Innovation within the capital markets sector remains one of the key factors in ensuring its continued resilience, ability to adapt to change and even its future growth.
The G20 noted the importance of promoting entrepreneurship and innovation across countries within its ‘Core Values for Sustainable Economic Activity’, which it created in response to the 2008 financial crisis. Yet nearly a decade later, firms in the investment banking and asset management space still noticeably struggled to make the necessary changes to their existing systems in time for MiFID II, with many back offices running on legacy technologies that are now some 30 or 40 years old.
Such examples tend only to generate further negative commentary around the lack of innovation in the markets, with common factors being cited such as hostility to change, perceived vendor risk, budgetary constraints and long procurement cycles. This fails however to recognise the growing number of firms in the market who have now been able to successfully execute a programme of transformation.
In this article, Nicola Tavendale and Mike O’Hara of The Realization Group speak to Nomura’s Ling Ling Lo, James Maxfield and Ali Rutherford of Ascendant Strategy, Saxo Bank’s Richard Jeans and George Andreadis of TreoTrade about some of the practical steps that all capital market firms could, and should, take to successfully implement innovation within their own organisations.
One critical success factor that banks often overlook, but which is vital to tangibly executing innovation, lies with the organisation’s own people and how well firms are able to overcome any resistance to change, says Ling Ling Lo, COO, EMEA Finance at Nomura.
“It sounds simple but it’s actually a significant challenge,” Lo says. “People aren’t robots and you can’t just programme them to be receptive to transformation. The organisations that fare best are those that have brought their people on a journey with them, rather than having come up with a solution and then said, ‘Here you go. Now, come on board.’”
George Andreadis, Co-Founder of TreoTrade, agrees, adding that successful innovation does then depend to a large extent on the size and nimbleness of the firm. In his view, the firms that prove to be better at executing innovation tend not to have such a huge challenge to overcome as the larger, more siloed global banks, simply because they are able to more easily spot a technology problem and then be able to turn it into a competitive advantage.
“For example, the main focus for both buy- and sell-side firms, at least up until the crash, was on transforming the front office,” he explains. “Budgets were being spent on trading and trading technology applications. But that focus has started to shift, with more and more firms now looking at what needs to change in the middle and back office as well.” To achieve this, firms should ideally be led by a CEO who recognises that unless certain parts of the operational puzzle gets solved, they will not be able to grow their business.
“They’re at a significant disadvantage if there are similar firms competing with them that have already implemented new technology,” Andreadis explains. “That ought to be a huge driver in terms of allocating enough budget to solve these problems and grow the business.”
Deciding how this budget should then be allocated and for which projects is also a significant challenge, particularly for large, global businesses who will have a number of different decision makers involved in this process. According to James Maxfield, Managing Director at Ascendant Strategy, it then becomes very hard to reach a consensus, simply because each senior figure will tend to want a new system to be customised to fit their area or business function. However, he warns that when firms attempt to take an off-the-shelf vendor product and then try to get it customised to match their current processes, this only serves to make the project far more expensive and difficult to successfully implement.
Doing things differently
In addition, all firms need to be more realistic about the extent of the solution that they are trying to innovate and be more pragmatic about what can be achieved within that legacy architecture.
“Firms need to be relentless around forcing market standardisation onto their internal processes and starting to use those standards”
James Maxfield, Ascendant Strategy
“The size of the innovation that they’re trying to drive needs to be practical, relatively small scale and something that they can make progressive steps around, rather than just trying to do the whole thing at once,” explains Maxfield. “Firms also need to be relentless around forcing market standardisation onto their internal processes and starting to use those standards, instead of taking standardised products – such as cleared derivatives or credit default swaps – then customising them in-house to fit their existing systems.”
In order to achieve this, the first step is for firms to begin with a clearly written strategy and execution plan, says Richard Jeans, Global Head of Operations, Finance and Risk Technology at Saxo Bank.
“The second step is then to formally seek the feedback from the organisation, that they understand it and they understand their role in it,” says Jeans. “Then you have a clear idea of the areas where you need to do more work for them to fully understand their role in the process.”
For this to be successful, the firm must ensure it already has an effective culture of innovation in place. It is fundamental that firms are open and offer the ability for people to come forward and ask questions if anything is unclear, Jeans argues.
“The ideal organisation is one that’s open to you to be able to come up and knock on the door. But that takes time and trust,” he explains.
“The ideal organisation is one that’s open to you to be able to come up and knock on the door. But that takes time and trust”
Richard Jeans, Saxo Bank
The language used to explain the planned transformation also has to be quite carefully worded, warns Lo. She also believes that the firms that tend to be better at executing innovation are those that start small and are able to demonstrate that the planned changes are achievable.
“They should take it very slowly, very gently,” Lo adds, “but in the background, there should be a bigger engine that is getting ready to make those changes the moment people are on board. It’s a two-speed journey.”
According to Lo, financial institutions always need to be mindful of the bottom line and on delivering value to their shareholders. However, this often means that the transformation journey is measured in very commercial terms. “People often talk about return on investment (ROI),” Lo says. “Yet the reality is that ROI is a by-product of what you do as a culture.”
One of the easiest, and potentially the most impactful, areas to start executing innovation in are those areas that deal predominantly with data, Lo argues.
“The rate of growth in data volumes has been exponential as the cost of computers has started to fall,” she explains. “Most financial institutions tend to use ‘classical tools’, such as Excel or email, even though they can’t handle the amount of data now being generated.”
“People often talk about return on investment. Yet the reality is that ROI is a by-product of what you do as a culture.”
Ling Ling Lo, Nomura
Andreadis agrees and adds that in order to overcome this joint challenge of budget allocation and continued reliance on outdated systems, board-level intervention will ultimately be required.
“If you’re only solving one part of the puzzle, then that’s not a great return on investment,” he explains. “To overcome the issue of numerous silos in the business, the CEO needs to be closely involved in the process.” This is because it is ultimately the CEO who can ensure the firm has clear goals, that each division cooperates with the IT department and that there is shared revenue attribution to make it possible.
“The CEO needs to understand the technology and be able to discuss with the CTO how that technology can help to achieve specific business needs,” Andreadis adds.
Firms also need to ensure that innovation is an ongoing process, otherwise they run the risk of accruing a ‘technological debt’, warns Andreadis. Institutions that do not stay on top of technology trends tend to find the potential bill for replacing legacy infrastructure only goes up in the long run, creating bigger projects with more to be fixed. “But firms that look at the competitive landscape and the technology that exists, perhaps by establishing an innovation centre or appointing a head of innovation, are then able to spot what is being developed and how that can applied to help their business needs,” says Andreadis.
“If you’re only solving one part of the puzzle, then that’s not a great return on investment. To overcome the issue of numerous silos in the business, the CEO needs to be closely involved in the process.”
George Andreadis, TreoTrade
Realising the benefits
Moving innovation forward in a high legacy environment also presents an additional challenge in being able to understand how that infrastructure works and how different business functions are interconnected. This is a vital consideration for institutions, as introducing a change in one area may create unintended consequences for another part of the business, warns Alastair Rutherford, Managing Director at Ascendant Strategy.
“Generally, what you see in organisations is that the functional silos have a reasonable understanding of what goes on within their own area, but as soon as it crosses that boundary, they have absolutely no clue what those other functions do with that data,” he explains. The first step, according to Rutherford, should then be to increase the levels of cross-functional engagement in order to promulgate a broader understanding of the end-to-end flow of data.
As a result, firms need to have someone in the organisation who broadly understands how front office processes are connected to middle- and back-office functions in order to gauge the impact of proposed changes to that business flow.
“If you have those people in your organisation they should be treated like gold, because they are the key to unlocking the ability to plug-in new technology safely,” Rutherford explains. “And once you’ve got a very high-level understanding of what the impact analysis looks like, then you also have a common language to move forward, even in a cross-functional environment.”
“The functional silos have a reasonable understanding of what goes on within their own area, but as soon as it crosses that boundary, they have absolutely no clue what other functions do with that data”
Alastair Rutherford, Ascendant Strategy
These downstream dependencies create additional considerations when attempting to innovate around a legacy technology stack. According to Jeans, the approach taken can then often depend on which type of investment cycle the firm is currently in. He explains that this can either be a ‘down cycle’, which requires finding ways to do the best with what you have, or an ‘up cycle’, where you can actively invest in enough bandwidth to be able to engineer your way out of your business issue or need.
“It’s not really about innovating around a technology stack, it’s more about innovating in terms of what you want to achieve as a business, whether that’s lowering costs or becoming more agile,” Jeans adds. “Innovation is really asking: ‘Are you getting the outcome that you want?’”
Standardise and keep-it-simple
However, firms also run the risk of making their innovation strategy too one-dimensional, which will not create the necessary buy-in to get people involved. Jeans warns that people are motivated by different outcomes, whether that be working with new technologies or solving business problems. Instead, firms need to focus more on getting the right people into the right roles, says Jeans, adding that true innovation can only come from “getting a varied cross-section of perspectives”.
Andreadis agrees, stressing that it is vital that firms opt for a modular solution that sits alongside the legacy technology, rather than a big ‘rip-and-replace’ project every few years. However, he explains that for firms to be able to take advantage of developments in open-source technology and REST APIs, they need greater standardisation for this to be effective.
“Once you have that kind of framework in place, you can start to much more efficiently and effectively innovate with new applications that come online,” Andreadis adds. “It suddenly opens up a whole new world of innovation, without the headache of getting different systems to talk to each other, or needing massive six-figure sums.”
So where should firms start when formulating their innovation strategy? Maxfield re-emphasises the need for a top down approach, coupled with firms fostering a sense of shared ownership in the transformation programme. He explains: “For the last 10 years, the innovation message in organisations has typically just focused on cost-cutting, which on its own is not overly motivational. Having an impactful strategy or vision, something that is going to excite and motivate, is far more effective.”
With that strategy in place, firms then need to break it down into smaller, manageable projects and avoid, or minimise, attempts at customisation, Rutherford adds. He believes that when firms have failed to innovate in the past, it is often because they attempted too many change trajectories all at the same time.
“Rather than focusing on just one or two areas, firms often attempt to change processes, technology, location and people all in one go, which only adds to the complexity and decreases their chance of success,” he concludes. “Successful innovation is about taking a pragmatic approach, keeping it simple and ensuring there is a firm-wide commitment to the ‘no customisation’ mantra.”
Please note that all contributors’ views expressed in this article are their own and do not necessarily represent the views of their firm