Operational excellence in investment banking through partnerships

24 July 2023 Consultancy.uk

In today’s rapidly evolving landscape, investment banks are increasingly struggling to maintain operational excellence. While most banks lead their operational excellence endeavours in-house, Nikhil Shah and Theadora Bulajic from Elixirr make a case for building more value through external partnerships.

The reputation of an investment bank hinges on its products, service quality, and public trust. However, beneath these pillars of customer experience often lies a considerable reliance on operations, which includes key processes required to run the bank (product processes, risk management, etc) and technology.

Yet over the past years, the speed and degree of regulatory requirements and technological innovation has surpassed the ability of most investment banks to handle internal operational processes that support the evolving client needs. While this may have been manageable in the past, times have changed.

Building Operational Excellence in Investment Banking

Investment banks therefore should consider different avenues to delivering their operations. One way in doing so is in making more use of external partnerships, enabling investment banks to concentrate on their core strengths.

The traditional approach of benchmarking operational processes solely against peers to determine what ‘good’ looks like has become insufficient in the ever-evolving landscape of investment banking. To truly excel, investment banks must now expand their horizons and benchmark themselves against not only their peers, but also technology firms and outsourcing providers.

Even the esteemed Tier 1 banks have recognised the need to forge partnerships with technology firms and other banks to outsource certain operational processes, acknowledging that they are better off when they partner with the industry experts.   

Early examples

A prime example of this shift can be seen in the case of MUFG, which outsources its custodian provider to benefit from Citi’s technology capabilities and extensive sub-custodian network. This allows MUFG to pass on value-added benefits and cost efficiencies to its clients.

Similarly, prominent institutions like BNP Paribas, Barclays and Credit Suisse have teamed up with FIS to offer innovative futures and cleared over the counter (OTC) servicing. This collaboration helps them address the challenges of increased volume and decreased margin by centralising critical post-trade tasks onto a market-leading, fully funded system.

In today’s landscape, investment banks facing constraints in terms of budget, expertise or resources must recognise that they cannot surpass all market competitors in every service or process to offer top customer experiences. By forging strategic partnerships, banks have access to a realm of expertise and cutting-edge solutions, propelling operational efficiency, streamlining processes and slashing costs.

Moreover, dynamic third-party firms evolve at an astonishing pace, meaning they can enrich investment banks with an array of additional benefits to seize upon. Take, for example, Finastra‘s introduction of ALM IQ, a groundbreaking solution empowering community banks to revolutionise their risk and compliance management for their balance sheets. This compelling narrative underscores the transformative potential that partnerships unlock for investment banks.

Nikhil Shah and Theadora Bulajic, Elixirr

Worried about losing control? This is just a myth

It is imperative to debunk the misconception that partnerships equate to loss of control. A well-executed partnership is the epitome of control. Establishing clear service level agreements (SLAs), robust escalation paths, and transparent handshakes, alongside stringent quality controls and regular evaluations, form the bedrock of any thriving third-party relationship.

Additionally, it is crucial to implement effective governance and processes that encompass the following key aspects:

  • Regularly evaluating the commercial viability of the agreement, comparing the quality of service received with alternative market options
  • Ensuring robust and tested business continuity plans are in place for all third-party relationships
  • Exercising sufficient oversight and challenge from the second and third lines of defence, as and when required

What’s more, the industry is witnessing an escalating focus on mitigating systemic risks and promoting risk-averse practices among banks. Central banks worldwide are intensifying their scrutiny of third-party risks due to the exponential growth in the number of providers in the industry.

The Bank for International Settlements (BIS), which supports central banks in their pursuit of monetary and financial stability, is also committed to monitoring banks’ third-party risk management and arrangements to address concentration risks.

Getting started

With operational excellence the goal, investment banks must acknowledge that they can’t do it all. It is time for them to embrace the fact that while certain services are worth retaining in-house, others may be more efficiently and effectively outsourced.

To assess which areas could benefit from external partnerships, compare the different parts of operations with the dynamic market landscape, including technology firms and business process outsourcing firms.

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