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Operations in financial institutions why it s more than just processes l.jpg

OPERATIONS IN FINANCIAL INSTITUTIONS - WHY IT’S MORE THAN JUST PROCESSES

B60.2315.20 OPERATIONS IN FINANCIAL SERVICES

Spring 2002

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.


Three operations related themes for financial institutions l.jpg

NY-101613.103/020417YlpolSL1 JUST PROCESSES

THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS

  • How to apply “manufacturing techniques” to reengineer and rethink the operations processes

  • How to use offshoring to redefine the traditional operations location and operating model

  • How to respond to industry planned next-day trade settlement (T+1) initiative


Three operations related themes for financial institutions3 l.jpg

NY-101613.103/020417YlpolSL1 JUST PROCESSES

THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS

  • How to apply “manufacturing techniques” to reengineer and rethink the operations processes

  • How to use offshoring to redefine the traditional operations location and operating model

  • How to respond to industry planned next-day trade settlement (T+1) initiative


Lean manufacturing genesis and key principles l.jpg

  • Many of these techniques are starting to be applied in service industries, including financial services, driving quick and dramatic improvements in performance, often without the need for significant investment

NY-101613.103/020417YlpolSL1

LEAN MANUFACTURING – GENESIS AND KEY PRINCIPLES

  • Key principles of lean manufacturing

  • A workforce that is “waste aware” and skilled in reducing/eliminating waste

  • Level production load from matching demand to capacity/supply

  • A just-in-time production process that produces only when needed and in quantities required

  • A process designed to deliver quality the first time using robust, ‘in-process’ mechanisms

  • An energized organization with the processes and capabilities to achieve continuous improvement year after year


Lean manufacturing levers to achieving operations excellence l.jpg

NY-101613.103/020417YlpolSL1 production system

LEAN MANUFACTURING LEVERS TO ACHIEVING OPERATIONS EXCELLENCE

  • Specific improvement

  • Example

  • Main lever

  • Migrate to lower cost channels

  • Reduced channel cost in credit card company by 50% due to migrating inquiries from call center to Web

  • Optimize/manage complexity

  • Segmented volume based on customer profitability to maximize contribution margin

  • Manage demand at the source

  • Level load incoming demand to match supply

  • Created measures encouraging branch loan applications to arrive on an ongoing basis during the workday

  • Capture information and correct errors one time, accurately, at the source

  • Reduced labor costs 40% in check processing due to one-time, quick capture of information

  • Understand customer preferences/tradeoffs

  • Conducted customer interviews to optimize required decision time of loan application

  • Standardize and stabilize work processes

  • Reduced variability on incomplete application handling to a no tolerance approach which improved completion rate by 50%

  • Streamline critical path

  • Ordered appraisals on homes for equity loans earlier in the decision process

  • Optimize process, layout, and flow

  • Operations excellence

  • Build in quality

  • Created data entry forms that have restricted fields to reduce incoming errors

  • Create one-piece synchronized flow

  • Redesigned the underwriting process to a single piece, first-in/first-out flow which reduced turnaround time from hours to minutes

  • Organize around processes, not tasks

  • Created “end-to-end” accountability for performance not department/task-based accountability

  • Set clear process metrics

  • Created a performance scorecard including timeliness, service quality, and cost/productivity measures

  • Manage perfor-mance

  • Determine stretch targets

  • Designed stretch targets based on theoretical limits, not incremental performance

  • Tailor incentives and consequences to results

  • Tied process metrics to team-level performance and to team compensation


Manage demand change schedules to match demand l.jpg

NY-101613.103/020417YlpolSL1 production system

MANAGE DEMAND: CHANGE SCHEDULES TO MATCH DEMAND

Number of applications

Fax demand

Current schedule capacity

New schedule capacity

140

120

100

80

60

40

20

0

7 AM

8

9

10

11

12

PM

1

2

3

4

5

6

7

8

9

10

11


Optimize processes layout amd flow listed equities trade flow l.jpg

NY-101613.103/020417YlpolSL1 production system

OPTIMIZE PROCESSES, LAYOUT AMD FLOW: LISTED EQUITIES TRADE FLOW

A

Automated

Automated

Eliminated

Manual

Sales/trading

Exchange floor

Middle

Order

Cash-

Daily

P&S

Office

Room

iers

P&L

Messengers/data

Sales/traders

Block traders

Booth

Brokers

entry operators

1. Enter order into A

8. Write down order (or print order from B)

4. Acknowledge order

A

A

A

5. Write down order on pad

10. Pick up order at booth

2. Select block trader from pull-down menu

9. Beep $2 or house broker

A

Rejected by D

11. Execute order in crowd

3. Send order to trader through A

6. Decide exe-cution strategy

Call order into

D

sales/trader

Executed by D

7. Call order to floor/enter order into D

12. Call verbal to booth

Client

A

A

15. Write down execution & check against pad

13. Deliver written to booth

14. Call back execution (or type into B)

A

A

16. Enter execution into A

20. Write floor execution report

21. Pick up floor reports and deliver for punching

17. Send/allocate execution to sales/trader

22. Type floor report into

18. Call execution to client

A

19. Print house execution report

A

Systems

A

B

C

Rolesinvolved*

Sales/ traders

Assistant

Booth

House brokers

Key punch

traders

clerks

$2 brokers

operators

Block traders

Runners

*Support block desk and other products


Impact from redesigning listed equities trade flow l.jpg

NY-101613.103/020417YlpolSL1 production system

IMPACT FROM REDESIGNING LISTED EQUITIES TRADE FLOW

  • Description of opportunity

  • Trade flow involves over 70 steps, 40 of which are manual

  • Manual steps and the resulting errors requires hiring costly FTE and limits capacity

  • Large numbers of systems increasing the level of complexity and steps

  • Numerous reconciliations based on multiple sources of data entry

Steps in trade flow process

  • Financial impact

  • 10% reduction in FTEs

  • Total steps

  • Manual steps

-13%

  • Key success factors

  • Walking the process to see each activity first-hand

  • Willingness to redesign the process from scratch rather than generating changes to current system

  • Make sure the trade flow is right before introducing technology

-33%

  • Assumptions

  • Service levels to customers would not decline

  • The majority of manual steps do not require complex decisions that cannot be automated

  • Before

  • After*

  • Before

  • After

  • Implementation time

  • 12-18 months

* New design also reduced flow through 18% of remaining steps


Optimize processes layout amd flow underwriting activity l.jpg

5 Order documents for equity second decision production system

6 Receive documents from vendors

8 Mail back to branches

2 Print credit report

3

4,7

Underwriting

1 Receive fax

NY-101613.103/020417YlpolSL1

OPTIMIZE PROCESSES, LAYOUT AMD FLOW: UNDERWRITING ACTIVITY

From convoluted physical flow

PC

Order

x

x

Denial

PC

Printer

Printer

x

U/Ws

x

x

6

x

PC

Printer

PC

Printer

PC

PC

x

x

x

PC

x

3 regional

underwriting queues

PC

x

PC

Fax

Fax

Fax


Optimize processes layout amd flow new underwriting process l.jpg

4,7 production system

Underwriting

Order/receive docs

Mail back to branches

3

5,6,8

2

Print credit report

1

Receive fax

NY-101613.103/020417YlpolSL1

OPTIMIZE PROCESSES, LAYOUT AMD FLOW: NEW UNDERWRITING PROCESS

“Production” flow

Phone U/W

X

X

Single

queue

X

X

X

X

PC

PC

10 paces

Printer

Printer

Processors

Fax


Impact of reorganizing underwriting activities l.jpg

Increased production systemunderwriting capacity by 40%

NY-101613.103/020417YlpolSL1

IMPACT OF REORGANIZING UNDERWRITING ACTIVITIES

  • Eliminated transportation time, increasing underwriting capacity by 6%

  • Moved all clerical work to processors, increasing underwriting capacity by 11%

  • Transitioned all first and second decisions to 4 underwriters (and reprioritize tasks), decreasing through-put time

  • Created ‘phone underwriter’s positions (for 2 staff members) to handle all communication and non-time-sensitive underwriting, allowing other underwriters to focus exclusively on first and second decisions


Optimize processes layout amd flow current check processing l.jpg

123 production system

123

123

Date

123

Jane Doe

123 Main Street

Anywhere, PA 11111

Date

Pay to the

Order of

Date

Pay to the

Order of

Date

Any Bank

Anywhere

Pay to the

Order of

Dollars

Any Bank Anywhere

Any Bank

Anywhere

Pay to the

Order of

Dollars

Any Bank

Anywhere

Dollars

Dollars

For

For

For

For

NY-101613.103/020417YlpolSL1

OPTIMIZE PROCESSES, LAYOUT AMD FLOW: CURRENT CHECK PROCESSING

  • Checks are transported from branches to centralized processing site

  • Each check is read by a proof operator who enters the amount which is MICR encoded onto the check

  • The checks are then run through a sorter equipped with a MICR reader and microfilm camera – data from each check is sent from the sorter to the bank’s IP servers

  • Checks are then prepped and put into trays


Optimize processes layout amd flow image technology l.jpg

123 production system

123

123

Date

123

Jane Doe

123 Main Street

Anywhere, PA 11111

Date

Pay to the

Order of

Date

Pay to the

Order of

Date

Any Bank

Anywhere

Pay to the

Order of

Dollars

Any Bank Anywhere

Any Bank

Anywhere

Pay to the

Order of

Dollars

Any Bank

Anywhere

Dollars

Dollars

For

For

For

For

NY-101613.103/020417YlpolSL1

OPTIMIZE PROCESSES, LAYOUT AMD FLOW: IMAGE TECHNOLOGY

  • Checks are transported from branches to centralized processing site

  • Checks are prepped and put into trays

  • Each check is run through a sorter equipped with a MICR reader and a digital camera which captures an image of the front and back of the check

Jane Doe

123 Main Street

Anywhere, PA 11111

123

Date

  • The images are then run through OCR software to determine the amount; the amount and other infor-mation on the check are sent to the bank’s server

  • For checks where the image cannot be read, a person at a terminal reviews the image and enters the amount


Impact of new technology on check processing l.jpg

  • -25% production system

  • -83%

  • Streamline critical path

  • Eliminate redundant activities to reduce time to get an entry through the process

  • Low investment required to move sorting equipment

NY-101613.103/020417YlpolSL1

IMPACT OF NEW TECHNOLOGY ON CHECK PROCESSING

  • Operational lever

  • Time to get 1 entry through process

  • Selected changes

  • FTEs

  • Optimize/ manage complexity

  • Improve labor utilization by introducing cross-training and workcells

  • Build in quality

  • Reducing the number of touches will provide fewer opportunities or errors

  • Before new process

  • Since new process

  • Before new process

  • Since new process

  • Organize around processes, not tasks

  • Team-based accountability improves total system quality


Three operations related themes for financial institutions15 l.jpg

NY-101613.103/020417YlpolSL1 production system

THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS

  • How to apply “manufacturing techniques” to reengineer and rethink the operations processes

  • How to use offshoring to redefine the traditional operations location and operating model

  • How to respond to industry planned next-day trade settlement (T+1) initiative


Recent significant reduction in interaction costs l.jpg

NY-101613.103/020417YlpolSL1 production system

RECENT SIGNIFICANT REDUCTION IN INTERACTION COSTS

  • Advancing technology

  • Maturing markets

  • Easing regulation

  • Reduction in bandwidth costs

  • Supplier base – India

  • $ Billions, revenue

  • Strong financial incentives (Malaysia example) :

    • 100% tax exemption for 10 years

    • No VAT

  • Aggressive operating incentives (India example):

    • State-sponsored training in “soft and domain specific skills”

    • Privacy protection act to protect offshored customer data

    • SLA’s between state and telecom providers to ensure dedicated, high quality supply

  • $ Thousands PA for 2 Mbps fiber leased line*, half circuit

CAGR

69%

Mar 2000

  • 85% drop in India as state monopoly faces competition from private satellite providers

Mar 2001

Mar 2002E

  • Employment in offshoring industry – India

  • Thousands

  • Philippines

CAGR

53%

Mar 2000

  • India

  • Ireland

Mar 2001

  • U.S.**

Mar 2002E

* Cost of international leased line for India; cost of long distance domestic leased line in the U.S.; costs are for January each year; for India, based on Mumbai or Cochin

** U.S. half circuit data is derived by dividing full circuit data by half

Source: VSNL press releases; literature search; Lynx, Goldman Sachs estimates; McKinsey analysis


Remote servicing has become a lever for driving performance l.jpg

  • System development

  • Credit decisioning

  • Call center

  • Customer research

  • Data entry

  • Objective

  • Remote servicing is the placement of operational units at globally optimal locations based on factor and interaction costs, timeliness, and quality of service

  • Key drivers for the banking sector

    • Centralizeable operations

    • Significant labor cost differentials

    • Manageable communication/monitoring costs

    • Available and reliable technology/infrastructure

    • Supportive regulatory and political environment

NY-101613.103/020417YlpolSL1

REMOTE SERVICING HAS BECOME A LEVER FOR DRIVING PERFORMANCE

  • From physically co-located end-to-end operations . . .


Three dimensions of benefits from remote servicing l.jpg

NY-101613.103/020417YlpolSL1 optimal value

THREE DIMENSIONS OF BENEFITS FROM REMOTE SERVICING

Cost

  • Dramatic reduction in cost (10-30%)

  • Increased flexibility permitting greater capacity/demand balancing

  • Improved transparency and predictability

  • Operational improvement

Quality

Time

  • More established processes and metrics for meeting higher performance standards

  • Access to basic and specialized skills

  • Minimized baggage of outdated infrastructure, e.g., software

  • 24 x 7 service

  • Faster turnaround times from learning curve benefits

  • Continuous production possible with effective synchronization


Locations used to remote service different services l.jpg

NY-101613.103/020417YlpolSL1 optimal value

LOCATIONS USED TO REMOTE SERVICE DIFFERENT SERVICES

  • Ireland

    • Software development

    • Call centers

    • Shared services

  • India

    • Call centers

    • Data entry

    • Software development

    • Engineering design

    • Back-office operations

  • Caribbean

    • Data entry

  • Philippines

    • Software development

    • Call centers

    • Data entry

  • Ukraine

    • Software

  • Singapore

    • E-commerce hub

    • Shared/financial services

  • South Africa

    • Financial services

Source: McKinsey analysis


Large opportunities in banking and insurance l.jpg

  • Oil optimal value

  • Packaged goods

  • Telecom

  • Retailing

  • Utilities

  • Automotive

  • Computer

  • Banking

  • Insurance

  • Pharma-ceuticals

  • Third-party engineering and design services

  • Electronics

  • Airlines

  • Aerospace

  • Chemicals

  • Steel

  • Equipment

  • Ship building

  • Hotels

  • Entertain-ment

  • Real estate brokerage

  • Software producer

  • Third-party call center providers

NY-101613.103/020417YlpolSL1

LARGE OPPORTUNITIES IN BANKING AND INSURANCE

Areas of greatest opportunity

  • High (300+)

  • U.S. cost base industry

  • US$ Billions

  • Medium (100-300)

  • Low (0-100)

  • Low (0-1%)

  • Medium (1-5%)

  • High (5%+)

  • Remote serviceable processes share of cost base

Source: U.S. Census Bureau; team analysis


Initial focus on lower end processing data entry activities l.jpg

Data entry optimal value

Revenue accounting

Claims processing (Tier 1)

Application processing

Call center

Data entry

Claims

Processing

  • CRM

  • Accounting

Claims processing

Claims processing

  • Financial reconciliation

  • Statutory reporting

  • Bill payments

  • Risk analysis

  • Underwriting

  • Transaction processing

Call center

  • Planning and forecasting

NY-101613.103/020417YlpolSL1

INITIAL FOCUS ON LOWER END PROCESSING/DATA ENTRY ACTIVITIES

Current activities

Future activities

  • Support activities (IT, HR)

  • Asset management

  • New business processing

  • In-force transactions

  • Customer acquisition

  • ( )

Source: Press searches; GE Remote services case study


Early movers are already seeing bottom line impact l.jpg

ESTIMATES optimal value

NY-101613.103/020417YlpolSL1

EARLY MOVERS ARE ALREADY SEEING BOTTOM-LINE IMPACT

2001

Forecasted savings (public statements)

  • Cost savings

  • $ Millions PA*

  • Current

  • employees

  • Main activities

  • 9,500

  • Call center, mortgage and insurance, accounting, bill payment

  • 340

  • 6

  • 14

  • 20

  • Back-office processing, e.g., payments, account services, support

  • 300

  • 2,050

  • Trade finance, check processing, data entry, customer services, loans, bills, credit cards, cash management

  • 70

  • 35

  • 105

  • 6

  • 54

  • 60

  • Transaction processing, e.g., accounts opening, mortgage clearing

  • 300

  • 17

  • 18

  • 35

  • 730

  • Data processing, accounts, check clearing

  • 16

  • 54

  • 70

  • 800

  • Accounting services, operating services, and call centers

  • 14

  • 41

  • 55

  • 400

  • Insurance claim processing, call center

* Total pretax operating cost savings based on labor cost savings for main activities adjusted for higher other costs (e.g., telecommunication); not adjusted for startup inefficiencies

Source: Literature search; industry interviews; team analysis


Citigroup example l.jpg

Details optimal value

  • Started operations in 1998 and has facilities in Mumbai, Bangalore and other places in India

  • Citibank Overseas Investment Corporation owns 37.2% of the company

  • Process ~ 70 million transactions of varying nature and complexity

  • Currently cater to mainly low to medium end remote service activities

    • Transaction processing

      • GF: Mainly focussed on trade finance related activities (Query handling, record keeping, scrutiny, data entry, authorisation and ledger entry). Some cash management activities including payment settlement account reconciliation and ledger keeping

      • GCB: Still in piloting stage (for TIDE loans, bills processing and expense tracking, credit card interchange)

      • Provides insurance claims & processing services

    • Technology services – software verification & validation, web catalog and content management, data center management

    • Call Centers – call centers, eCRM, sales and collection services : handle ~20 million calls

  • Merged with Citicorp Credit Services and added call center capability

ESTIMATE

2,700

Impact

370

150

50

Current Impact:

$40 million revenues expected for FY02

1998*

2000

2001

1999

NY-101613.103/020417YlpolSL1

CITIGROUP EXAMPLE

  • Corporate philosophy/thinking

  • Plan to become biggest outsourcing centre within Citigroup.

  • Works for over 22 overseas units - current geographies covered are CEMIA (Eastern Europe, Africa, South Asia). US and UK operations recently announced plans to use India as source base

  • Ensure at least 10% of total business comes from third party sources

  • Operate as a cost centre. Billing is on a cost plus basis for services offered. Billing per employee currently is $25,000-30,000/year

* Start of year

Source: Press searches, Interviews, McKinsey analysis


American express example l.jpg

Details optimal value

  • Started operations in 1994, first remote services effort in India

  • Located in Delhi - ~75,000 sq. ft. complex

  • ~800 FTEs; 100 of which are MBAs/CAs

  • Currently into low/medium and remote services activities. Mainly back-end batch processing

    • Accounts reconciliation

    • Accounts opening and closing

    • Cheque processing/other payment processing

    • Data processing

  • Expanding into call center operations

Impact

FTEs

1,500-2000

ESTIMATE

Current Impact:

$20 million/year**

800

700

500

1996*

1998

2000

2003(E)

  • “The new operations in India will include processing activities such as voice-based customer support, account & transaction processing and fraud and risk modelling”

  • Rajiv Ahuja, Amex's head of public affairs and communications for India and area countries

NY-101613.103/020417YlpolSL1

AMERICAN EXPRESS EXAMPLE

  • Background/corporate philosophy

  • One of the three global financial resource centres (FRCs)of AMEX

  • 100% owned by AMEX. Caters only to AMEX internal requirements

  • Key geographies covered are Australia, New Zealand, Singapore, Japan, Hong Kong, Philippines

  • Future plans are to:

    • Expand into higher value added work such as planning and forecasting, account consolidations, risk modeling

    • Increase service lines especially in TRS for activities such as voice based customer support etc.

* Start of year

** @$30000/FTE/year

Source: Press searches, Interviews, McKinsey analysis


Hsbc example l.jpg

Details optimal value

  • Started operations in 2000 - located in Hyderabad in an over 40,000 sq. ft. premises

  • Invested additional US$20million at the start of the year

  • Currently employs ~1,100 FTEs, mostly graduates

  • Has out performed UK banks on quality and productivity

  • Current activities include transaction processing, mainly in retail banking (processes are online but not real time) - Account opening/closing, standing instructions, monitoring inward clearing, mortgage processing

  • Recently announced plans to expand its operations to Bangalore

ESTIMATE

Impact

7,000

Impact$ million/year*

3,000

Current: 12

Expected : 120

1,100

2001

2002(E)

2003(E)

NY-101613.103/020417YlpolSL1

HSBC EXAMPLE

  • Corporate philosophy/thinking

  • Created a separate 100% owned subsidiary (HDPI) of HSBC, UK to provide services

  • Provides support for select back office operations of UK and US bank operations

  • Caters to more than 17 business areas

  • Plans to

    • Expand into high-end retail banking processes and expand to wholesale banking processes, and other branches in Europe, and Australia

    • Reach 3000 FTEs by 2002

    • Add another global processing center in Hyderabad

    • Invest additional $10 million

* @$40000/FTE/year

Source: Interviews, press searches, McKinsey analysis


Example process end to end lending l.jpg

NY-101613.103/020417YlpolSL1 optimal value

EXAMPLE PROCESS: END-TO-END LENDING

Fully remote serviceable

Partially remote serviceable

  • Origination

  • Servicing

  • Payout

  • Application to closing

  • Fund disburse-ment to coupon delivery

  • Description

  • Cost

  • Percent of total

  • Savings

  • Percent of cost

  • Initial customer contact

  • Data entry of applications

  • Underwriting/ credit decision- ing

  • Communication and upsell to applicant

  • Document preparation

  • Disbursements/ closing

  • 45-50

  • 15-20

    • Review of closing document for compliance

    • Booking of document to system

    • Funding

    • General ledger reconciliation

  • 25-30

  • 6-10

    • Scan and index of file

    • File management

    • Assist in internal and customer inquiries

    • Research of issues

  • 10-15

  • 15-25

    • Processing final payments

    • Releasing collateral

  • 5-15

  • 20-25

  • Source: Team analysis


    Firms adopting a utility view to identify opportunities l.jpg

    • Data entry

    • Recon-cilation

    • Strong candidates for remote servicing:

      • Data entry

      • Document prep.

      • Booking

      • Reconciliation/ compliance

      • Front-end collections

      • Call centers

      • Corporate center

    • Consumer lending

    • Commercial lending

    • From a perspective of product/service supply chains linked end-to-end . . .

    • Item processing

    • Trust services

    • Cash management

    NY-101613.103/020417YlpolSL1

    FIRMS ADOPTING A “UTILITY” VIEW TO IDENTIFY OPPORTUNITIES


    Potential barriers and concerns l.jpg

    NY-101613.103/020417YlpolSL1 across supply chains

    POTENTIAL BARRIERS AND CONCERNS

    • General concerns

    • Perceived issue/risk

    • Reliability of telecom

    • Lower quality

    • Lower productivity

    • Cultural differences

    • High bandwidth costs

    • Unsustainable labor cost advantage

    • High government/ regional risk/ instability

    • Data protection

    • Operational complexity

    • Current status/method for management

      • Reliability has improved over the last 5 years – satellite now at about 99 percent; fiber at 95 percent

      • Significant further improvements are likely – addition of 14 TBps of international capacity; addition of 270,000 miles of domestic fiber

      • Players experiencing increases in quality due to lower turnover and higher skill level

      • Higher productivity and quality can be achieved through investment in training, compensation and labor pool rotations between on-shore and off-shore locations

      • Bandwidth costs have significantly declined due to deregulation and investment in capacity

      • Supply of talent in some locations ensures cost advantage will exist for 20-30 years

      • Unlikely given not harmful to domestic constituencies

      • Government supports action – e.g., U.S. and Indian government agreed to decouple information technology trade from politics

      • Can manage through multiple location operations (e.g., India and Philippines)

      • Early development of public relations strategy

    Infrastructure

    Service levels/ responsiveness

    Cost advantage

    Political/country

    Operations and community


    Common question where to locate l.jpg

    NY-101613.103/020417YlpolSL1 across supply chains

    COMMON QUESTION: WHERE TO LOCATE?

    • Skills

      • Availability of frontline skills

        • basic/language

        • specialized (as appropriate)

      • Availability of senior management skill

      • Cost

    • Telecom/other infrastructure

      • Telecom bandwidth and reliability

      • Availability of IT service providers

      • Reliability of power sources

    • Regulatory environment

      • Mode of entry

      • Fiscal incentives

      • Operating area compliances

    • Attractiveness of a location for remote services

    • Political risk

      • Stable government

      • No domestic conflict

      • Legal enforcement

      • Bureaucratic transparency and limited corruption

    Source: Team analysis


    Common question what is the appropriate business model l.jpg

    • Subsidiary across supply chains

      • Function provides competitive advantage

      • Skill exists internally

      • Immature supplier market

      • Growth business within strategy

    • Joint venture

    • Third-party contract

      • Mature supplier market

      • Function not critical to distinctiveness

      • Scale and skill advantages not in house

      • Need overflow capacity

      • Not part of mission/growth portfolio

    NY-101613.103/020417YlpolSL1

    COMMON QUESTION: WHAT IS THE APPROPRIATE BUSINESS MODEL?

    • At scale

    • Size of operation

    • Significant sub-scale

    • High

    • Low

    • Degree of control desired


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    NY-101613.103/020417YlpolSL1 across supply chains

    THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS

    • How to apply “manufacturing techniques” to reengineer and rethink the operations processes

    • How to use offshoring to redefine the traditional operations location and operating model

    • How to respond to industry planned next-day trade settlement (T+1) initiative


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    WHAT PRODUCTS ARE COVERED BY THE T+1 INITIATIVE?

    • Included in T+1 effort

    Source: Streetside Fixed Income Working Group (The Bond Market Association, SIA)


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    Projected reduction in settlement exposure from T+1 settlement$ Billions

    1999

    2000

    ‘01

    ‘02

    ‘03

    2004

    Average daily number of institutional trades not affirmed prior to settlement

    41,000

    CAGR = 36% *

    12,000

    1995

    1999

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    WHAT ARE THE BENEFITS OF MOVING TO T+1?

    * Average daily transactions grew from 150M to 350M in the same period, a CAGR of 24%

    Source: SIA; T+1 Business Case


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    ACHIEVING T+1 WILL REQUIRE OVER-COMING SIGNIFICANT LIMITATIONS OF CURRENT PROCESSING ENVIRONMENT


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    NY-101613.103/020417YlpolSL1 settlement

    SOLUTIONS PROPOSED BY INDUSTRY (SIA) TO THESE CHALLENGES


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    MODULE 1: CREATE NEW MATCHING UTILITIES

    • From . . .

    • . . . to

    • Allocations

    • Investment manager

    • Confirm

    • Broker/dealer

    • Investment manager

    • Broker/dealer

    • Matching utility (central point of reference)

    • Confirm

    • Confirm

    • Affirm

    • Confirm

    • Custodian

    • Custodian

    • Affirm

    • Depository

    • Depository


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    • Annual cost savings opportunity by participant type

    • $ Billions

    • Institutional brokers/dealers

    • Brokers/dealers

    • Retail brokers/dealers

    • Asset manager

    • Asset managers

    • Custodian

    • Custodians

    • Corres. clearers

    • Infrastructure service providers

    • Depository

    • Exchange

    • Total

    • Matching utility

    • Total

    NY-101613.103/020417YlpolSL1

    SIA ESTIMATES OF T+1 INVESTMENTS AND COST SAVINGS

    • Majority of T+1 investment and benefits fall on market participants, particularly broker-dealers, who also gain vast majority of cost savings

    • Payback period of 3 years expected with a 28% IRR on total investment

    • 99% of total investment “within four walls” focusing on internal changes (e.g., IT infrastructure and applications)

    • Similarly, 78% of investment focused on two of ten building blocks: internal STP and standardizing reference data and protocols

    Note: Based on surveys; interviews; and industry data. Over 200 surveys were sent to different industry institutions across participant types. More detailed investment surveys were sent to targeted brokers/dealers, asset managers, and custodians to provide a better estimation of T+1 investments

    Source: SIA T+1 Business Case


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    NY-101613.103/020417YlpolSL1 settlement

    ECONOMICS OF T+1 BY PARTICIPANT

    $ Millions

    • Estimated T+1 investment for large participant

    • Payback period

    • Years

    • Comments

    • B/O operations major cost for brokers/dealers and requires significant investment for T+1

    • Brokers/dealers making majority of investment, but receiving largest benefit

    • Investment likely for large brokers/dealers given short payback period and business importance of B/O capabilities

    • For medium and small brokers/dealers, however, outsourcing B/O more attractive due to economies of scale in investment

    • Brokers/

    • dealers

    • $60-100

    • BO operations small portion of costs and not perceived as core activity

    • T+1 likely viewed as compliance event

    • Although investment per company less than brokers/dealers or custodians, relative savings even less resulting in longer payback period

    • Despite little economics incentive for asset managers, industry needs their cooperation to move to T+1

    • Asset

    • managers

    • 40

    • B/O operations important cost area and key business capability for custodian requiring large T+1 investment per participant

    • Significant investment and benefits shared by small number of players with short payback period

    • Large role in institutional trades combined with better risk management provide strong incentives to make investments required by T+1

    • Custodians

    • 60

    Source: SIA T+1 Business Case


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    NY-101613.103/020417YlpolSL1 settlement

    T+1 IMPLICATIONS FOR BROKER-DEALERS

    • Approach to back-office partnering

    • Joint

    • Individual

    • Option 3

    • Share common tasks and resources for T+1

    • Option 1

    • Implement changes to meet T+1 compliance requirements

    • T+1 as compliance event

    • Approach to back-office redesign

    • Option 4

    • Share/create a single back office processing platform

    • Option 2

    • Leverage and extend T+1 changes to broader redesign program

    • T+1 as catalyst for broader design


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    • Achieve basic STP as a means to accelerate trade processing settlement

      • Redesign institutional trade processing

        • Eliminate paper confirmations

        • Build links to electronic matching utilities

      • Modify internal processes to meet compressed deadlines

        • Consolidate systems supporting different products (front and middle offices)

      • Comply with accelerated submission deadlines

        • Move to real-time feeds to CDS system

      • Implement new industry communication standards

    • Change traditional back-office operating model

      • Extended automation (e.g., non-trade-processing activities)

        • Automate pre-balancing dividend activities

      • Eliminate duplicative work across departments

        • Integrate reconciliation activities performed in Operations and Accounting in consolidated group

        • Create central repository that contains all information and documents related to each account

      • Realign organization

        • Reorganize departments along end-to-end processes instead of functional silos

        • Shift input of account opening and information upstream to F/O departments and potentially customers

    NY-101613.103/020417YlpolSL1

    POTENTIAL INDIVIDUAL APPROACHES FOR BROKER-DEALERS

    • Individual changes (no JV)

    • Option 1

    • Implement changes required to stay in business after T+1

    • T+1 as compliance event

    • Approach to back-office redesign

    • Option 2

    • Leverage and extend T+1 changes to broader redesign program

    • T+1 as catalyst for broader design


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    • Leverage overlapping activities settlement

      • Build similar applications together

        • Standardized communications protocols

        • Common interfaces with shared vendors and service providers

      • Share common resources

        • T+1 program design, logistics, and management office (PMO)

        • Test scripts

    • Combine processing systems and functions

      • Segregate functions that could be performed more efficiently in a joint effort

        • Trade processing activities relating to clearance and settlement

        • Support functions such as Dividend

      • Merge systems into predominantly one of the existing IT platforms

      • Establish common interfaces to industry-wide utilities

        • Institutional trade matching

        • Fixed Income real-time matching

      • Create common reference data systems

    • Change traditional back-office operating model

      • Extended automation (e.g., non-trade-processing activities)

      • Eliminate duplicative work across departments

      • Realign organization

    NY-101613.103/020417YlpolSL1

    POTENTIAL JOINT APPROACHES FOR BROKER-DEALERS

    • Approach

    • Individual

    • Joint

    • Option 1

    • Implement changes required to stay in business after T+1

    • Option 3

    • Share common tasks and resources for T+1

    • T+1 as compliance event

    • Approach to back-office redesign

    • Option 2

    • Leverage and extend T+1 changes to broader redesign program

    • Option 4

    • Share/create a single back office processing platform

    • T+1 as catalyst for broader design


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    NY-101613.103/020417YlpolSL1 settlement

    POTENTIAL END GAMES


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