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The Productivity Agenda: Moving Beyond Cost Reduction in Financial Services

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Friday, June 28, 2019 12:59 PM / By PwC Nigeria

A variety of forces have put tremendous pressure on the financial services industry in recent years, leaving many institutions with unsustainable cost–income ratios. And several of these challenging trends — from new regulatory mandates to augmented capital requirements to aggressive fintech competitors — are strengthening. This paper presents excerpts of a larger publication with the same title, which detailed the results of PwC's 2018 Productivity in the Financial Services Sector Survey. It's part of a series of thought leadership pieces about important issues and opportunities facing the financial services industry and the ways in which senior executives at the most innovative and successful institutions are responding. Some Nigerian senior level executives were part of the 150 surveys completed from the 36 territories represented in the survey.

Moving forward with a focus on productivity

Typical cost-cutting measures – reducing personnel cost, automating, offshoring and introducing new technology- haven't done enough to address the impact of the current downturn, which has been uniquely severe. Most institutions have seen whole businesses jettisoned, geographic footprints reduced, and clients 'fired' to the point where the financial services industry has, in essence, de-globalised and become regional and national in nature.

The industry is recognising that it has nearly exhausted its arsenal of conventional cost-reduction tools and that further cutbacks in many businesses are likely to be counterproductive to long-term profitability and sustainability. Organisations also realise that the onslaught of competitive threats and cost pressure is likely to continue, even for institutions that are performing well at the moment. Our clients are asking themselves where to go from here.

As the introduction of new regulatory mandates diminishes and management concentrates on bringing financial institutions' performance in line with investor expectations, organisations increasingly have sufficient capacity and motivation to tackle the productivity challenge — and many of our clients understand that they should. Institutions tend to need help, though, in acquiring the skills and tools needed to boost productivity.

We at PwC have identified six areas where clients are focusing their productivity efforts. In this report, we'll outline the actions you can take within each area to achieve positive results.

1. Better understanding the workforce

2. Rethinking change functions

3. Embracing the platform economy

4. Improving workforce digital IQ

5. Bringing an agile mind-set to the mainstream

6. Mastering digital labour

Outstanding execution and transformation capabilities are critical to overcoming the challenges involved in increasing productivity. And urgency is growing daily as the consequences of inaction become clear.

Better understanding the workforce

The current situation Most institutions have limited knowledge of what their employees actually do on a daily basis. They understand broad job responsibilities and activities in most cases, but if asked how long it takes to process a trade or how much time a certain employee spent in meetings last month, they typically can't tell you. In our productivity survey, only 27% of respondents said they tracked any employees by task on an hourly basis. For those who did track, the following areas reaped the most productivity benefits from the process (see Figure 1).

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What needs to happen

The financial services industry is beginning to recognise, though, that some form of consistent time tracking and workflow analysis is needed to better identify productivity opportunities and execute necessary changes. Of the organisations in PwC's survey that didn't track work by hours and tasks, 62% believed such tracking would yield productivity benefits. And change is coming, with 52% of respondents noting that new productivitybased measurements and initiatives would be implemented in their organisations in the coming year. Our experience indicates that by simply tracking hours by task, organisations can improve productivity by 15% to 20%, and the implementation of service catalogues and multi-tier sourcing can bring another 20% improvement.

Steps to take

Creating a 'task catalogue' of key responsibilities specific to particular roles and positions can facilitate disciplined time tracking in areas beyond IT, allow for comparability across employees and locations, and enable financial institutions to better examine the nature of work inherent in various roles and divide work into more efficient bundles. This often makes it possible for institutions to use lower-cost or less experienced workers to accomplish certain tasks. Also, companies need to address the privacy issues and cultural challenges associated with this type of tracking. This requires a combination of clear communication and a suitable system of rewards for desired behaviour. In addition, companies need to ensure compliance with appropriate laws and regulations.

Rethinking Change functions

The current situation

From our survey, more than 41% of financial institutions are spending, on average, 20% of their entire budget on so-called 'change-the-institution' efforts that are outside of business-as-usual activities. This work includes implementation of new technology and business processes, creation of new products, and mergers and spin-offs. Unfortunately, many financial institutions struggle with change management. Only 15% respondents said they were satisfied with their ability to execute change. Projects often go over budget, fail to meet timelines and milestones, and leave both regulators and shareholders disappointed. Many organisations respond by relying too extensively on contractors and consultants to fix the problem. Others fail to leverage the assets those third parties bring, such as tools and methodologies that can improve performance across the organisation. What needs to happen As with business as-usual functions, organisations typically need to better understand the important tasks involved in change efforts, the composition of the workforce required to execute change and the available sourcing options. Finally, workforce performance should be comprehensively measured and managed.

Steps to take

The first step is to recognise the importance of the change function and treat the individuals involved with it as people whose roles are critical to the success of the institution. Secondly, it's typically necessary to perform an in-depth skills analysis, comparing the backgrounds and experience of the current team (including contractors and other external resources) to those needed to drive not only the specific projects on the docket but also successful transformations in the modern age. Do you have enough architects and data scientists? Do you need to add people with analytical skill sets or product-specific or other specialist skills in areas such as new regulation, cyber and digital? After doing this evaluation, it's possible to develop a strategy to bridge the skills gap in a cost-effective way. Finally, leveraging technology for time tracking and adding the appropriate program management elements will enable a more efficient and effective change function to support the execution of the organisation's goals.

Embracing the platform economy

The current situation

Airbnb and Uber are two of the most valuable companies on the planet, yet neither owns the primary physical assets used in their businesses. Embracing the platform economy has huge productivity benefits for financial institutions, too. Mutual fund marketplaces have shattered the myth that asset managers have to manufacture all of their own funds. And peer-to-peer lenders have taught us that financial institutions can create effective business models without owning the financial capital as deposits. These businesses derive their value primarily through what PwC calls BeCoN, or behavioural, cognitive and network capital. As technological innovation accelerates, these three new forms of capital have become critical to creating value. Behavioural capital is developed by tracking ongoing activity, cognitive capital is the value inherent in algorithms, and network capital is made up of the connection points, with people and machines, that an organisation can deploy. Each compounds itself exponentially and reinforces the others' growth.

What needs to happen

One thing organisations can do is use crowdsourcing to innovate. Several platforms are now available that can be used to run challenges that tap the collective brainpower and resources of a crowd, driven by a sense of competition to develop the best response. Institutions also need to start engaging with the gig economy. According to research firm Wonder, the global gig economy is 77m people strong and growing. One reason the gig economy has gotten so big is the proliferation of platforms such as Wonolo, Fiverr and PwC's own Talent Exchange, which have connected workers with tasks to be completed.

Steps to take

It's critically important to do some basic research to understand what talent and solutions platforms are applicable to your business, and to periodically update this research. Next, choose an area or a handful of areas where you can make the most of crowdsourcing. Are you looking for a new product design? A logo? Are you planning to improve an existing algorithm or process? Run a challenge and include the crowd. On the resource side, explore solutions to better acquire talent and apply that talent to specific gigs or tasks that you would normally assign to fulltime employees or contractors.

Improving workforce digital IQ

The current situation

Digitisation is an important aspect of improving productivity. And as people live longer and work longer, and unemployment rates remain low, training and retraining of existing workforces is particularly crucial. Despite its importance, research shows that current training and re-skilling efforts are not achieving the desired results. Of the financial services leaders polled in PwC's 2018 CEO Survey, 75% reported they were concerned about shortages of digital skills within the industry. Digital skills go well beyond just technical aspects, too. Soft skills such as creativity, emotional intelligence, adaptability and the ability to influence and innovate should be developed in tandem with technical know-how.

What needs to happen

To motivate the workforce to up-skill, we have found it's important to not let anyone opt out of developing digital skill sets. Make it a two-way trade. For those who train hard, offer specific rewards. We'd also say it's crucial to focus on not just the tech side of the equation, but also the interplay between business, experience and technology, which we call BXT. The ability to drive digital transformation depends on understanding new business models, appreciating the art of the possible from a customer experience perspective and integrating both with leading-edge technology. It's also important that this be made to feel easy and fun. Gamification as well as testing and scoring create a competitive dynamic that drives both individual and group behaviours. As with video game scoreboards and personal health apps, people compare scores and set specific goals, putting organisations on the path to a real workforce transformation.

Steps to take

Getting leadership support is the foundation of any successful workforce digitising effort. The transformation approach must be appropriately tailored to suit the institution's culture and workforce characteristics. For example, lifetime employment–based workforces are not motivated by the fear of losing their jobs, so gamification and other positive aspects of becoming digital must carry the day. Another important step is to put in place a management process and technology infrastructure, along with discipline and clear metrics. Lastly, creating a sense of momentum and accomplishment, including the publishing of 'success stories' that show how improved digital skills result in important achievements (e.g., new clients and better customer experience), is critical to reinforcing desired learning behaviours.

Bringing an agile mind-set to the mainstream

The current situation

To be competitive in tomorrow's financial services industry, banks and insurers must be able to rapidly deliver a simple, seamless and instant customer experience at a competitive cost. Financial institutions also have to confront new disruptive technologies that are developing at an exponential pace, new forms of regulation, the continuous rise of fintechs and the threat of 'bigtechs.' To keep up with leading incumbents and digital-only competitors, institutions recognise that they should employ productivity-boosting agile techniques, with 77% of survey participants saying they use agile in some way throughout their organisations. The agile management approach, draws from a broad set of practices, including; scrum, extreme programming, DevsecOps, lean, humancentered design and continuous improvement. And when organisations employ these techniques across the company, we call it 'enterprise agility.’

What needs to happen

Most organisations don't have a lot of enterprise agility. They concentrate their agile efforts in IT and Operations departments and not including other parts of the institution (see Figure 2).

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Interestingly, though, survey respondents who were using agile methods in other areas reported the most benefits from using the techniques in the front office (81%) (see Figure 3). We're not surprised to see benefits in business areas that might not normally be associated with agile techniques. And we've found that organisations with a high level of enterprise agility tend to demonstrate a time-to-market advantage over their peers, have clients who love their brand and have become ambassadors, continuously disrupt their own business model and can attract the best digital talent from the market. They are also flexible and cost-efficient. Institutions need more enterprise agility to adapt quickly, move fast, learn rapidly, embrace dynamic career demands from the workforce of the future and continuously reinvent themselves.

Steps to take

As we've stated, agile is best implemented in financial institutions when it's viewed from the enterprise level versus from the perspective of a single business or support area. It is critical, that this implementation be a C-suite-level (preferably CEO) issue and have the full support of the management team. Having said that, agile is a journey that can and should be divided into parts. The best way to do this is to identify the key end-to-end processes in an institution and determine those that would most benefit your customers by adopting the agile approach. Is it new product development? Customer service? Underwriting? System development? Whichever it is, it's best to prepare for the long term, because these transformations typically take several years to complete.

Mastering Digital Labour

The current situation

Robotic process automation (RPA) is a common first step for most of our clients in incorporating digital labour into their businesses. But most institutions haven't moved forward from RPA. On the other end of the digital labour scale, artificial intelligence (AI) — which organisations typically explore after implementing simpler technologies like RPA — has been called the most important development in computing since the creation of the Internet. It also has unprecedented potential to improve productivity by not only further automating tasks performed today by humans but also performing tasks that no human could conceive of executing. Leading institutions are now rapidly incorporating AI into business functions such as robo-advising, credit scoring and customer support. Leveraging AI has substantially improved client experience, reduced cost and, in some cases, created new products and services. Regulators have begun to take notice. Increasingly, there are concerns that AI is creating new 'black boxes,' where humans are unable to understand the nature of the algorithms and their implications.

What needs to happen

Organisations should start with a system to classify various types of digital labour and understand the unique benefits and challenges of each.

Steps to take

The first step is to understand what's out in the market and familiarise yourself with relevant use cases. A technology such as RPA is pretty well understood, and there are a few leading vendors now in the market, but something like deep learning is nascent and some would say unproven. Creating a COE (Center of excellence) within an organisation is an important next step. Why? Because things like tool selection, maintenance of case studies, methodologies and models should be handled in one place and accessible to the rest of the organisation. Insight can be more easily shared, and each subsequent deployment of digital labour benefits from the experiences that preceded it. Otherwise, knowledge tends to be diffused, and multiple tools, technologies and methodologies typically lead to a suboptimal implementation experience. Lastly, taking the time and effort to model end-to-end processes allows for sophisticated 'what if' analyses, which, in turn, facilitate the optimal placement of digital labour.

Final thoughts

Sustainable productivity improvement is imperative for the financial services industry, but it will be difficult to implement. The transformation will require technology and humans to work together in a fundamentally new relationship, one in which machines take over routine manual tasks but also assist humans in better executing their roles, creating new opportunities for institutions and their employees. To do this, the employees themselves must be 'digital,' and organisations must better leverage the crowd. There's no one right way to approach the productivity challenge, but concentrating on these six areas is a great place to start the journey. To get things rolling, CEOs should ask themselves whether they are taking productivity seriously or if they are just cutting costs to meet quarterly earnings goals. What are they doing in these six areas? And maybe, just maybe, we've arrived at the moment when it's time for the naming of chief productivity officers to drive the productivity agenda for the industry.

Download Here – Financial Focus: Journal of Financial Services in Nigeria