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The Survival Compass for Post-Crisis Financial Services: Managing Complexity

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According to global management consultancy Oliver Wyman, banks and insurers must focus on managing complexity better to restore sustainable profitability and transform their business to survive in a dynamic, post-crisis industry environment. Average returns of large financial firms have fallen from over 20% in the early 2000s to 7% in 2013, the level of utilities companies. Returns of the 8 American and 16 European banks designated GSIBs (global systemically important banks) have declined by 70% since 2006. Although absolute profits grew during the nearly two decade bull run in financial services from the 1988 peak in interest rates until 2006, the productivity of financial sector firms has not improved since 2001.

The 18th annual State of the Financial Services Industry report examines the complexity drivers of greatest concern for financial institutions: regulation, multi-channel customer interaction, fragmented systems, product proliferation and geographic expansion. In addition to driving up operational costs, the study notes these complexity sources cause opacity which undermines decision-making and dilutes the influence that managers can exert over the various parts of their firms.

Additional key findings on the cost of complexity include:

  • Oliver Wyman estimates that between 2 .5% and 3.5% of North American, European and Australian financial institutions’ total costs come from meeting the elaborate new regulatory guidelines, that equates to US$0.7-1.5 BN per annum for the next two-to-three years for large financial firms.
  • The average bank in the US and Europe now has five board committees overseeing risk/compliance, whereas before the crisis the average was less than three.
  • Over the last 15 years, within the top 100 global corporates, there have been more M&A deals on average in the financial industry than in any other, which has exacerbated IT fragmentation.
  • An expensive growth of middle management has been another cost of increasing complexity. For example, the number of banks in the US has fallen by 45% since 1993 while the number of employees grew by 15% over the same period.

“Eliminating complexity completely is not an option and simplification cannot provide the whole answer,” said Michael Wagner, report co-author and Oliver Wyman partner. “A large bank or insurer will always be a complex business, with many customers, products, channels and staff. Economies of scale, risk diversification and continuing globalization require it.”

Financial services companies are not alone in dealing with the expansive complexity challenge. Highlighted within the report are brief case studies on how airlines, energy firms and online insurers find ways of reducing the costs that arise from complexity while retaining the benefits of it.

For financial services firms, the Oliver Wyman study recommends five measures to reduce the costs of complexity while retaining its benefits:

1. Use common metrics for the core financial and non-financial metrics that measure complexity, available to all decision makers, to develop self-knowledge of the financial institution and its customers.
2. Use advanced statistical analysis and analytical decision-making culture to make tactical decisions involving increasingly complex trade-offs, drawing on the explosive growth of information created by in-house data systems and social media.
3. Automate or standardize core processes, taking advantage of rapid advances in technology such as artificial intelligence.
4. Delegate decision-making to those closest to the subject matter who therefore have the best information.
5. Build a strong corporate culture that supports consistent conduct standards without the need for micro-management.

“A successful and effective complexity management program requires commitment and endurance from all levels of an organization, especially the very top. Investors realize that only a significant overhaul can change the fortunes of financial institutions,” said Rebecca Emerson, report co-author and Oliver Wyman partner.

The Oliver Wyman State of the Financial Services Industry 2015 report is available here.

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm’s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE:MMC) . For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.

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