Revenue Growth. More Revenue Growth. And More Revenue Growth This is the mantra you can hear chanted through the halls of financial services firms all around the world today. It is particularly important to this segment of the economy since share prices have climbed 91 percent in the last four years. So the million dollar question is, where in the future is this incredible revenue growth going to come from? Most organizations would probably answer “product innovation”. However, if you examine this closely, the reality is that even product innovation does not ensure competitive advantage. More than $11 billion is spent by financial institutions on this a year, but even a new kind of offering gives a company less than a three-month lead over its competitors. New products also often bring with them increased complexity, an increase in operating costs and unsatisfied customers. And the failure rate is high, 60 to 80 percent.¹ There are other obstacles to organic growth today including saturation of products in markets which have become mature, increased sophistication of the customer base, new competitive threats emerging from retailers (i.e. Walmart and Target) and insurers, increased costs due to requirements for complying with regulations (not only SOX, but Basel II and the International Financial Reporting Standard) and the costs associated with the high churn rate of customers moving from one bank to another.

What some consultancy firms have proposed is that profitability for financial service organizations will come from looking within their own companies. “The game will be to steal market share and share of the wallet by relearning the growth habit through innovative practices.”² Two of these practices are process innovation and automation of these new processes. By innovating internal operations, greater efficiencies are achieved, the work that is done is more effective and capital can be redeployed to focus on the core business. This white paper addresses one often overlooked area for process innovation and technology deployment, corporate real estate (CRE).

In a press release announcing Dr. Glenn Mueller’s appointment as investment strategist for Dividend Capital, he made the statement that in addition to cash, stocks and bonds, real estate was coming to be viewed as the ‘fourth asset class.’ We believe that not all organizations recognize this, and a discussion of the value of real estate holdings is often not heard in the C-suite offices until the CFO is trying to raise capital and tells the VP of CRE to sell off real assets (particularly in an up market) or some traumatic event occurs. This could be a natural disaster, like Hurricane Katrina, which shut down operations for an extended time and destroyed property, or following a merger or acquisition when the financial markets were expecting massively reduced cost of operations and it did not happen. The time is ripe to recognize the value of this fourth class asset—real estate—and how it can bring to an organization new process innovations and technology implementations, like an Intelligent Workplace Management Systems (IWMS). IT can now support CRE with new management tools linked to existing systems to pull increased efficiencies out of internal operations of its real asset base.

The Problem Cs: Complexity, Consolidation, Compliance and Costs

Complexity

The interior world of the financial services firm is an extremely complex environment. It is a world full of companies that have joined together through consolidation opportunities with different work practices, cultures and disparate and redundant systems trying to sing from the same songbook. It is a world where outsourcing is on the agenda or will be for all financial institutions, and not only for transaction-based back room operations and call centers, but higher valued analytical studies as well. It is a world which bet on the retail branch becoming obsolete and now realizing that not only did that not happen, but the local branch is now more important to revenue growth than ever. It is a world peopled with not very loyal and extremely restless customers, with only half of them staying with the same branch and only half of those remaining who will recommend that bank to any of their friends or colleagues. And it is a world that is already full of thousands of financial products, often one more confusing than the next. A UK market study counted 29,000 different products on the market at any one time…how’s that for complexity!

Wharton has published a report on the increasing complexity in services and describes how banks and other financial institutions are often closer to their customer base than most companies, but this can be a problem. “In fact, they could actually be smothering both themselves and their customers with dispensable or outdated offerings, made worse by overburdened internal processes that ultimately hurt the essential elements of survival—customer service and satisfaction.”³ And because complexity does not jump up as a problem on a financial statement, there is often a lack of perspective can have a profound impact on the costs of operations.

Consolidation

Consolidation is not new to financial services as there has been much merger and acquisition activity for the last decade. But mergers and acquisitions have increased as companies try to find a balance between more risky segments of their portfolio, like investment banking, with more stable offerings, like retail banking. In fact, today is being dubbed the ‘retail renaissance.’⁴ Savvy financial executives are learning new dance steps, not from their competition, but from the ubiquitous coffee houses and hamburger franchises who understand how to sell to the 21st century customer. Therefore, instead of distancing themselves from their customers as they did with the advent of the ATM machine, they are turning the staid old bank branch where we went to perform some financial transaction into a financial “center”. This ensures all of their innovative products are understood and accepted by the market anytime any day that the customer wants to have a more in-depth discussion of their financial needs. Some of these retail “stores” have become so successful that they are recording more foot traffic than the local hamburger joint with the golden arches down the street.

Compliance

The finance function of a bank is being entirely restructured due to the growing requirements from the regulatory agencies. Not only do they have to comply with Sarbanes-Oxley in the U.S. and tighten financial controls, they must upgrade their management of risk and ensure greater transparency. In addition, the global players (and even some of the regional and national banks) are preparing for Basel II and the International Financial Reporting Standards (IFRS).

Basel II is the International Convergence of Capital Measurement and Capital Standards. It is the outcome of the Basel Committee on Banking Supervision’s work over recent years to better align the regulatory capital measures with the risk profile of a bank based on market, credit and operational risks. IFRS requires compliance with IAS 39 which is constantly being amended and in turn makes implementation more difficult. And to make matters even more difficult, IAS and Basel II do not always agree, further complicating compliance.

Costs

“Revenue growth is the primary driver of shareholder value and the #1 challenge for financial service companies around the world. Yet, this time around, the industry’s growth objectives are tempered by a continuous focus on cost containment.”⁵

A discussion of real estate is often not even on the table until some traumatic event occurs, like bad financial transactions which cost the company millions of dollars in unnecessary expenses or following a merger or acquisition when the financial markets were expecting massively reduced cost of operations which did not happen. We believe real estate needs to be recognized now, not as a problem but as an enabler. One financial institution in Australia even views real estate as this fourth asset class and revenue generator as it invests in shopping centers, toll roads, airports and even broadcast towers.⁶

The Solution:  Process Improvement in Real Estate with IWMS

In order to respond to all of the above drivers, real estate organizations have to investigate new ways of adapting to the changing requirements of their customers (the business units), as well as continuing the quest to reduce costs. As mentioned previously, one area that has been repeatedly overlooked is real estate; the land, buildings and equipment on the buildings (ATMs) and in the buildings (i.e. furniture, computers, trading floor technology) that an organization leases and/or owns. There is now a new attitude toward these assets today as the value of real estate alone has risen substantially and can no longer be ignored. Nor can the value of the knowledge about these assets not be paid attention to, which is about to walk out the door with baby boomer retirees if no formal system is in place to capture this valuable information.

This white paper addresses how executives in the financial services industry should apply their same level of fiduciary analysis to this fourth asset class that they apply to their cash, stocks and bonds. There are enterprise technological tools available today to give executive management, along with their real estate and asset management teams, the information to make informed decisions as they determine where, when and how their capital should be deployed. It is time to explore new strategies and technologies, like an IWMS solution, which can raise the financial intelligence of the real estate function to help create a highly productive workplace for the financial services industry.

An Integrated Workplace Management System has been described by Mike Bell, Gartner Group, as an “enterprise-level software solution that integrates four key components of functionality: project management; real estate portfolio and lease management; space management (moves, adds and changes [MAC]); and maintenance management. The software operates from a single database, and it offers workflow tools, executive dashboards, and predefined and customized reporting capabilities. Most suite applications will interoperate with other enterprise applications, such as enterprise resource planning (ERP), supply chain management (SCM) and human capital management (HCM), via Web services technology.”

In order to plan for the use of this system, Part II of this paper will first describe two strategic approaches that involve the use of the IWMS solution. Then a definition of the metrics, which can be reported on using this solution, will be provided which can be utilized to measure the success of these strategies for the business.

By Nick Moore and Nancy Johnson Sanquist

We welcome your Questions and Comments

Copyright 2008 Tradeline Inc.
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ISSN: 1096-4894