the wholesale bank, with credit being the central issue. Consequently, such banks tend to have a strong lending franchise but engage in minimal crossselling, resulting in a return on equity (ROE) and profitability that fall well below full potential. A silo mentality, between and within both the wholesale and retail banks, governs the sector approach, thus under utilizing strengths across the organization and limiting revenue opportunities to capture the potential across the sector ecosystem. Exhibit 3 reflects our assessment of why the prevalent silo mindset is ineffective. Exhibit 3: Key challenges faced by the traditional banking business model AREA ORGANIZATION ASSESSMENT OF TRADITIONAL APPROACH No accountability for overall sector performance, with no sector owner and no sectorwide KPIs. COVERAGE Coverage typically fragmented across business segments with limited cross-selling. Some banks have common segment ownership across corporate, commercial, and SME, but linkages with retail remain a challenge. PRODUCTS Ability to deliver bundled solutions to the sector as a whole impeded by the fact that product teams are usually housed within different segments. PRICING Limited ability to cross-subsidize at a sector level. For example, the Commercial Banking unit is unable to offer lower margin loans to customers in order to obtain a higher share of more profitable auto loan business, and be compensated by the Retail Banking unit. RISK Risk management strategy performed at a macro level with implementation at a segment level with a view to managing sector/single name concentrations. KPIS AND INCENTIVES MARKETING Limited success in leveraging dominance in one segment, for example where the Large Corporate banking division has not grown business in other segments, such as Retail. This concept has been attempted through a mix of referral bonuses and additional KPIs, but results have rarely been successful. Limited ability to project broad-based sector expertise, even with sector dominance, since sector teams may not exist across different segments. Weak Strong Copyright 2016 Oliver Wyman 5

6 A SUCCESSFUL SECTOR STRATEGY The delivery of a sector solution requires banks to break down existing product and coverage silos, bringing all of their products and capabilities to the sector ecosystem, and ensuring close coordination between their wholesale and retail banking segments. New products or coverage models are not necessary. The aim is to make different product and coverage groups work seamlessly together to provide effective solutions to all players in the sector. Exhibit 4 below illustrates the difference between the traditional approach, and an integrated sector approach. Exhibit 4: Traditional sector approach vs. integrated sector approach in the Automotive sector Traditional Approach Component supplier Automotive manufacturer Dealer Sub-dealer End customer Covered by SME/ Commercial Covered by Corporate Covered by SME/ Commercial Covered by Multi-finance Retail Covered by Multi-finance Retail/Insurance Holistic Sector Approach Component supplier Automotive manufacturer Dealer Sub-dealer End customer Covered by automotive sector team Comprises a sector lead, and representatives from corporate, commercial, SME, retail, insurance and multi-finance 6 Copyright 2016 Oliver Wyman

7 CASE STUDY HEALTHCARE COVERAGE IN AN ASIAN BANK: VISION AND VALUE PROPOSITION Our case study bank developed innovative solutions that tackled a wide range of existing and potential future challenges in healthcare (Exhibit 5). Healthcare is diverse, involving the public sector, insurers, and private-sector players such as hospitals, physicians, and pharmacies. Massive volumes of information flow across the ecosystem. This includes claims submission and processing, invoicing, payments, and claims receipts. As they work with the entire ecosystem, banks stand at the center of these flows, and hence are in an ideal position to view the sector as a whole. Exhibit 5: Simplified healthcare sector ecosystem challenges and solutions CATEGORY SOLUTIONS PAYMENTS Apple Pay-type solutions for patients to settle bills through one touch and instant verification COLLECTIONS Virtual account implementation leading to automated claims processing and fulfilment, and integration of straight-through payments, reconciliations, and remittance advice Digitizing invoicing solutions, resulting in seamless supplier management and elimination of manual processes and reconciliations FINANCING Innovation in point-of-sale solutions, providing financing based on cash flow, support capacity management, and analytical tools Innovative healthcare-specific financing models, and the provision of healthcare skills and advice, including simple analytics such as working capital projections and peer benchmarking Financing platform for claims receivables for hospitals to cover the period until receipt of money from insurers Settling medical bills for retail clients using claims on insurers as collateral, and where cashless settlement is not available SUPPLY CHAIN Supply-chain solutions, where hospitals can purchase from pharmaceutical equipment manufacturers and broader participants at a lower cost of financing, using straight-through ordering and financing RETAIL Partnerships with staffing companies, providing solutions to the company and to staff, such as payroll solutions that link to invoicing from the hospital or clinic Partnerships with medical communities, such as offering new business starter kits or innovative healthcare loans, to foster industry growth INSURANCE Employees who provide real-time health information could be eligible to pay lower premiums, based on available digital medical history and fitness information. Copyright 2016 Oliver Wyman 7

8 IMPLEMENTING A SECTOR STRATEGY: HOW TO GET IT RIGHT Once the bank has identified the sectors to target, it needs to develop a bank-wide ecosystem approach to extract the maximum value out of each sector ecosystem. Such solutions cannot be provided through a siloed approach. They require co-ordination of the retail division with the Corporate Banking division, as well as with Transaction Banking and Treasury. We see a checklist of seven elements that need to be in place. Exhibit 6: Checklist to successfully implement sector solutions KEY ELEMENTS TO IMPLEMENTING A SECTOR STRATEGY 1 VISION 2 SECTOR 3 SECTOR 4 ORGANIZATION 5 KPIS 6 MIS 7 QUICK PURPOSE AND VALUE PROPOSITION Develop and quantify sector ecosystem, and product positioning to drive vision and value proposition ENTRY APPROACH Identify the best approach to establish sector access points based on existing client relationship and sector dynamics OWNERSHIP Assign single point of accountability (sector czar) to own sector strategy across the bank; with corresponding KPIs & COVERAGE Assign implementation responsibilities across business units, including products and distribution AND INCENTIVES Ensure that KPIs and incentives are aligned across the organization including reward schemes for distribution staff & REPORTING Ensure sector reporting provides consistent, comprehensive, actionable insight into sector WINS TO BUILD MOMENTUM Identify and execute any immediate actions that can help to achieve strategic vision Critical enablers 8 Copyright 2016 Oliver Wyman

9 VISION AND VALUE PROPOSITION: Typically, banks will develop their strategies within the segment coverage team working with the products. However, in developing ecosystem strategies, there needs to be a greater sense of collaboration at a bank-wide ecosystem view to have a clearer sense of how the end-to-end ecosystem fits together via information and payment flows, what pain points are common and critical across participants and how this sector builds on the bank s capabilities. This in turn needs to be grounded in the competitive dynamics and digital context (re)shaping the future industry evolution. Exhibit 7 illustrates a typical end-to-end approach for developing the sector proposition. Exhibit 7: Approach to defining the sector-value proposition KEY STEPS A Identify ecosystem and customer needs KEY ACTIONS Identify the total revenues, loads volumes, CASA volumes, and number of players at different parts of the ecosystem Define focused ecosystem based on market potential analysis Develop understanding of pain-points of customers across ecosystem B C D E Define Bank s current positioning and area of focus Define vision and target Develop solution through test-and-learn Pilot and implement Identify areas of product opportunities based on understanding of customer pain points Determine potential areas of focus based on where the bank is relatively overweight or underweight in market share (by ecosystem stage, product etc.) Define areas of focus Set overall vision for medium and long term Develop quantitative targets for different parts of the ecosystem based on identified strengths and weaknesses Working with the ecosystem, develop potential product solution Adapting a test-and-learn approach and continuously make quick iterations in solution offering that can cover all players in the ecosystems Develop client value proposition based on client needs and developed vision and targets for different parts of the ecosystem Determine actions required by business unit and region to implement strategy Copyright 2016 Oliver Wyman 9

10 SECTOR OWNERSHIP Most banks struggle with the issue of sector ownership. Often they use virtual teams to manage the sector. However in our experience, members of these virtual teams only devote part of their time to this role, thus undermining commitment to the sector. Banks therefore need to establish a single point of accountability for sector ownership, bank-wide. This role of sector czar will need to be sufficiently senior, considered an industry insider who, ideally, has been exposed to both retail and wholesale banking, and is well-respected across the organization. The sector czar should take overall responsibility for the sector strategy by working with segments, products, and regions, as well as with subsidiaries where relevant. ORGANIZATION AND COVERAGE To ensure that existing organization silos are broken, the sector czar should not be based within the existing retail or corporate business unit. Since the sector strategy operates throughout the bank, the sector czar could report directly to the CEO, or to a new dedicated sector director, or to someone with bank-wide responsibility such as the CFO or the Head of Marketing. The bank also needs to identify responsible stakeholders in business, product and support divisions, including Corporate and Investment Banking, Commercial, SME, Distribution, Retail, Risk Management, Global Transaction Banking, and Treasury. This would in effect establish a sector client service team (CST). Communications among the CST members should be maintained through regular meetings and other mechanisms, and reporting templates should be put in place. A process should be established to manage and identify key risks, and review limits and appetite for the sector. Overall responsibility for implementation remains with the different business units. 10 Copyright 2016 Oliver Wyman

11 KPIs AND INCENTIVES: To foster collaboration between working groups in different business units, one essential element is the need to create incentives, via shared KPIs, to achieve a common goal. Shared KPIs need to be supplemented with bank-wide incentive schemes and subsidies, including reward schemes for distribution staff to achieve sufficient focus on high-value sectors. HOW TO GET THERE In our experience, successful sector strategies focus on quick wins using pilots. These strategies have the following characteristics: Organized around one or two key anchor clients within the sector, and targeting no more than 10 sector participants in all Set clear targets and milestones to monitor Have a dedicated SWAT team to support and track progress Involve about two weeks of RM as well as regional team training to onboard the pilot team effectively Run for about four months to gather sufficient test and learn data Are iterative and adaptive, modifying pilot design based on initial outcomes Overall, we believe that a bank should ideally be ready to roll out a sector strategy within 12 months. At the outset, the bank is likely to take a little more than three months to identify the attractive sectors in its home market, and then understand sector challenges. It will then take another three to four months to set up the necessary internal organization. Finally, it will need three to four months to launch a test-and-learn pilot with a couple of anchor clients in each sector to refine and finalize the design, and plan for a broad-based rollout. Given the size of the prize in terms of greater profitability, lower cost of acquisition and greater access to low-cost funding, we believe that the time has come for banks to focus their minds on the sectors in which they can excel. Copyright 2016 Oliver Wyman 11

12 Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, and organisation transformation. For more information please contact the marketing department by at info-fs@oliverwyman.com or by phone at one of the following locations: EMEA AMERICAS ASIA PACIFIC ABOUT THE AUTHORS Jason Ekberg is a Partner in Oliver Wyman s Corporate & Institutional Banking Practice jason.ekberg@oliverwyman.com Reet Chowdhuri is a Principal in Oliver Wyman s Corporate & Institutional Banking Practice reet.chowdhuri@oliverwyman.com Ajit Raikar is a Senior Advisor in Oliver Wyman s Corporate & Institutional Banking Practice ajit.raikar@oliverwyman.com Copyright 2016 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.