Why Banks Must 'Partner-Up' to Survive
Market dynamics are dramatically changing the banking industry. To stay competitive, banks need to move toward a supplier-sourcing-by-partnership model.
Banks used to think they were special, that what they did was unique or more complicated than what everyone else was doing, and therefore only they could handle running their business. But a fundamental shift is taking place — and it’s become too expensive for banks to operate in this way. Now, banks are being forced to accept that they can no longer afford to be special.
Banks used to think they were special, that what they did was unique or more complicated than what everyone else was doing, and therefore only they could handle running their business. But a fundamental shift is taking place — and it’s become too expensive for banks to operate in this way. Now, banks are being forced to accept that they can no longer afford to be special. The “owner-operator” model, in which banks are running operations by themselves, is dying. Now, banks can source from partner organizations up to three-quarters of the operations they historically ran themselves — a massive shift. We see significant benefits from adopting a partnership model, where the critical capabilities are kept in-house and optimized, while many other things are leveraged from partner firms.
Adopting a partnership model
As banks move to a partnership model, standardization is key. The ability to do things the same way across your business units, regions and customer segments is a prerequisite to driving true efficiency. A new partnership model also allows for better interoperability of standards and improved alignment of incentives to encourage innovation and investment, while avoiding long-term lock-in.
Banks can’t transform by themselves, and no single organization can transform them either. Their ability to skillfully partner will define their future success. To achieve this, banks must take a different view of partnerships and build an ecosystem of partners to help them deliver this change. Banks also need to view this ecosystem as a community of partners who actively work together in a collaborative way for the greater good and the better value of the bank. We see this supplier-sourcing-by-partnership model as transforming the industry.
For many banks, the biggest single barrier to change is themselves. Banks still have an operating mind-set in which they are uncomfortable with giving a partner organization what they see as critical functions. Other challenges in the market also need to be addressed. For example, regulatory requirements prevent banks from outsourcing some aspects of the business.
An operational model based on supplier partnerships takes many forms. For starters, the whole model for procurement has to change. The “race to the bottom” on price cannot continue in the new model. We have found it is more successful if the group’s chief financial officer (CFO) or its chief operating officer (COO) owns procurement. Because procurement can’t be part of the problem, it needs to be part of the solution.
Making a successful shift
To successfully shift to a partnership model, effective leadership to drive and manage change is essential. Driving change has to come from the top down, and it needs to be led at the group level. Somebody, most desirably a group level CFO or COO, needs to assert authority across the business units, and that person needs to be charismatic and very authoritative. Plus, it has to be a person who has a clear mandate to oversee change.
Banks can gain many benefits from outsourcing. When banks outsource, it creates a leaner, lighter operating model. They have less to worry about. First, they have less on their balance sheet. And, if they have less on their balance sheet, there’s less capital needed to provision because there is a smaller risk of things going wrong.
To respond to the radically shifting industry landscape, banks need to rethink their operating model. By embracing new technologies through moving to a supplier-sourcing-by-partnership model, banks can capture next-generation efficiencies that will help them survive in an increasingly competitive marketplace.
DANIEL MEERE is managing partner, Banking & Capital Markets Consulting, at CSC.