In this article, Mike O’Hara and Adam Cox of The Realization Group explore opportunities for financial services firms to undergo digital transformation, a concept some companies have thus far been slow to embrace. The benefits are proven in other sectors, but banks and other financial firms have been cautious about adopting many of the new technologies that make transformation possible. What’s holding them back, how can they overcome those hurdles and what advantages can they expect if they do? Andy Slight, Business Development Director at The Test People, Chris Smith, CTO for Digital and Analytics at KPMG, Jonathan Bell, Client Services Director for DMW Group and Matt Barrett, Director at Adaptive Consulting offer answers to these questions and insight into what makes for a successful digital transformation strategy.
For a sector that is meant to be on the cutting edge, the financial industry is surprisingly lagging in the digital transformation race. Other sectors such as retail and B2C companies have readily pursued cloud computing, continuous delivery and a range of disruptive technological practices in order to foster more automation, faster releases, improved customer service and state-of-the-art testing. For those financial firms now ready to widen their horizons, however, a strong digital strategy can make all the difference in gaining a competitive edge. At the same time, in an era of increasingly stringent regulation and trade reporting requirements, both buy-side and sell-side firms have little choice but to consider how they can gain efficiency through technology. But to make the leap, experts say that executives and IT leaders need to bear in mind some cardinal rules. Make sure to start small with a talented team, gain the trust and backing of top leadership, and most of all ensure that the business strategy, the technological change programme and the company culture all work hand in hand and are seamlessly interwoven.
“You do digital transformation, that’s brilliant, but if you don’t change your development practices and your testing practices, then you lose all of that competitive advantage you got by going digital because you can’t get your data out of the door quick enough.”
Andy Slight, The Test People
In the past, technological change at large financial services firms often came down to a question of resource. Andy Slight of The Test People will quickly tell you that those days are gone.
“Doing things the old way, by throwing bodies at it, is not going to cut it in a digital world”, Slight says. “The systems are becoming so complex and the data is coming from so many different areas that you need to do it in a better way.”
Enter the concept of digital transformation. By moving away from resource-intensive large-scale programmes and ‘big bang’ releases and instead employing practices such as agile software development, continuous delivery and automated testing, companies can transform their digital operations.
But the process involves far more than just the underlying technology and development operations. It involves transforming the way companies interact with their customers and the way that staff work with each other.
To get to that stage, companies need to lay the groundwork and then be prepared to follow through.
“The thing that we always say to our clients is, once you start to embark on this journey, there absolutely has to be top-down commitment and top-down leadership to make these things actually work properly,” says Chris Smith of KPMG. “When we talk about digital operating models and the agility that’s needed, it’s very much as a co-creation and collaboration with the business – technology can no longer be treated as a silo, it is a key input into the core strategy in away it has never been before”.
“Agile development methodologies have been around for a long, long time now and they are nothing without buy-in and agility from the business itself. It’s got to have the business model and a business case sitting around it… It’s got to have a bottom- line impact, and that understanding has got to be driven through the organisation.”
Chris Smith, KPMG
Financial services are no different from other sectors in that they have a wide range of technology systems, whether that is the result of mergers and acquisitions, insourcing or outsourcing. Because of this, IT systems become costly not only in terms of operational expenses but also in terms of lost opportunities through slow time to market, poor customer service or competitive disadvantages from a functional perspective.
An added complication is the sheer speed at which technology and the market are changing.
“The pace of change is so fast, it’s hard to keep up,” says Jonathan Bell at DMW Group. “I think one of the real challenges for investment banks in particular is they need to react quickly. Their traders, their front office people, need the tools and the ability to rapidly access data in order to react and respond to market events. You can’t afford to be running on dead slow technology or be stuck with old IT processes that mean your required system change is six months away.”
Smith of KPMG notes that it is not only a matter of being agile, innovative and more interactive with customers. It is also a question of dealing with a whole new breed of entrants in the financial arena, many of whom are benefiting from state-of-the-art technology whilst at the same time have lower barriers to entry and growth.
In fact, agile methodologies typically have come from smaller players that look at specific problems and then build out from there, re-imagining products and processes that the bigger players only reengineer. “They have the freedom to decide what the outcome is through that process,” Smith says.
Larger organisations do not necessarily have the luxury of having a clean slate. They need to consider the existing technology stack that supports the business. In that sense, it highlights how valuable an approach such as a microservices architecture can be. “That is exactly the sort of thing that needs to be investigated and applied to enable a business to really be agile,” Smith says.
Matt Barrett at Adaptive Consulting suggests that one way to conceive of digital transformation is to think of it as the process of reducing the amount of human contact with clients that a firm has as they make their way through the value chain.
For instance, the FX market involves very little human intervention, whereas transactions in the interest rate markets are characterised by extensive voice interaction.
“For investment banks, digital transformation is about being able to greatly increase the number of clients they can serve by removing the amount of human contact that each of those clients needs, and replacing it with an electronic interaction,” Barrett says.
“The organisation needs to change to get the best out of what the technology enables, which is basically becoming more and more focused on what your core centres of expertise are and not being good at things that aren’t important.”
Matt Barrett, Adaptive Consulting
If firms can take the electronic interaction as far as possible through the value chain – ultimately to the point of eliminating human interaction – they can scale much more easily.
As could be expected, different segments within the sector are at different points in their digital transformation journeys.
Larger sell-side organisations that have invested heavily in technological systems over the decades typically find it much more difficult organisationally to turn their backs on the old ways of doing things. In the current climate, where so much of the focus is on regulatory change,
it is also difficult for change-agents to put forward a business case and generate interest in transformation programmes.
Barrett says smaller to medium sized firms – such as some interdealer brokers or nimble, technology-driven specialist firms – are much closer to having fully digital organisations. “Some of the hedge funds are already there,” he says.
However, DMW’s Bell warns against companies seeking to undergo digital transformations for faddish reasons, simply because they see that other companies are doing it. “You always need to think about your business reasons for any kind of digital transformation project”, he says. “Pressure to do something because everyone else is doing it is always a bad reason for anything.”
The case for making a digital transformation starts with a company’s strategy. But to seal the deal, executives need to be able to see the business benefits.
For instance, companies in other sectors that have embraced DevOps are able to make new releases within minutes, not months. One of the reasons for this is because so much testing is automated.
“It’s a mindset issue,” Slight of The Test People says. “You can automate anything. It just depends on whether there’s a return on investment or not. But if it’s a well-defined test automation framework built in the correct fashion by good strong software developers, from a testing perspective there’s nothing that can’t be automated or wouldn’t be better to be automated.”
There are a few financial firms that have grasped the benefits that digital transformation brings. One top bank reportedly is running about 14 million tests a day using automation.
In fact, one of the ironies is that while some believe agile involves less testing, it actually involves far more – only the testing is far more automated, takes place earlier in the lifecycle and is performed continuously. Test early and test often, as the saying goes. In fact, Slight says testing at the beginning, low down the technology stack, is fundamental.
“You should be breaking all your components down and testing all your components individually, but against intelligent stub solutions,” he says. “That allows you to test any particular component in isolation, and once it’s been tested, promote that code up into an integrated environment, where all of the other components have been tested.”
One big benefit of this approach is that companies should be able to reuse significant amounts of automation. In this context, the intelligent use of stubbing and testing components via automation gives a company real speed. “You’re doing more testing all the way through the development lifecycle, but it’s just in a more automated fashion,” Slight says.
All of this feeds into the practice of continuous delivery, where small releases of functionality are released on a regular basis. Companies can then fine-tune the releases based on those early experiences that internal or external clients have.
“It’s less risky for production. You get your code into production earlier, so your customers get the benefit of that code earlier. It’s less risky to put in, and it’s easier to change if you got it wrong,” Slight adds.
This ability to change quickly while still having resilient systems could be particularly important in the financial services industry because banking is so much in the public eye. “These banking systems need to stay up continuously. Every time one goes down we all read about it in the papers, so they’re very visible,” Bell says
“If you don’t have the culture that is willing to embrace that change and really give it a whirl and get behind it and realise the benefits that it can bring to the business then you don’t have the right people to make it stick. You’re off to a non-starter.”
Jonathan Bell, DMW Group
Barrett adds that those companies that adopt continuous delivery methods recognize that being able to iterate and modify quickly is really about the velocity of change and being able to change the way customers are served. These companies can deliver an application or some functionality, see how it’s used, and then iterate on it. The iterative process can involve additional information from the marketplace, from what competitors are doing, or from information supplied by new technology, Barrett says. The point is that the feedback loop is continuous.
Many larger organisations miss the point, he adds. They think in terms of “getting it right” the first time, such as with trader tools. But customers can often easily switch between different providers and so the ability to be flexible and responsive takes on outsized importance.
Bell of DMW thinks of digital transformation in terms of future-proofing. “The reality is, everything is changing so quickly, what will we need to do it five years’ time? How will we need to interact? This is why you need to bake in flexibility into your digital systems,” he says.
Having been convinced that the benefits from a digital transformation are substantial, what is the journey that financial firms need to make to undertake such a transformation? KPMG’s Smith identified three stages in the process. The first involves management understanding and experiencing what mobile usage and social media could mean in terms of the business and the customers. “Understanding actually what experience they want to present out to their customers – what is that holistic experience?”
Stage two concerns considering how a company will use the mobile technologies that are available to interact and engage, or to enhance engagement. How will a company use social media and the way in which people now communicate to make itself more relevant? This second stage is based on agility and innovation. At its heart it is about how companies such as investment banks and retail banks need to change in order to cater to a new breed of clients with different expectations from those in the past.
“Then the final stage is about collaboration and trust,” Smith says. The way in which solutions are devised is no longer a case of: ‘I put a product on the shelf and I can sell it’. Now the narrative is: ‘How do I create a product and experience with the people that I’m actually trying to engage?’ The phrase now in vogue to describe such activity is “the collaborative economy”. Crowd-funding, open source software, participatory budgeting, open data and open governance are all examples of the concept. “The collaborative economy is on the march and it’s not going to be stopped,” Smith says.
If Smith’s three-part process describes the journey, there remains a critical question: how does a firm actually go down that road? Experts say there are at least two significant areas that companies need to focus on. The first is operational and the second is cultural. And just as digital transformation is about moving away from big bang releases and large-scale programmes, the process of undertaking a transformation is itself also one of iteration.
Many large financial institutions have gone in with the mindset that they will initiate a massive transformation programme and fix a wide range of problems in one go, Bell says. In fact, they should be taking the opposite approach.
“If you take a sensible look and you plot your course step by step, start small – maybe build out some new function with some new technology in a new way, embrace DevOps or some new tooling, or relax your processes for releasing things live into a small user base – then I think you will start to embed that way of working,” Bell says.
What that can do is pique the interest of other parts of the organisation. They see that this new way of working is more productive, faster or more efficient and they wonder if they can emulate the process. “Then you can scale out and you can change the processes from within, without tackling everything at once,” he says.
If big change programmes represent one extreme, trying to be purely agile and tweaking as you go represents the other end of the spectrum. It may sound cutting edge, but Bell says that won’t work either. “You can’t run at these things blind; you need to think it through, but realise that you don’t necessarily know where the world will enable you to be in five years’ time, let alone exactly where you want to be in that context in five years’ time.”
Instead, Bell advises a middle course, looking two to three years forward and taking on digestible chunks, with an eye on the end goal. Otherwise, a firm risks building a tactical system that doesn’t fit in and strategically doesn’t hang together. “You’ve got to avoid that. You can’t just go tactical with your blinkers on, nor can you take on the whole thing because it’s too large, if that makes any sense.”
The good news is that a team of four or five talented people can do enormous things, whereas a team of 70 people of uneven strengths may not achieve much – and will involve great costs.
Starting small has another important feature. It can allow digital visionaries to enlist the support of top management. A small injection of agility can be used as a showcase. “At some point, you’re going to need to have someone sitting on the executive committee that holds in his hand a baton with the words ‘digital’, ‘experience’ and ‘data’ written on it,” says Smith. Bell of DMW agrees: “It can take some time because you need that senior sponsorship within the business, whether that’s the CIO or even the CEO.”
With a successful showcase project under its belt and senior management buy-in, a company finally needs to set about changing its culture to fit with a more collaborative, iterative operational model. Which, for established companies, is no mean feat.
As if to hammer home the point, Slight of The Test People conjures up a business scenario based on the old school methods. A project is kicked off with a requirements document that takes six months to write. It includes a long list of sign-offs and takes another six months of coding to meet the requirements. Finally, it takes another six months of testing.
Rather than mitigating risk, this approach is more likely to increase it. “Everyone’s been involved in those projects where people can’t make their mind up and it’s very, very difficult to capture people’s requirements. So you get to the end and you don’t really get the solution that you want,” Slight says.
In the end, for those financial sector executives sitting on the fence, it thus comes down to a rather stark choice. There’s the comfort zone of traditional methods, such as spending 18 months and a good deal of money on what could be an ineffective solution. Or there’s digital transformation, where innovation, collaboration and speed are the order of the day. For these experts, the choice is obvious.