Combined 10 Challenges 2011

Top 10 Challenges for Investment Banks
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Top 10 Challenges for Investment Banks 2011
Introduction Navigating Through Uncertainty

With leverage no longer an easy option to drive returns on equity, and proprietary trading now seen as risky by both regulators and shareholders alike, investment banks are faced with the difficult task of identifying new ways to propel their returns on equity back to something close to pre-crisis levels. In such an uncertain operating environment, assessing risk, making the most of existing revenues, and capitalising on new opportunities have never been more important.
Introduction: Navigating Through uncertainty
Figure 1: Real GDP Growth (% growth year-on-year)

10 8 6 4 2 0 -2 -4 -6
20 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
US EU Emerging & Developing economies
Source: IMF, World Economic Outlook Database, April 2010
Focusing on the future:

Investment banks are increasingly operating in a volatile, resource constrained and highly regulated environment. Rigorous focus on strategic and operational priorities provides the key to high performance.
The world economy is emerging from its most severe recession in over 50 years. And the mid-term prognosis is still far from rosy. Recoveries from creditinduced recessions take time. Often twice as long, in fact, as recoveries from recessions sparked by interest rates hiked to contain inflation. Signs of real structural strength are in short supply. In the US, although recovery is underway, underlying fundamentals remain relatively weak. The governments stimulus package has not delivered as significant a boost as had been hoped. Meanwhile, in Europe, the likelihood of any sustained recovery from the worst downturn in 30 years remains at best uncertain. For the moment, bank lending continues to be constrained by new regulation such as Basel III, as much as by now cautious bankers just when it is needed most. While banks managed to dramatically improve productivity over the past two years, a new wave of banking innovation and revenue generation has yet to arrive. The most encouraging signs of growth are in the emerging markets highlighted by the IMF for their exciting catch-up growth potential. In many of these markets, escalating levels of wealth point to accelerating demand for financial services and products an exciting opportunity for investment banks, provided they can tailor their offerings to suit local requirements.
Introduction: Navigating Through Uncertainty
No surprise that investment banks are still scrambling to adjust to the realities of this new normal. In a straitened operating environment where the only certainty is increased regulation, pre-crisis returns on equity (RoE) of, on average, 20 percent look extremely optimistic. As banks seek to identify (and exploit) every revenue opportunity, they need to ensure a rigorous focus on strategic and operational priorities. If they do not, they risk undertaking a series of broad-based transformations that achieve little other than squandering precious resources and dulling competitive edge. To help achieve the focus that we believe is essential to high performance, Accenture has developed a list of the top ten challenges facing investment banks today. Although these may not apply to all with equal weight, each represents a major concern (and source of opportunity) for the industry going into 2011 and beyond. Fundamental macro trends As they face up to the challenges that lie ahead, investment banks need to keep the following six macro trends front of mind. Each of them, we believe, will play a crucial role in shaping the future operating environment:
1.Demographic challenges Widely reported, most developed economies are struggling to come to terms with seismic demographic challenges. To varying degrees, these are set to transform the way people live and work. Life cycle savings and ageing populations point to the need to save in developed economies, making asset management an increasingly vital source of revenue growth for investment banks. 2.Emerging markets growth Economies experiencing rapid growth, combined with little well established competition, offer exciting opportunities for investment banks. But the risks, and operational challenges, of expansion into these new geographies are still being potentially underestimated. 3.Technology commoditisation Technology has repeatedly demonstrated its ability to commoditise banking offerings particularly in non-relationship based, low value added areas. With commoditisation increasingly dominating flow businesses, clearsighted strategic decision-making is vital. Banks must either make the substantial investments in straightthrough processing capabilities needed to achieve economies of scale, or concentrate on areas such as advisory, that cannot be commoditised.
4. Ultimate value to investors Investment banks have to concentrate on services and offerings where they deliver value to their clients, not just margins to themselves. This makes it essential for banks to develop deep, real-time insights into the risk/reward balance of their products and services. 5. Re-evaluation of capital Savings deposits may be the most desired form of capital, undemanding and sticky, but those attributes also make it rare and likely to become rarer. Investors have many more choices on where to place their capital and the amount placed in savings has been one of the slowest growing of all areas for over a decade. With this in mind, investment banks need to re-evaluate capitals importance in any service of product and charge accordingly. 6. Resource constraints Mounting resource constraints point to gradually rising input costs becoming a universal backdrop to all business and banking activity. With oil approaching peak output, and basic commodity costs responding to wide demands of emerging markets, a reordering of economic priorities looks to be the likely result. Sustainability is now on the agenda (as a serious business issue) across all business sectors and investment banks must overcome their institutional cynicism and follow suit (as well as capitalise on the opportunities presented).
Investment banking three themes for the future With these macro trends in mind, we have divided the challenges facing investment banks into three broad themes: Responding to regulation Of course, banks must still take risks to achieve their targeted RoE, but they must now do so through a complex (and still evolving) regulatory framework. Beyond question, responding to the postcrisis wave of regulation presents a major compliance challenge for all investment banks although new opportunities will be created from the market dislocation that is already underway. From now on, robust risk management will be a crucial demonstration of intent to regulators, as well as allowing banks to shape regulation and protect shareholder value. If one lesson can be taken away from the crisis, it must be that previous risk governance models were largely inadequate to shield investment banks from the onslaught of systemic turmoil. Going forward, therefore, banks must commit to adopting and embedding a culture of managing risk throughout the organisation (particularly in the front office).
Driving the client agenda With proprietary trading operations being limited by regulators and questioned by shareholders, the importance of building (and maintaining) a successful client franchise is now critical to the bottom line. So too is the need to drive greater efficiencies from existing revenues. From now on, banks must focus on providing integrated client services to attract and retain client business, as well as developing the deep analytical insight needed to monitor and maximise client returns, and undertaking realistic assessments of the costs and benefits of the services that they provide. As figure 2 shows, the results of this discipline will allow them to pinpoint where to invest to achieve economies of scale, and where to aim for high-touch differentiation. Lastly, now more than ever, by taking sustainability seriously, they have an opportunity to regain trust (amongst clients and throughout wider society), while delivering returns to their core business through responsible business practices.
Figure 2: Effective Targeting of Client Offerings
Value of Client
Banks can find new revenue through effectively segmenting clients and determining where value is delivered Realistic assessment of cost and benefits of services need to be undertaken Result indicates where to invest to achieve economics of scale and where to aim for high touch distinction Services may well be denied even where marginal costs are low in order to privide distinction Objective is not to focus on top 20% to the exclusion of all else, but to be aware of costs and benefits of eack client
Marginal Value of Provision
Access to Capital & Select Investments Access to Analysts
Broker reports Electronic Trading - Direct Market Access Client Coverage (%) Source: Accenture Research
Low Touch
High Touch
Access to Core clients
Preparing for the new normal Whilst banks must remain resolutely focused on the many challenges of today, they also need to keep an eye on tomorrow. That way, they can ensure they are positioned to take advantage of the next wave of growth instead of having to react to it. The banks that successfully capitalise on future strategic opportunities will possess acute strategic insight, be early adopters of emerging technologies and, critically, be able to make measured assessments of tomorrows key battlegrounds and their chances of success in each of them. Unknown unknowns may be proliferating in todays operating environment. But one basic fact remains there are still really only three ways to make money in investment banking: take risks, grow revenues and control costs. This years report explains why we think banks can and should keep each of these truisms in mind albeit, inside a wrapper of customer centricity, operational flexibility and risk awareness. Pinpointing the core challenges In such a competitive marketplace, investment banks must move swiftly to plan and execute optimal responses to the complex challenges they face. To help them, Accenture has used its research, industry expertise and client insight to pinpoint and examine what we believe to be the ten key challenges currently confronting the industry. We have surveyed over 2000 of our capital markets professionals across the globe, and over 200 senior clients, to determine the Top 10 Challenges for Investment Banks 2011:
Responding to regulation 1 Responding to the regulatory tsunami 2 Dealing with OTC derivatives reform 3 Embedding effective risk management Driving the client agenda 4 Refocusing on client needs 5 Maximising client profitability 6 Taking sustainability seriously 7 Delivering valuable transformation Preparing for the next horizon 8 Harnessing innovative technologies 9 Engaging effectively in emerging markets 10 Picking the right battles. In this paper, we explore each of the Top 10 Challenges in detail. For each one, we describe the background and context, as well as providing specific examples of the challenges faced by many investment banks today and the reasons why these will be front-of-mind issues for 2011 and beyond. We also provide Accentures perspective based on our research, experience and insight in the market. Finally, we show how our proven services and solutions have already delivered benefits to clients, helping them to overcome these challenges in a real world context.
Accenture Experts Dean Jayson Senior Executive, London dean.l.jayson@accenture.com +44 20 7844 8295 +44 79 5841 4692 Ryan Westmacott London ryan.m.westmacott@accenture.com +44 20 7844 5259 +44 78 1030 4031 James Sproule London james.r.sproule@accenture.com +44 20 7844 3387 +44 78 6680 8366
Introduction: Navigating Through uncertainty
Responding to the Regulatory Tsunami Dealing with OTC Derivatives Reform Embedding Effective Risk Management Refocusing on Client Needs Maximising Client Profitability Taking Sustainability Seriously Delivering Valuable Transformation Harnessing Innovative Technologies Engaging Effectively in Emerging Markets Picking the Right Battles
10
Responding to the Regulatory Tsunami

Fears in the financial services sector of a drastic increase in regulation at a national and supra-national level have been realised. With so much game-changing oversight being introduced, it is increasingly difficult for investment banks to ensure complete compliance while continuing to make money in an uncertain market.
Challenge 1: Responding to the Regulatory Tsunami
The recent financial crisis has resulted in a plethora of governmental and regulatory actions. As the financial markets begin to stabilize, governments are now seeking to develop an improved regulatory environment.
Shearman & Sterling LLP
And there is little prospect of a more joined up approach being adopted for the foreseeable future. In the hope that they can prevent a similar crisis from happening again, the tangled web of regulators and supervisors across the UK, Europe and the US have all been introducing significant changes to their regulations. And in the face of ongoing economic volatility, national governments are likely to continue to plough their own furrows as they strive to garner political support through new regulatory initiatives, instead of focusing on a more systemic approach. Beyond question, fears in the financial services sector of a drastic increase in regulation have been realised, with ongoing scrutiny of both strategic and more technical, low-level requirements. The non-exhaustive list in figure 1 gives an indication of the range of regulations currently being implemented around the world.
Background
Radical (and often uncoordinated) overhauls of financial sector regulation

Shifting from light touch regulation towards a more intrusive focus on both strategic and low-level technical requirements
As the dust has settled on the financial crisis, it is clear that politicians and regulators are keen to make up for their perceived lapses in control in previous years. However, notwithstanding commitments made at the G20 Financial Summit in April 2009, for a unified approach, national changes in financial services regulation since then have been uncoordinated, often even contradictory.
Figure 1: Global regulatory landscape

Regulatory landscape Market changes
European Supervision Authority Financial Stability Board
FSA / BoE
Rating Agency Regulation
Hedge Fund Regulation
Increased Liquidity reserves
Too connected to fail
OTC Derivative Central Clearing Exchange Trading
Remuneration
Securitisation Treatment Risk reporting and disclosures Living Wills / Orderly Liquidation
Enhanced Capital Requirements
Volcker Rule
Banking Requirements
There has been a pronounced shift away from light touch regulation (considered adequate pre-crisis), towards a much more intrusive role for regulators. Dodd-Frank, Basel III, Capital Requirements Directives 2 and 3 and OTC derivative clearing regulations on both sides of the Atlantic, all examples of this stance, are each game changers in their own right. However these are layered with other ongoing developments including increased risk and reporting requirements, stringent oversight of remuneration and far-reaching changes in the shadow banking sector. The combined effect of this onslaught is difficult to digest and, because regulations are in continual flux, hard to plan for with any certainty.
At a high level, bank CEOs and CFOs will have to develop effective relationship-based links with the regulators
Key challenges
Reassuring regulators while continuing to satisfy shareholder expectations

There are strong indications that in the future, regulators will move away from deep dive transaction-level audits towards a more macro approach. This will be geared to gauging the resilience (or otherwise) of banks strategic risk and control frameworks. In the UK, the abolition of the existing tripartite regime between the FSA, Bank of England and HM Treasury (effectively scrapping the FSA) is symptomatic of this trend. So what challenges does this shift create for investment banks? At a high level, bank CEOs and CFOs will have to develop effective relationship-based links with the regulators. This looks inevitable and there is already evidence that some banks are becoming more proactive in this respect. These new relationships see bank CEOs communicating their in-depth understanding of existing front-to-back infrastructures and processes, as well as whatever plans have been developed to address weaknesses from both tactical and strategic perspectives.
The writing is on the wall. With little warning and at short notice, C-suite bank leaders will increasingly have to be equipped to provide macro-level assurances on the state of their risk and control environments. Inevitably, therefore, the compliance director (who will need to support this relationship-based approach) will become increasingly influential. At a more granular level, the key regulations are set to have a major impact on the business operations and behaviours of investment banks worldwide. In the current economic climate, it is already hard enough for financial services firms to remain profitable, without the added burden of market changes, costly regulatory programmes and further restraints on their business models. In fact, an Accenture poll of 101 financial industry executives found that nearly half (49 percent) thought their profits would decline as a result of the Dodd-Frank Acti.
The recent Basel III proposals, although less onerous than originally expected, demonstrate how deeply the new regulations will be felt (see figure 2). The agreement sets a new Core Tier One ratio of 4.5 per cent, more than double the current 2 per cent, plus a new capital conservation buffer of a further 2.5 per cent, so the rule sets an effective floor of 7 per cent. Further to this, there is likely to be local variation as national regulators determine countercyclical capital requirements and additional requirements for systemically-important institutions. However as with all of these announcements, the devil is in the detail and along with the increased ratios, the Basel committee has also tightened up the rules around what can be used as core tier one capital. This has the potential to cause serious pain as banks are forced to shrink their balance sheets and assess the future viability of business lines with high capital consumption. We will see increased levels of retained earnings, and even capital-raising, to ensure sufficient capital buffers, all of which suggests a challenging proposition for investors (and employees) as dividends and compensation packages are squeezed. Figure 2: Building up to Basel III
Tier-One Ratio Core Tier 1 Ratio
The scale of organisational challenges should not be underestimated. The combined effect of this new regulation will require significantly enhanced business and product transparency. Costly overhauls and upgrades of existing infrastructures will be unavoidable. Additionally, clear control functions, effective risk management and welldefined processes and procedures will be important not just to have, but to continually maintain and improve. Accenture predicts that the industry will spend between $3 billion and $5 billion over the next three years to implement The Dodd-Frank Wall Street Reform and Consumer Protection Act aloneiii, and a recent survey of financial services executives across the US revealed that 70 percent believed that proposed regulation would increase costs.
With so many high-profile regulatory changes hitting the banks, there is an enormous amount of pressure on them to manage these developments as quickly and effectively as possible. As if this was not challenging enough, they must do this while satisfying increased demands for the creation and delivery of robust shareholder value. It is clear that there will be winners and losers as banks emerge into the new world of regulation. The winners will be those banks who have been able to view the changes in a strategic way, understanding how their business models need to change, either in terms of divesting or closing business, or through regulatory arbitrage across geographies.
Figure 3: Expected impact of proposed financial services regulation

What impact on your company do you anticipate as a result of proposed regulation?
Will weaken competive position Will stengthen competitive position Will decrease profitability Will increase profitability Will decrease costs Will increase costs Will have great impact on long term business strategies
40% 27% 48% 31% 11% 70% 61%
Source: Accenture researchiv
8.5-11% 8.5% 6% 2.5% 2.5% 2.5%

Core Tier1 =7%
0-2.5%
0-2.5%
Various hurdles stand in the way of achieving these goals. As far as satisfying the regulators is concerned, poor data, limited understanding of processes and lack of senior management sponsorship are common issues in most investment banks. As a direct result, regulatory change takes much longer than it should. It also consumes far more costs and resources than would otherwise be necessary.
4%
2.5%
4.5% 2% Current Basel II Regime Increase to Core Tier-One Capital Conservation Buffer
4.5%
4.5%
Countercyclical Capital Buffer
Proposed Basel III Regime
Source: Basel Committeeii
Our perspective
Enabling a continuous cycle of risk and control enhancement

Regulatory change is notoriously difficult for investment banks to implement. In large part, this is because the timescales are immovable something that banks find extremely difficult to work with. In fact, the only variable that banks can change is the budget available for regulatory projects. And in our experience, throwing money at the problem is commonplace, with projects often running at least two to three times over budget. According to our estimates, over the past three years an average bank will have spent up to $900 million on regulatory change-related programmes, as well as tying up huge numbers of resources. With such large numbers at stake (see figure 4), poor delivery can be very costly indeed.
Figure 4: Regulation-related costs over three years

Discipline Data Finance Risk Operations Technology Total Costs (US$m) 90 230 260 200 120 900 FTE (per year) 90 280 360 290 115 1135
Source: Accenture research
The problem is the current wave of regulation is bringing several regulatory programmes of this scale together at the same time.
History has shown us that implementing a single regulatory change, such as MiFID and Basel II, has caused major problems for implementation, with many banks still struggling to integrate the changes into their existing systems. Successful responses to these regulations were those that tackled the challenges through a strategic and co-ordinated response that embedded the changes within both business and operating models, rather than implementing short-term tactical solutions to the regulations. The problem is that the current wave of regulation is bringing several regulatory programmes of this scale together at the same time. More than ever, banks need to ensure that they fully understand the new regulations and the effect on their business.
Based on Accentures extensive experience in implementing large-scale regulatory change programmes, we have developed a framework for translating and mapping regulatory change requirements to improved system architecture and process changes. By using this approach, banks can ensure that they are driving through their implementations as efficiently and effectively as possible. With a delivery methodology specifically designed for strategic regulatory and operational implementation across financial services organisations, we enable banks to create, develop and deploy new governance structures, risk and control frameworks and processes for ongoing monitoring and effectiveness assessments. As well as satisfying regulators demands for ongoing oversight, these structures and processes inject discipline and rigour into the change process. The objective is not just to make the required changes on time and within budget, but also to do so strategically. That way, it will be easier to manage further regulatory change as part of a continuous cycle of risk and control enhancement.
The objective is not just to make the required changes on time and within budget, but also to do so strategically.
Additionally, the bank needed to increase its Regulatory Capital Reporting capability to achieve daily reporting for multiple asset types (from an existing monthly reporting basis). Using Accenture Target Operating Model design and Basel II Regulatory Capital assets, the Accenture team identified the key objectives of this project: Achieve a common Target Operating Model design (encompassing Risk and Finance systems, data process and governance) to simplify and consolidate the reporting process, enabling a daily reporting capability Bundle aspects of the Target Operating Model design into logical projects and agree the prioritisation and plan for project delivery Secure long-term funding approval for change and deliver projects. Accenture supported the bank by facilitating workshops and deep-dive analysis geared to achieving a common Target Operating Model design across multiple stakeholders each with their own business priorities. As a result, the team achieved a single and agreed delivery prioritisation schedule and plan spanning a number of years, as well as securing senior buy-in and funding and implementing a multi-year delivery programme. By using the proprietary Accenture assets, the team was able to successfully implement numerous technology and process change projects, including: Migration to a single Regulatory Capital platform and reporting process redesign Delivery of multiple risk system enhancements Migration to daily reporting process across multiple asset classes Mechanisms put in place to identify and remediate regulatory compliance gaps.
In practice
Developing a single operating model view for regulatory capital reporting

A major European investment bank urgently needed to develop a common operating model view across multiple areas of the enterprise, including Risk, Finance and Technology, as well as putting in place and delivering a multiyear strategy and plan for delivering on that model. There were two principal drivers for this project. First, having evolved over time, the banks Basel II Regulatory Capital Reporting environment (spanning technology, data, process and organisation) was fragmented, with multiple tactical systems, parallel processes, data issues and control gaps. The net effect was unnecessary production pressure and significant regulatory risk.
Accenture experts To discuss any of the ideas presented in this paper please contact: Chris Thompson Senior Executive, New York chris.e.thompson@accenture.com +1 917 452 4986 +1 917 378 1409 Peter McCloskey London peter.mccloskey@accenture.com +44 20 3335 0876 +44 77 4079 9130 Samantha Regan New York samantha.regan@accenture.com +1 917 452 5500 +1 404 790 7378
iSource: Accenture
(US Financial Regulatory Reform: Cost or Opportunity?, June 2010) iiSource: Basel Committee Press Release (BIS, September 2010). Note = capital ratios refer to proposed ratios as of 1 January 2019, and are subject to phase-in arrangements. Proposals are draft and are subject to ratification by national authorities. iiiSource: Accenture (US Financial Regulatory Reform: Cost or Opportunity?, June 2010) ivSource: Accenture (US Financial Services Regulation Survey, June 2010). N=102 (33% C-suite, 20% VP/SVP/EVP, 24% MD/Director, 24% Senior Manager/Manager)
Dealing with OTC Derivatives Reform

Banks are seeking to develop cohesive responses to ongoing OTC derivatives reform in the US and Europe. Although the combined impact of these reforms is still unknown, it is clear that the industry landscape will be significantly transformed. We will see derivatives moved through clearing houses [and] traded on exchanges. Senator Chris Dodd, April 2010
Challenge 2: Dealing with OTC Derivatives Reform
The Wall Street reform bill will for the first time bring comprehensive regulation to the over-the-counter derivatives marketplace.
Gary Gensler, Chairman, Commodity Futures Trading Commissioni
Background
Reforming the maligned derivatives industry

Although the end-state of the OTC derivatives market following this major regulatory thrust is still unclear, there is no questioning the commitment to major reforms on both sides of the Atlantic
Accounting for 90 percent of the global US$605 trillionii derivatives market, the over-the-counter (OTC) derivatives market was widely viewed as a catalyst of the financial crisis. Light on both risk mitigation and risk management, it is blamed for facilitating the build-up of excessive exposures, as well as operational inefficiencies, complexity and an overall lack of market transparency. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform & Consumer Protection Act. This introduced an extensive set of new regulations that focuses on both reducing counterparty risk and increasing transparency. The Act mandates the establishment of a new regulatory structure, limits on proprietary trading and the reshaping of regulation on swaps trading (including the spin-off of certain swaps trading operations into separately capitalised businesses). Amongst other consequences, the Act may have a negative impact on capital efficiency, as well as significantly reshaping banks operating models to ensure greater market transparency and reporting.
The Act is extensive in its scope, though the focus of this discussion is around the ongoing shift of bilateral and uncollateralised transactions towards regulated markets and central counterparty (CCP) clearing. This move seeks to lower systemic risk in the OTC derivatives market. However, while the Obama Administration is clearly applying pressure on Wall Street, and encouraging similar action from the European Commission, it is still too early to evaluate the exact impact of this concerted effort to reform the OTC derivatives market on investment banks.
What is clear, however, is that the combined effect of these major reforms will significantly transform the industry landscape. The challenge for investment banks is one of staying ahead of the regulatory curve as it continues to evolve. The focus throughout this transitional phase and beyond must be on ensuring agile decision-making processes. These will be key in enabling rapid responses and gaining competitive advantage in a fast-evolving marketplace.
Figure 1: The regulatory outlook for OTC derivatives
Regulation
Implications
US
EU
Central Clearing
Financial Companies to centrally clear swaps (grandfathering of existing swaps) Exception: Non-financial companies (end-users) exempt
Liquidity demand of high initial margin Daily variance margin Cash form of margin
Exchange Trading
All standardised swaps to be exchange-traded, where an exchange/ASEF exists Exception: Non-financial companies (end-users) exempt
Inability to customise (important for hedging) Standardisation of swaps Increasing volumes
Swaps Push-Out
Certain swaps trading operations to be transferred into separately-capitalised non-bank entities Exception: Hedging own risk, IRS, FX, and some metals (gold, silver, etc.) Conservative requirements for dealers and major swap participants for cleared swaps Higher capital requirements for dealers on OTC positions
US only Majority of market is exempt from requirement (IRS=72%, FX=8%)
Capital Requirements
Increasing trading costs Increased focus on efficient capital allocation
Margin Requirements
Stringent initial margin requirements with clearing houses Further daily variance margins Minimum margin requirements under debate for OTC Real time price and volume reporting (T+1 for OTC) Existing swaps also to be reported Overseen by CFTC/SEC in US and new ESMA/ESRB in EU
Tightening spreads Daily margin calls Higher OTC trade costs
Post-Trade Reporting
Price transparency Standardisation of swaps Reporting infrastructure implications
Sources: Deutsche Bank, Shearman & Sterling LLP, Accenture analysis
In executing their chosen market strategy, we believe banks immediate efforts should be focused on External Positioning and Internal Strengthening: External Positioning The priority here is to develop a focused business response to the fundamental market change brought about by the Dodd-Frank Act. The consequences of the Act are still to be fully understood within the industry, though the need to clear OTC derivatives through central counterparties (CCPs) indicates that this topic alone will demand strategic thinking at the C-suite level of investment banks.
Key challenges
Strengthening the core to execute market strategy

These regulatory developments place extreme and far-reaching challenges on investment banks (see figure 3). Already struggling to address wider financial sector reforms, the priority for banks must be one of determining a viable strategic response to the shifting regulatory environment for OTC derivatives, and understanding the internal transformation across people, process and technology required to bring this to life. Figure 2: Revenue opportunity presented by the shift of OTC derivatives to clearing through CCPs
Client trading revenue Agency commission Revenue opportunity Clearing commission Interest income Clearing only service provider Execution only service provider Full service provider
The scale of work involved in shaping banks market responses should not be under-estimated. Accenture Research suggests up to 65 percent of industry OTC derivatives could be eligible for CCP clearing by 2013iii. Given this significant scope of trades that could be eligible for CCP clearing and as greater market transparency drives compression of margins, banks must be prepared for a decline in the revenues generated on a per trade basis. The upside for investment banks will be the significant increases in trade volumes driven by the shift of OTC derivatives to clearing through CCPs and the likely mid-term consolidation amongst clearing houses. The industry experience of the electronification of exchange-traded derivatives in the early 2000s serves to corroborate this hypothesis; commoditisation following electronification led to volume growth of over 400 percent from 2000 to 2010, whilst average spreads felliv.
Note: Illustrative only. Relative shares of revenue source will vary by Investment Bank.
The main challenge for investment banks is one of developing a client offering that protects existing revenue bases whilst capitalising on new market opportunities driven by this evolving regulatory landscape. The first challenge that banks face, then, is to determine their strategic response. Internal strengthening Investment banks must ensure a rapid response to developments being driven by regulators (including greater use of electronic execution, mandatory use of CCPs for all eligible products, registration of all trades in central data depositories and enhanced risk management). Particular areas for attention include: Upgrading ageing and inflexible legacy applications to increase system capacity that will enable growth under a new market infrastructure Understanding the complex change in operations needed to address the shift of various asset classes onto exchanges and electronic trading venues for subsequent clearance and settlement of CCPs
Strategically, banks are deciding between two key responses to the market changes: whether to develop clearing capabilities or outsource this service to third party providers. Building clearing capabilities opens up the market opportunities of offering a full service to clients across both execution and clearing, or acting purely as a clearing broker for those clients that opt to execute their trades with other market players. This latter response seeks to capitalise on the market dislocation and the creation of what is effectively a new market for derivatives clearing services. These services include clearing access, crossmargining, multi-asset risk management, and client reporting. For those banks unwilling to develop these capabilities, outsourcing the clearing process to a third party provides a viable option to staying in the market whilst stopping short of investing in capabilities that will deliver a full service to clients. Regardless of the strategic response adopted, the revenue opportunity from the shift of OTC derivatives to clearing through CCPs is significant (see figure 2).
Challenge 2: Dealing with OTC Derivatives Reform Challenge 2: Dealing with OTC Derivatives Reform
Figure 3: Summary of challenges facing investment banks

Function Front-office Systems Challenge Integrate with new market models as they evolve and with downstream applications Multiple affirmation & matching system connectivity Use in-house derived prices for valuations or EOD (End of Day) exchange prices (exchange arbitrage) Listed products vs OTC who will reconcile the collateral calls and margins? CCP model increases collateral activity and valuations Impact More change whilst BAU (Business As Usual) continues to add complexity Uncertainty around which trade venues, matching venues and affirmation platforms and clearing houses to support Different exchanges will close at different prices though a standardised approach across the bank must be implemented Process split between Prime Brokerage and OTC Strain on legacy processes as trade volumes increase and clearing specific information is required, including trade level detail to align with CCP reporting New processes and controls need to be designed and integrated New processes and controls need to be designed and integrated Increased complexity in client onboarding Co-ordinated effort required to leverage inflexible legacy applications Will banks be forced to cover Variation Margin for clients who declare bankruptcy? Controllers need to clearly define reporting flows for Agency vs Principal trades, as this has a direct impact on upstream business and technology processes How will banks update their models and ensure that market risk is integrated at the point of execution for OTC client cleared trades? Modification of existing controls and processes required to preserve straight through processing One size fits all approach isnt viable flexible rules & tables, legacy applications
Trade Capture/Booking
Pricing & Valuations
Margin Calculation & Collateral
Client Reporting
Settlements Product Control Legal Credit Risk Management
Multiple clearing house methodologies Clear handoffs between Product Control & Finance required Differing legal frameworks in different jurisdictions Managing all the moving parts new collateral types, ISDA agreements, individually-negotiated Netting rules Default management
Finance & Accounting
Balance sheet reporting
Risk finance integration
Confirmations and Documentation
BAU or new process
Fees and Billings
New reconciliation requirement
Processing
New ways of working required New internal front-to-back processes, controls and hand-offs to be understood, documented and signed off
Our perspective
Market opportunity abounds, but diligence in managing operational complexity will be essential
Accenture is currently working with seven of the top ten global investment banks on business change projects driven by the shift of OTC derivatives to clearing through CCPs. Based on our experience, we believe that: New market opportunities are available and must be seized. As the buy side is forced to clear OTC trades through CCPs, new revenue opportunities will be generated from clearing commissions and margin interest. The increased securitisation of trades is also set to drive up both liquidity and trade volumes. Accenture estimates that the market for derivatives clearing services across Credit, Rates and FX could be worth US$10 billion by 2013v
To capture this prize, banks will have to successfully manage complex operational change. A first step for some may be to conduct a cost-benefit analysis to ensure the projected volume of their derivatives business makes investment worthwhile. Assuming compliance does make sound economic sense, the key to competitive advantage will lie in successfully building scalable solutions for electronic execution and cross-asset clearing processes around trade capture, collateral and netting Winning outcomes will hinge on banks adopting and embedding strategic responses (rather than pursuing tactical approaches that vary by asset class). Such strategic responses will include delivery against a global cross-asset vision that focuses on improving client access to services and the development of a scalable set of capabilities that support all existing and future electronic trading venues, affirmation platforms, CCPs and other key market infrastructure players. In particular, the following capabilities will be essential:
Scalable Trade Capture and Processing & IT Infrastructure Securing connectivity to market-wide tools that enable optimum trade capture across products and increased automation in core trade processing engines to improve efficiency will be a key requirement. This infrastructure will provide the foundation on which banks can industrialise their offering to manage the high volumes that will ultimately generate scale economies in the clearing and trading of OTC derivatives on exchange. Global cross-asset risk policy Banks must develop an intra-day risk monitoring capability that ensures proactive management of banks exposures to individual clients and CCPs. Identification of exposure limits in line with banks own policies and regulatory mandates will be fundamental, as will the use of consistent methodologies to measure risk exposure across asset classes.
Global cross-asset collateral management Optimised collateral management across OTC and CCP clearing, with crossproduct netting leveraged wherever possible, will be a key facet of the client proposition. Banks will effectively need to develop a consolidated ledger to report and control both the collateral placed by clients, and in turn the collateral placed by banks with the CCPs. Optimised balance sheet and risk-weighted asset (RWA) usage and funding Optimised balance sheet and RWA usage will inform banks allocation of scarce resources to the most profitable client relationships. Producing detailed, clientlevel management reporting will ensure ongoing diligence in these allocation decisions and the subsequent refreshing of banks client portfolio as appropriate.
Accenture worked with the client to define a robust strategic response that was geared to achieving three primary objectives: Articulating and quantifying the client value proposition and business opportunities arising from the shift of OTC derivatives to clearing through CCPs Defining the new Target Operating Model and the changes to people, process and technology that would enable this Defining a transformation roadmap of projects needed to execute the business strategy The programme helped drive the client towards its vision of becoming a leading provider in this space through four key areas or work: 1 Client value proposition: The bank was able to define its market differentiator to prospective clients, ensuring it could win new business that supported its growth objectives across asset classes 2 Revenue model: The bank understood the size of the prize across each main asset class, and could therefore calibrate its go-to-market approach accordingly to fully exploit the available opportunity 3 Target Operating Model: The bank could develop a new way of working that would provide the foundation for its operations and growth under the industry shift brought about by OTC derivatives reform 4 Transformation roadmap: The bank could mobilise a multi-year change programme to deliver its target capabilities
In practice
Seizing the opportunities from OTC-CCP

Fuelled by escalating regulatory pressure, widespread uptake of CCP clearing for OTC-traded products is expected by 2013. To seize the opportunities flowing from this paradigm shift, a global investment bank plans to expand its franchise through its leading Exchange-Traded Derivatives (ETD) and FX businesses into Rates and Credit.
Accenture experts To discuss any of the ideas presented in this paper please contact: Dean Jayson Senior Executive, London dean.l.jayson@accenture.com +44 20 7844 8295 +44 79 5841 4692 Anastassia Khomenko Paris anastassia.khomenko@accenture.com +33 1 53 23 61 85 +33 6 32 27 08 90 Ben Shorten London benjamin.j.shorten@accenture.com +44 20 7844 7212 +44 77 3661 0252
i Source: Financial Times, 11 August 2010 ii Sources: Bank for International Settlements (December
2009), Quarterly Review

iii Source: Accenture research iv Source: Bank of International Settlements (September
2010), Quarterly Review v Source: BIS, DTCC, Euromoney, Accenture research. Assumes product CCP eligibility by 2013 of 90% for credit, 70% for rates, 15% for FX.
Embedding Effective Risk Management

Regulatory demands for enhanced risk management are now a fact of life for investment banks. However, instead of adopting reactive approaches to these demands, more fundamental reappraisals of enterprise risk management (ERM) are needed. Until joined-up ERM cultures are embedded throughout the organisation, the business value that can and should be generated from substantial risk-related investments will not be realised.
Challenge 3: Embedding Effective Risk Management
The best enterprise risk management practice is to have business managers, profit centres, business unit heads and functional heads really assuming full responsibility and accountability for the risks they take.
Axel Lehmann, Chief Risk Officer, Zurich Financial Servicesi
Background
Moving towards true enterprise-wide risk management awareness

Although multiple tools have been developed to address identified risks, these are still far from integrated.
One inevitable consequence of the financial crisis, and the regulatory deluge that ensued in its wake, has been a complete reappraisal of risk management. As well as playing a vital performance-related role, risk management is acknowledged to play an essential part in vouchsafing banks wider role in society. However, while most investment banks now recognise risk as a major feature on board-level agendas, only the most mature amongst them have truly embedded a culture of risk management throughout their organisation. As a result, although multiple tools have been created to address identified risks, these are far from integrated. This is supported by independent research: According to a recent Economist Intelligence Unit reportii, only 13 percent of respondents believe their organisation to be very effective at instilling broad-based risk awareness. This is at odds with management thinking outside the industry, where 60 percent of companies see embedded ERM as the critical objective of any risk management programmeiii.
Accentures recent survey of financial services firms found that the primary strategic planned response to regulatory change was to further tighten risk management processes across the enterprise. See figure 1 The reality is that most investment banks continue to see risk management as a process for managing management or worse, managing regulators. This ignores the clear benefits that flow from enterprise-wide risk management cultures, both in terms of improved business decision-making and as the foundation for strategic agility and commercial success. For as long as top-down approaches to risk management fail to connect with bottom-up tools development programmes, risk management will fail to deliver the level of protection (and business benefit) that it can and should provide. However, while investment banks are only too aware of the disconnect between front-office risk management and back-office risk control, the challenges that must be overcome on the road to joined-up, enterprise-wide risk management are substantial. Figure 1: Expected strategic responses to proposed regulatory reforms
Tighten risk management Implement cost reductions Change pricing structure Focus more on core competencies Launch new product or service lines Enter new market or customer segments Implement change management program Divest business or geographic units Decrease Headcount Merge or acquire other companies Launch new business or geographic units Increase headcount Shut down product or service lines Relocate headquarters or business unit locations No strategic change Other
0%
For as long as top-down approaches to risk management fail to connect with bottom-up tools development programmes, risk management will fail to deliver the level of protection (and business benefit) that it can and should provide.
54% 44% 39% 31% 29% 28% 26% 25% 24% 21% 20% 18% 16% 10% 5% 1%
10% 20% 30% 40% 50% 60%
Source: Accenture (US Financial Services Regulation Survey, June 2010).
While each of these is significant, because the tone of an organisations risk management culture is set at the top, senior management sponsorship and board-level commitment should be viewed as the foundation for any successfully embedded ERM programme. Board buy-in establishes priorities, sanctions resource allocation and, crucially, is a key factor in building the appropriate top-down approach. In other words, top-down impetus is vital. So is bottom-up implementation. However, all too often poor data, weak reporting and inadequate analytics obstruct the quality and flow of risk management information needed by professionals throughout the organisation and particularly at midlevel, the stratum where day-to-day activities are most likely to be exposing the business to risk. So although investment banks are continuously reacting to new regulatory demands, their responses are seldom grounded in integrated, enterprise-wide risk management behaviours. Beyond the behavioural level, challenges abound in the storage, management and analysis of data. Specifically, how can investment banks meet the requirements of the various consumers of risk management information in their organisation? This means confronting a number of issues, including:
Key challenges
Weak integration across risk-related data, reporting and analytics

Multiple challenges confront banks efforts to embed enterprise-wide risk management cultures. Individually and combined, these have undermined the success of many initiatives to date. AONs Global ERM Survey 2010 identifies four high-level challenges: Lack of skills necessary to embed ERM (according to 34 percent of respondents) Lack of senior management sponsorship (31 percent of respondents) Lack of any clear implementation plan (28 percent of respondents) Failure to communicate the case for change (27 percent of respondents)
Board buy-in establishes priorities, sanctions resource allocation and, crucially, is a key factor in building the appropriate top-down approach.
Talent fighting off competition from other banks and/or regulators for highly-skilled, but limited resources (including analytics experts) Consolidation integrating systems architectures that are still fragmented along traditional silo, risk and business lines Quality building accountability for data quality throughout the organisation so that end data, when used, can be completely trusted Structure constructing appropriate feedback loops for controlling risktaking behaviours, including compensation-linked incentives.
Last, but certainly not least, the impact of substantial and ongoing regulatory change will reduce firms profitability while consuming costs and other scarce resources (in Accentures 2010 risk survey, 70% of respondents expected an increase in costs, 48% expected a decrease in profitability). The challenge here is to balance the requirements of regulatory compliance with the wider transformation needed to embed risk management at all levels while minimising long-term cost impacts.
Figure 2: Impact of regulation on profitability
Figure 3: Impact of regulation on costs
Increase: 31% 35% 30% 25% 20% 15% 10% 5% 0% Increase Increase 11-20% more than 20% Increase 1-10% No impact
Decrease: 48%
Increase: 60% 50%
70%
Decrease:
11%
32% 24% 21% 14% 6% 2% 2%

Decrease Decrease Decrease 11-20% more 1-10% than 20%
56%
40% 30%
20%
20%
12%
10%
9% 2% 0%
2%
0%
Increase Increase Increase No impact Decrease Decrease Decrease 1-10% 11 - 20% more than more than 11 -20% 1-10% 20% 20%
Source: Accenture (US Financial Services Regulation Survey, June 2010).
FF
Source: Accenture (US Financial Services Regulation Survey, June 2010)
FF
Challenge 3: Embedding Effective RiskRisk Management Challenge 3: Embedding Effective Management
The traditional view of risk management as policeman or second line of defence must be continually challenged.
Our perspective
Truly mature ERM demands a proactive approach from the organisation.

As investment banks move towards embedding enterprise-wide risk management, Accenture believes their approach must embrace Culture & Performance, Risk Functions and Leading Practice. Culture & Performance The traditional view of risk management as policeman or second line of defence must be continually challenged. The objective must be to replace this outdated view with deep enterprise-wide collaboration and feedback loops that reinforce proactive discussion and implementation. The following stand out:
Collaboration decision-makers across the business must have access to appropriate risk metrics so that risk management can be included in all decisions Internal controls rather than resenting the constraining effect of risk management programmes, it is important that managers must recognise these as enablers of business objectives Individual and organisational goals ensuring that individuals needs are aligned with the wider needs of the business, especially through compensation structures Performance measures defining pragmatic measures that acknowledge risk taking and problem prevention, balancing future goals with an effective early-warning system.
Risk Functions The Risk departments traditional functions data gathering, reporting and analysis must be subjected to constant review. This should focus on a number of priority areas: Organisation high performing investment banks continually strive to break down silos between mid and back office Data gathering to ensure that all parts of the organisation receive a single version of the truth, data acquisition must be standardised and simplified (without losing the flexibility needed to reflect business changes) Reporting uncluttered with irrelevant detail, reports should enable effective business decisions, while being available rapidly enough to support trading and management decisions Common analytics able to learn from unexpected and/or extreme events, the models used must be updated accordingly and subjected to continuous stress-testing (calling for closer integration with front office risk management systems and processes) Strategy risk must be aligned with other key management decisionmaking and corporate governance processes (particularly with CFO and CEO-level processes).
Embedding leading practice We know that truly embedded ERM moves from a reactive approach to a more mature and proactive configuration. Accenture regularly assists organisations in evolving from the former state (where risks are simply identified as hazards that interrupt routine operations) to the latter (where more sophisticated threats and opportunities can be identified). Based on this experience, we can point to the following as hallmarks of organisations with an advanced and deeply embedded understanding of risk: Constantly scanning for shifts in market/stakeholder expectations, regulatory developments and new models of leading practice Continuously assessing the robustness and integrity of their risk profile Accurately measuring whether their risk management actions are actually reducing exposures Using post-implementation reviews to show whether or not lessons are being learned and integrated into risk profiles, especially after extreme or unexpected events.
Accenture regularly assists organisations in evolving from the former state (where risks are simply identified as hazards that interrupt routine operations) to the latter (where more sophisticated threats and opportunities can be identified).
In practice
As well as benchmarking the status of their current ERM capability, this tool allowed the bank to identify the gaps between its As-Is and To-Be target maturity levels) and supported the creation of the roadmap needed to achieve the key objectives. More broadly, the Accenture team championed deeper awareness of risk culture throughout the bank, developing performance-linked long-term metrics to incentivise behaviours. To ensure sustainable and fully-integrated ERM transformation, the team embedded the performance management process within the change management function.
Enabling sound, risk-based decision-making

In common with many of its peers, risk and compliance functions in this leading global bank were run as silos, fragmented under each business line. And at a more fundamental level, technology infrastructures were fragmented across Credit Risk, Market Risk, Finance and Treasury. Struggling with losses of over US$60 billion related to subprime lending, management recognised that the current operating model was fundamentally flawed. Accenture was asked to develop a new risk management operating model, integrating previously siloed functions into an enterprise-wide capability. Working with the board down, the Accenture team introduced industrialised real-time reporting, aiming to equip decision-makers with relevant metrics that could be trusted to provide accurate insights.
Enables
To facilitate this process, the team used Accentures Risk Management Maturity Model (see below). This tool helps organisations assess the maturityof their ERM capabilities overall, and across the five key areas crucial to enabling sound, risk-based decision-making Organisation & Governance,Process, Analytics, Reporting and Data Management.
Risk Management Framework

Key Components for Risk Based Decision Making Organization / Governance Risk management process Risk analytics Reporting Information Mgt / Data Governance
Performance Management Risk Culture Systems and Technology Regulatory Compliance
Accenture experts To discuss any of the ideas presented in this paper please contact: Steve Culp Senior Executive, London steven.r.culp@accenture.com +44 20 7844 4855 +44 77 7581 8701 Ashley Davies London ashley.davies@accenture.com +44 20 7844 0058 +44 77 6850 5950 Takis Sironis London takis.sironis@accenture.com +44 20 3335 0457 +44 77 4094 9497
iThe Economist Intelligence Unit, Rebuilding Trust:
Next steps for risk management in financial services, 2010

ii The Economist Intelligence Unit, Rebuilding Trust:
Next steps for risk management in financial services, 2010

iii Aon Global Enterprise Risk Management Survey 2010
Refocusing on Client Needs

Driven by shareholder demands and regulatory pressure, investment banks are going back to basics shifting the emphasis from complex product innovation towards increased client intimacy. The priority now is to better align service offerings with clients needs a significant challenge for the majority of banks that have neglected client service-based investments in recent years.
Our first priority is and always has been to serve our clients interests.
Goldman Sachsi
Challenge 4: Refocusing on Client Needs
Background
Banks that can truly understand and meet client needs will stand out from their competitors
Post-crisis, a number of trends are driving leading investment banks to refocus on client relationships
In the years leading up to the financial crisis, investment banks moved away from their historical role as intermediaries, concentrating instead on developing complex products and taking on risk through proprietary trading activity. Now, however, spurred by shareholder demands, regulatory pressure and a transformed competitive landscape, banks are refocusing on client relationships. Major drivers behind this trend include:
A renewed long-term focus on agency business over proprietary trading (fuelled by the need to de-risk and repair balance sheets, and in response to regulatory developments) Key client segments increasingly value trusted relationships over the continued innovation and proliferation of complex products. Reduced buy-side willingness to trade complex high-margin products has forced investment banks to refocus on some of their more commoditised offerings (e.g. execution of exchangetraded securities). With little product/service differentiation in these areas, banks have an opportunity to seize competitive advantage through superior client service. The rise in multi-asset trading, the attractiveness of emerging markets and the proliferation of electronic trading platforms are driving clients' demands for banks to deliver an integrated service offering spanning regions, products and channels. The varied needs of different client segments (institutions versus hedge funds, for example) only make this a greater challenge.
Key challenges
Investment banks need to integrate their client strategy across regions, business units and channels
In recent years, most investment banks have neglected investments in their client service offerings. As a result, many of them are struggling to develop greater client intimacy by better aligning service offerings with client needs. Based on our experience, we see banks facing systemic difficulties in four major areas: Client Strategy Many investment banks lack an integrated client strategy spanning regions, business units and products. Hampered by siloed departmental structures, they are struggling to meet mounting client demands for uniform service levels across geographies and product segments. Additionally, because few banks have a deep understanding of client profitability, most of them are unable to assess their clients true value to the bank meaning that they continue to over-serve and under-value, as well as failing to manage the long tail of unprofitable clients. This strategy shortfall extends to channel considerations. Unlike their counterparts in the retail-banking sector, many investment banks have yet to develop cohesive channel management strategies that integrate voice, face-to-face, electronic and selfservice channels. Defining entitlement and service levels across channels (by client segment and priority) are critical in ensuring clients service expectations are met profitably. Many investment banks also still lack a consistent and complete set of metrics for managing the sales organisation. Without this there is a lack of common and truly effective incentives to promote client focus and greater levels of cross-selling.
Client service delivery processes need to be sufficiently adaptable so that exceptions can be accommodated for highvalue clients, whilst ensuring that the majority of clients can be processed (eg. onboarded) and serviced efficiently.
Client Service Delivery Model Servicing clients is no longer just about sales. Instead, it increasingly means providing a seamless front-to-back and cross-product service. Sales teams in many banks are, however, not well equipped to facilitate this. This is because investment banks still view client service delivery as a discrete set of processes, rather than considering the end-to-end service proposition across all stages of the client life-cycle (from client prospect to client exit). Client service delivery processes need to be sufficiently adaptable so that exceptions can be accommodated for high-value clients, whilst ensuring that the majority of clients can be processed (e.g. onboarded) and serviced efficiently. Client Insight and Relationship Management Sales mentalities focused on pushing product present a significant barrier to understanding client needs. In particular, this can mean that client issues are not properly understood at an institutional level, with no mechanism in place for identifying and validating client needs. Client insight is also limited by the fact that banks often fail to sufficiently institutionalise their client insight, with client relationships often owned by individual sales staff who can be easily lost to competitors. A limited understanding of client needs and their service history across markets and products limits the ability to target advisory services and cross-sell additional products. Cross-selling is also often hampered by salespeople having insufficient knowledge across products and asset classes, and lacking the incentives to develop it.
Integrated technology support has a key role to play in supporting relationshipbased client insights, enabling data capture across the various client touch points and powering sophisticated analytical capabilities. However, solutions such as CRM tools are still sometimes seen as inhibitors rather than sales enablers, despite such systems offering potential beyond contact and call-sheet management. Leading CRM platforms provide rich client management information, supporting sales/trading team collaboration and issuing actionable client alerts based on market developments. At many banks CRM remains insufficiently integrated with other systems (trade data, onboarding, etc.) and common desktop applications (Outlook, Excel, etc.). This limits the ability to automate the tracking of sales interactions, a fundamental requirement for building client insight and tracking whether service delivery is aligned with strategic priorities. Additional challenges arise from usability and system performance issues, both of which continue to present significant barriers to CRM adoption at investment banks. Salespeople have come to expect these tools to match the simplicity and customisability of Web 2.0 applications (e.g. social networking platforms), whereas few custom-built CRM applications match this capability.
Our perspective
Embedding top-down commitment to the new strategy

Developing an integrated client strategy Only an ambitious client strategy that covers the banks regions, client segments and product areas can deliver on the crucial objectives of integrated and consistent service delivery, deeper client insights and improved client penetration. Any drive towards this goal must start at the top with committed senior-level engagement. At large banking groups, consideration should be given to whether or not to extend the investment bank client strategy to group level. But any decision to do so must not be taken lightly even leading banks have struggled for years to make this work effectively. The client strategy, often best led by a Head of Client who is not product aligned, must mesh priority client segments with overarching product and channel strategies. This approach needs to consider access levels to advisory services, and other premium services by segment. Flexibility is key. The integrated client strategy should not inhibit a degree of local adaptation, nor should it prevent product desks from developing their own client prioritisation criteria. Instead, the strategy should provide an overarching framework, creating a common purpose while enabling individual product areas to maximise their own revenue potential.
The client strategy, often best led by a Head of Client who is not product aligned, must mesh priority client segments with overarching product and channel strategies.
Aligning the client service delivery model If they are to better meet client needs, banks must re-evaluate their front-, middle- and back-office processes. As things stand, many have already made good progress in tailoring client-facing front-office processes to different client segments (e.g. meeting hedge funds cross-product requirements). But because too many middle- and backoffice processes are one size fits all, they are unable to meet the needs of particular types of client. Banks should also consider the overall client experience across all aspects of service delivery and all stages of the client lifecycle. Only a delivery model that spans and integrates all these elements will attain outstanding levels of client service. See figure 1
Developing deeper client insight Investment banks have to understand the evolving needs of client segments and those of individual clients. Recent experience shows what can happen if they do not. For example, many banks were too reactive in recognising the rising trend of hedge funds using multiple prime brokers to reduce their single counterparty risk, which caused some players to lose market share. Leading banks are not only able to anticipate such trends, but also have concrete client insight and data to inform their response and monitor developments in their clients activities. Customer Relationship Management (CRM) tools are a vital element in providing the front office with access to such client insight. Rich client management information is required at every stage of the client lifecycle, and at every stage of the sales process. Leading CRM platforms, whether inhouse developed, or customised vendor suites (e.g. Salesforce.com, Microsoft Dynamics, Oracle CRM) aggregate client data across multiple data sources to provide a rich single view of the customer. Increasingly, the same tools are being used across the front office and support functions such as Credit Risk and Operations who can review client profiles using a custom view. It is hugely useful for staff working in these areas to be able to see the same data on, for example, a clients onboarding status or assigned prioritisation segment. Work processes become less fragmented, duplication of effort is avoided and a more seamless customer experience ensues.
Figure 1: Effective client service is about much more than sales a wide range of supporting functions and sales enablers must be considered
Strategic Marketing and Sales Selling Function

Flow Product and Channel Sales Structured Product and Channel Sales Service Delivery Management Research and Advisory Services
Service Delivery Service Delivery

Trading CreditControl Operations
Compliance
Client Enablement
Client Onboarding / Maintenance
Culture, Incentive and Reward
Client Data and Document Management
Information Acquisition and Analytics
Developing a high performance CRM capability is much more than a technology challenge.
For the front office to directly benefit from CRM and to drive broad adoption, it is important that these systems provide functionality such as: Automated tracking of client interactions across all channels (voice, email, chat, etc.) through back-end integration. Client profiles that are developed over time can be mined for trends and shared across the organisation Allowing salespeople to manage a client project across structuring and trading by collaborating on a single platform The ability to manage and service clients directly from within a single application (e.g. to distribute research content directly to a client when viewing their client profile) Reporting and other management information that provides salespeople with insights into how they are spending their time and how this corresponds with actual sales/trades
Increasingly, sophisticated analytics are being used to give salespeople greater insight, helping them respond more rapidly to changes in client needs, identify cross-selling opportunities and match trade ideas with customers. Developing a high performance CRM capability is much more than a technology challenge. Such tools will only deliver success when they are aligned with a clear and embedded client strategy within a culture that strongly encourages adoption and an incentive system that rewards it. Senior management buy-in, with a strong mandate that all client contacts must be tracked electronically, is vitally important to ensure the necessary momentum is sustained.
In practice
Enabling enterprise-wide client insight

This global investment bank lacked a client strategy that clearly articulated how its service proposition would adapt to meet evolving client needs. Having conducted extensive interviews with senior global management and some of the banks key clients, Accenture built on these insights to develop an integrated client strategy, including prioritised objectives and metrics and a target operating model, before undertaking detailed process engineering and enhancement. Core to this project was the development and implementation of a new technology architecture for crossproduct CRM. To achieve this, Accenture undertook in-depth evaluations of vendor and custom-build technology options to support integrated CRM capabilities. Having canvassed detailed requirements, the team designed and implemented the CRM platform supporting a 4,000-plus user-base. Accenture also took responsibility for managing the global deployment of this solution, as well as coordinating all user training.
Benefits delivered As well as enabling the bank to segment its client base and vastly improve its understanding of clients cross-product requirements, this project also meant that the banks change portfolio could be mapped against a refreshed target operating model. Additional benefits included increased understanding of client profitability and through the new CRM platform seamless integration between distribution and communications channels. Because this platform delivered a simpler (but more powerful) user experience, aligned with analyst/salesperson workflow, it also significantly lowered barriers to CRM adoption across the organisation.
Accenture experts To discuss any of the ideas presented in this paper please contact: James Woodhouse Senior Executive, London james.woodhouse@accenture.com +44 20 7844 4415 +44 78 3623 3985 Cathinka Wahlstrom Senior Executive, New York cathinka.e.wahlstrom@accenture.com +1 917 452 5897 +1 917 414 1055 Robin Martin London robin.martin@accenture.com +44 20 7844 6464 +44 77 3914 2895
iSource: Goldman Sachs, Annual Report 2009
Maximising Client Profitability

Facing reduced leverage and with proprietary trading revenues in decline, investment banks are refocusing on client business. In this environment, increased client profitability will prove crucial to achieving pre-crisis levels of profitability. Regulatory changes could significantly lower investment bank profitability. J.P.Morgani
...tiering customers by profitability would give us a deeper understanding of their requirements and help us to actively manage our client base.
Standard Bankii
Challenge 5: Maximising Client Profitability
Background
Investment banks will increasingly depend on client business to generate profits

There is mounting pressure on leverage and proprietary trading two of the principal pre-crisis drivers of profitability
Increasingly today, banks are focusing on client portfolio optimisation. This is because, with reduced leverage and proprietary trading in decline, client business represents an attractive source of future profitability. Reduced leverage While banks will continue to use leverage, the higher cost of debt means that leverage rates will inevitably fall. This will make it harder for them to maintain their historic return on assets. A reduction in leverage from 95 percent of capital to 66 percent, for example, could reduce average return on equity (ROE) from approximately 15 percent to 10 percentiii. Figure 1 below illustrates the continuing trend of deleveraging in the industry as banks return to a stable long-term average leverage ratios, and begin to face the challenge of restoring pre-crisis revenues in the absence of this leverage.
Figure 1: Selected banks leverage ratios

2500% Average Leverage 2000% Top 5 Average Leverage 1500%
1000%
500%
0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bloomberg, Accenture researchiv
Loss of proprietary trading revenues Part of the recently enacted Dodd-Frank Act, signed into law by President Obama in July 2010, the Volcker Rule sounded a death knell for proprietary trading by investment banks. Of course, these are early days. There is continuing ambiguity around the precise definition of proprietary trading (excluding, as it does, market-making activities, riskmitigating activities and activities on behalf of customers). Furthermore, potential opportunities for regulatory arbitrage have been created by the exclusion of foreign trading (outside of the US) by non-US banking entities. But despite current uncertainty over the substance of regulation, banks that generate a significant proportion of revenues from proprietary trading can be certain that they will face significant challenges to these revenue streams. A number of banks including Goldman Sachs and J.P. Morgan have already announced the closure or reorganisation of their proprietary trading desks in response. Indeed, Accenture estimates that between
US$2.5 billion and US$12 billion of proprietary trading revenues are at risk across the five largest US investment banks as a result of the Volcker Rulev. The impact of the regulation on foreign banks operating in the US is not yet clear, but could be even wider than initially expected. In sum, headwinds from regulation and market forces are challenging two key drivers of profitability from the pre-crisis era. This is leaving banks with a stark choice: either accept a future of reduced earnings, or approach client business with renewed focus on understanding (and maximising) client profitability.
Key challenges
Most banks have only limited understanding of client value

Improved client profitability will be key to replacing those revenues previously derived from high leverage ratios and lucrative proprietary trading desks. Clearly therefore, a key challenge facing investment banks is that of how to increase client revenues whilst reducing client cost-to-serve. The challenge is considerable. Accenture analysis of a sample of three leading investment banks showed that: 20 to 50 percent of clients in those organisations were unprofitable; 10 percent of clients generate over 80 percent of revenues, on average; very significant variations in client profitability exist between desks. The causes of these inter-desk variations typically differ from bank to bank. That said, differences in client types (corporate vs institutional), desk-level client data sophistication and technology maturity are all common explanations. Each points to an urgent need for tailored client servicing requirements by desk. It should, however, be noted that where clients are trading cross-asset, client profitability should be viewed holistically, at an enterprise level. The long tail of unprofitable clients (see Figure 2) presents some tough questions to management. Can these profiteroding clients be transformed into valuable relationships? Or should they be terminated in a way that maintains brand value and reputation?
Figure 2: Illustrative Client Revenue Segments

High value; generate >80% net revenues
Cumulative Client Revenues
Low value; generate <20% net revenues
Erode value; revenues below breakeven threshold* Erode value; revenues below breakeven threshold*
# Clients
*Breakeven threshold to be determined based on core costs of annual KYC and credit check
At the same time, the fact that most banks rely on a small proportion of their clients for the majority of their revenues gives real cause for concern. As clients can easily be lost in such a competitive environment, banks should be mitigating this risk by developing a broader and more diversified client base in tandem with more effective client retention strategies. As they move to address these issues, banks are hampered by the lack of any holistic approach to client relationship management. Because sales are rewarded according to revenues (sales credit) and not profitability, the typical view is that any client is a good client. Additionally, clients have, until now, been given little incentive to concentrate their share of wallet with fewer sell-side providers.
Of course, many banks have attempted to address the issue of client profitability over the years. But success has been limited. Only a few such programmes have resulted in any ingrained understanding of client value or, crucially, of the data architecture and management information (MI) needed to support this on an ongoing basis. Based on Accentures experience, we believe that a successful outcome hinges on banks recognising (and addressing) two key implementation challenges from the outset: Hazy management view of client base. Very few banks have the detailed MI needed to understand their client base. Even fewer have a data architecture capable of mapping trade-level client costs to revenues. This lack of insight into client portfolios must be addressed before any optimisation can begin. Stakeholder scepticism. Because previous attempts to address this issue have failed, resistance to change is a major issue. Key stakeholders (particularly in Sales) have not historically been incentivised to consider client profitability or client value, making them sceptical of client profitability data especially where it diverges from the sales credit data on which their remuneration is typically based. They will also have concerns over top-down approaches to client portfolio optimisation that ignore more diffuse aspects of client value (such as flow generated from highvolume clients and managing client prospects). Because any successful attempt to address client portfolio issues must first secure buy-in from Sales, the solution must explicitly address these concerns.
As clients can easily be lost in such a competitive environment, banks should be mitigating this risk by developing a broader and more diversified client base in tandem with more effective client retention strategies.
Accenture experience has shown the single greatest obstacle to success in optimising client portfolios is a lack of senior sponsorship from Sales and Trading
Our perspective
Banks must combine tactical and long-term solutions to maximise client profitability
Given the profound challenges facing banks in this critical area, Accenture proposes a two-phased solution for maximising client profitability. The first Tactical phase is geared to securing stakeholder buy-in and proving the case. This provides the foundation for the second Strategic phase which establishes a detailed client segmentation structure, supported by robust client data, reporting and governance frameworks. Phase 1: Tactical In the short-term banks should focus on achieving stakeholder sponsorship and proving the case as the foundation for a more comprehensive strategic solution. Accenture experience has shown the single greatest obstacle to success in optimising client portfolios is a lack of senior sponsorship from Sales and Trading. Clearly, data is key here without detailed trade-level cost data, a true view of client profitability is hard to assemble. But management needs to be pragmatic throughout this phase. See Figure 3
Figure 3: Client Cost Matrix

High
Client-Specific Costs e.g. Attributed Sales costs
Trade-Level Client Costs e.g. Operations, IT, Finance costs
Data complexity
Universal Client Costs e.g. KYC, credit check
Client-Specific Costs e.g. Minimum Sales margin
Low
High
Consensus on cost allocation
Low
This dataset can be used to raise a number of questions with Sales, providing them with an opportunity to rectify unprofitable relationships with light-touch actions: 1 Identify erroneous costs e.g. clients who are supposed to be e-execution only and are calling up Sales and Research 2 Discuss high volume yet unprofitable clients with Sales. Are there pricing tactics that can be taken forward rather terminating relationships? 3 Identify marginal clients who may be pricing with the bank but not transacting, and identify opportunities to improve revenue capture Once there is common agreement on a set of unprofitable clients, the first battle has been won, and this sets the stage for developing a wider-reaching segmentation programme.
Pragmatism in this context means beginning with simple data that is commonly agreed upon by stakeholders across the business. We propose a simple methodology that combines widely accepted client costs (Universal Client Costs in Figure 3) and maps these against revenues. KYC (Know Your Client), credit check and other indisputable client costs are combined to determine a minimum breakeven point that can provide a revenue threshold from which to identify known unprofitable clients. Before any discussion of revenues, we recommend gaining consensus on this breakeven point; rarely will senior stakeholders dispute these costs, and once they are mapped against revenues there can be little room for disagreement.
Phase 2: Strategic In the long term, banks should have in place a robust approach to client profitability that incorporates focus on Total Client Value (TCV), rather than just revenues. This focus must permeate the entire organisation from management, to Sales and Trading and support functions. In practical terms, this means extending Phase 1 into a sustainable client segmentation programme. Using the minimum breakeven methodology, revenue thresholds should be agreed (and reviewed on an ongoing basis) with varying levels of service, and therefore cost, at each level. These thresholds should remain the basis for determining segments which, at their most basic, should correspond to those highlighted in Figure 4.
Figure 4: Identifying baseline segments

Illustrative Revenue Band > US$100k High-value Response Protect & Grow Proposed Action Focus on protecting and growing relationships with the most valuable clients. Premium offerings include higher sales/client ratios, increased solution-driven sales, and full access to research materials. Focus on minimising the cost-to-serve of this low-revenue client base. Initiatives include restricting access to high-cost Sales staff, referring client queries to a low-cost service centre. Restriction of trading to e-channels for eligible products. Restricted access to research materials. If client remains in this segment for two consecutive years, the relationship should be put into a dormant state (credit checks and KYC allowed to lapse, uncompetitive pricing, no proactive Sales contact).
US$50-100k
Industrialise
Low-value
< US$50k Unprofitable
Offboard
The benefits delivered by adopting a holistic, strategic approach to client segmentation include: 1 Client costs reduced: Client cost-toserve can be substantially reduced because costly clients at the bottom of the value chain are removed (reducing credit check, KYC, sales and other enterprise costs), and the cost base of low-value clients is minimised through industrialisation. Lower cost channels are mandated, replacing the need for expensive salespeople for this segment. 2 Client revenues increased: Because higher revenues carry the promise of better service, clients are incentivised to move up the value chain. Sales can positively market to clients the advantages of consolidating their broker relationships so the bank achieves a greater share of wallet, and the client achieves improved service.
3 Refocus on profitability: Internally, banks will benefit from an enterprise focus on profitability rather than just revenues. Sales can now be incentivised to deliver against profitability targets rather than sales credit, and management can benefit from significantly enhanced insights into client portfolios, which can aid decision-making and ensure a laser focus on value creation. A number of considerations arise from the proposal to segment clients. We have recommended solutions for these in Figure 5.
Figure 5: Recommended Solutions
Challenge
Sales Incentivisation
Salespeople will be incentivised to propose their clients in higher value segments to ensure the best service for their clients, and potentially secure higher sales credits/remuneration for themselves.
Solution
The approach to managing client prospects needs to be addressed in a holistic fashion, to avoid the distorting effects of incentivisation. Revenue targets for the year need to be agreed and monitored, and Sales staff remunerated not only on sales credit achieved, but also on meeting pre-agreed sales targets. Senior Sales management should sign off the assignment of clients to segments. A comprehensive exception methodology needs to be developed as part of the governance for client segmentation. Prior to offboarding clients, a number of mandatory checks should be performed to confirm that there is no profitable relationship with another business line or client entity that could be jeopardised. A robust methodology should be in place, providing clear guidance on how to approach such exceptions. Clients should be made aware of the client offerings at each segment level, including an articulation of the benefits of consolidating broker spend and moving up the segment ladder. The offboarding process should be kept confidential, and should be executed using the soft-boarding approach outlined above to avoid any negative impact on clients.
Managing Exceptions
In determining client profitability, a number of cases for exceptions are likely to emerge. For instance, a client may be unprofitable at the investment bank level, but have a highly profitable relationship with the corporate banking division that may justify maintaining relationships. Banks may question the reputational benefits (and costs) of client segmentation, particularly when competitors may be less sophisticated and operate without segmentation. It is therefore important to be aware of the carrot as well as the stick for clients. Whilst boosting top-line revenues by incentivising increased client share-of-wallet, there is a risk that banks do not complete the process by realising cost savings from offboarding and industrialisation.
Incentivising Clients
Realising Cost Savings
As part of the offboarding process, exact targets for cost reduction must be identified and delivered upon. For example, if KYC and credit check costs are identified as a key cost saving from offboarding unprofitable clients, then actual savings must be realised in these departments to deliver the overall profitability benefits. Similarly, industrialisation programmes for the low-value segment will require a reorganisation of Sales staff to deliver tangible cost savings.
The project was then able to use this threshold to determine the proportion of the client base likely to be unprofitable (with revenues under this threshold for two consecutive years), and thereby identify the optimisation opportunity. As part of this study, the team developed an Access tool to consolidate revenue extracts from multiple desks, regions and systems and combine this with cost thresholds to provide concise management reports, enabling critical management decisions Having identified the opportunity and socialised the findings with key stakeholders in the business, a proposal for client portfolio segmentation was prepared, including recommendations around the client service offerings for each segment. The project team prepared a roadmap for delivering this segmentation and presented the client with a robust business case for the investment. Benefits delivered Accenture presented the client with a clear view of its client portfolio across asset classes, and a reusable tool for consolidating client revenues and costs across desks and systems. The analysis confirmed managements hypothesis concerning the large tranche of unprofitable clients, and went on to quantify the optimisation opportunity. The project team prepared a robust proposal and roadmap for client segmentation, along with a business case for carrying the project through to delivery and realisation of client profitability enhancement.
In practice
Client profitability assessment and strategic portfolio optimisation roadmap

A global investment bank engaged Accenture to help it understand client profitability, recommend quick-win solutions and develop a roadmap for the strategic optimisation of its client base to enhance profitability across asset classes. Although this client had a limited understanding of its client base, management believed that the bank was serving a large tranche of unprofitable and low-value clients. The Accenture team initially focused on investigating the current state of client profitability, developing a light-touch methodology that would be readily accepted by sceptical Sales and Trading stakeholders. This involved agreeing a minimum acceptable breakeven point for a profitable client based on known client costs of annual KYC, credit check and attributed sales costs.
Accenture experts To discuss any of the ideas presented in this paper please contact: Joakim Mellander Senior Executive, New York joakim.mellander@accenture.com +1 917 452 2267 +1 917 539 9266 Thomas Syrett Paris thomas.syrett@accenture.com +33 1 56 52 71 20 +33 6 83 66 03 80
iSource: JP Morgan research note iiSource: City Fios:
http://www.cityfios.com/pdfs/City_Fios_Standard_Bank_ Case_Study.pdf iiiSource: Accenture Research, June 2009 ivSelected Banks = HSBC, Bank of America, JPMorgan, Citi, BNP Paribas, ING, Goldman Sachs, UBS, Socit Gnrale, Deutsche Bank, Barclays, Credit Suisse, Credit Agricole, Morgan Stanley, Merrill Lynch, RBS, Standard Chartered, RBC, Bank of Montreal, Bank of Nova Scotia, CIBC, BBVA, Unicredit; Top 5 Banks = Goldman Sachs, UBS, Morgan Stanley, BNP Paribas, Merrill Lynch). Note: Merrill Lynch figures are to 31 December 2008 and are incorporated into Bank of America figures thereafter. vSource: Deutsche Bank, company filings and presentations, Accenture analysis; sum of revenues at risk at BAC, JPMC, GS, MS, Citi assuming range of 2-10% 2009 core trading revenues derived from proprietary trading.
Ronan OKelly London ronan.okelly@accenture.com +44 20 7844 0155 +44 79 4671 2749
Taking Sustainability Seriously

Although investment banks direct environmental footprint may be minimal, their ability to influence the economywide footprint is unparalleled. Aside from the direct reputational benefits; advances in technology, increasing environmental regulation and, most importantly, customer demand, all mean that there is now a risk-adjusted, profitable business case for taking sustainability seriously.
Challenge 6: Taking Sustainability Seriously
The business case for J.P.Morgan to address sustainability is that doing so will lead to both improved profitability and responsible corporate citizenship. If there were no climate change issue, no sustainability concerns and no natural resource constraints, it would still make perfect sense to use resources most efficiently.
Jim Fuschetti, Managing Director of J.P.Morgans Office of Environmental Affairs
Background
Investment banks have an unprecedented opportunity to finance, and thereby influence, sustainable behaviours by businesses and consumers
Properly addressed, sustainability plays a vital role in building and protecting long-term business value
For an investment bank, sustainability means the ability to combine social, environmental and economic results to make a positive impact both on the organisations own future and on that of the world in a way that builds shareholder value and trust in the organisation.
There is an enormous opportunity for doing so. Estimates vary of the capital required to fund the roll-out of low carbon technology, however the Green Investment Bank Commission estimates an amount of 550 billion could be required for investment in supply chains and infrastructure in order to meet UK climate change and renewable energy targets between now and 2020i. Globally, The Stern Report valued the level of investment to address climate change at 1% of global GDP. Recent analysis finds investments equivalent to approximately 2% of GDPii,iii. At US$44 billion in Europe, this is significantly short of the US$329 billion level of investments implied from the 2% GDP investment targetiv. Investment banks have a significant opportunity to bridge this widening investment carbon chasm.
Despite financial services being one of the worlds least carbon-intensive industries, banks manage over US$16 trillionv of investable assets globally. That gives them a unique opportunity to provide new financial products and meet the demand of businesses and consumers from the transition to the low carbon economy.
Sustainability must focus on strategic imperatives: growing new business, optimising and protecting assets, strengthening the licence to operate and driving operational efficiency. Ultimately it is about building trust. The trust of customers and the trust of government. Provided this focus is maintained, investment banks will see their efforts translate into the creation and protection of long-term business value. This is supported almost unanimously with the findings of the United Nations Global Compact (UNGC) and Accenture joint survey which canvassed the views on sustainability of over1,000 CEOs globally. 97 percent of bank CEO respondents consider sustainability to be very important to the future success of their business. Indeed, 80 percent of bank CEOs believe that the economic downturn has actually raised the importance of sustainability as an issue for top managementvi.
It is very important not to confuse the idea of being in business, with the ideal of being an environmentalist
Because banking is such a diverse sector, any strategic approach to sustainability will vary according to individual banks. But definitions aside, sustainability for investment banks is fundamentally about delivering the right products and services to the right customers, in the right way and at the right time. It is very important not to confuse the idea of being in business, with the ideal of being an environmentalist. Banks are intermediaries and within this role, have the opportunity to craft solutions that meet client needs. Those that do this stand to reap substantial business and reputational benefits.
Sustainability is not a new concept for investment banks. Stewardship was the founding principle on which the Quakers helped build Friends Provident over a century ago. This manifested itself in their stewardship funds perhaps one of the origins of the socially responsible investment movement. The social investment forum estimates socially responsible investing (SRI) in the US now encompasses an estimated US$2.71 trillion out of US$25.1 trillion investmentvii, with similar proportions throughout the UK and Europe. Fast-forward to todays volatile postcrisis environment, and sustainability has a crucial role to play providing investment banks with a lens through which they can shape their strategy and operations to regain public trust and achieve tangible business outcomes.
Sustainability is not a separate department and it must not be perceived as such
Key challenges
Embedding sustainability to achieve tangible outcomes

At a high level, one of the principal challenges for investment banks is to find ways of addressing, and overcoming, continuing deep-rooted institutional cynicism around this issue. Our experience shows that the best way to approach this is by appointing a senior-level owner of sustainability for the organisation. But that is only the first step. Too frequently, where this has been done, we find that the front office remains largely unaware of any such initiatives. The next challenge therefore is to ensure that awareness of this commitment is consistently communicated throughout the business. Sustainability is not a separate department and it must not be perceived as such. Although there is no one-size-fits-all approach, the best way of ensuring organisation-wide buy-in (and an end to cynicism) will be to identify which sustainability drivers will impact the business and, more specifically, what actions can be taken to create tangible and quantifiable outcomes.
These outcomes can be summarised as follows: Strengthening the licence to operate Rebuilding trust sustainability, properly embedded, can provide the foundation for regaining and building the trust of key stakeholders (investors, consumers, governments and regulators). Increasing and protecting revenues Unlocking new business opportunities identifying products and services that support the transition to the low carbon economy, with the ability to deliver revenues at the same or lower risk than alternatives. Optimising and protecting assets Managing environmental and social risk exposure translating environmental and social risk exposure into credit and market risk to guide business/investment decisions. Driving operational efficiency Streamlining operations identifying how best to streamline the banks operations, from stripping out redundant processes through to ensuring energy efficiency across the organisation.
Figure 1: Investment Bank sustainability drivers and tangible outcomes

Sustainability
Strengthening the licence to operate

Rebuilding Trust Research of Dutch investors showed that trust within an listed company can increase the probability of investors buying a companies stock by 50 percent and raises the share of wealth invested in stocks by 3.4 percentage points vii
Increasing & protecting revenues

Unlocking Business Opportunities
Financing required transition to low carbon economy from 2011 2020 for UK: is estimated at 550 billion viii
Optimising & Protecting assets

Managing environmental and social risk exposure
The equity market is beginning to react with studies showing carbon efficiency has a meaningful relationship to asset multiples across companies in carbon intensive industries ix
Driving environmental efficiency

Streamlining Operations
Accenture estimates combined initiatives in Smart Buildings, Smart Logistics and Green IT can remove between 1 - 2 percent from the cost bases of most investment banks x
Most importantly, sustainability is a key lever in building trust with customers and government
This is supported by wider market statistics. Investments in rolling out low carbon technologies (including renewables and energy efficient infrastructure) have witnessed steady growth in the past five years, reaching US$40.2 billion globally for 2009, and were resilient through the economic downturn, down only 5 percent on the record in 2008 of US$42 billionviii. These findings underline the fact that far from being a marketing exercise, sustainability has an increasing business impact either through demonstrable increases in revenue, proven cost reductions and/or quantifiable societal benefits. Most importantly, sustainability is a key lever in building trust with customers and government. By understanding and quantifying the scale of these impacts (for their own organisations and/or for their customers) banks will come closer to embedding this mindset within the organisation and realising the risk-adjusted business opportunities that it creates. (i) Strengthening the licence to operate The 2010 Edelman Trust Barometer saw trust in banks plummet globally. In the US, banking moved from the 3rd most trusted to the 3rd least trusted industry (of 14)ix. This has recovered significantly from 2009, as banks have taken action like removing underperforming management, restricting pay and repaying bailout loans. These are, however, somewhat automatic reactions to the financial crisis. The industry now needs to have a clear direction for how to build and retain trust now and in the future.
Our perspective
The imperative to act on sustainability has shifted from a moral obligation to a robust business case
The United Nations Global Compact (UNGC) Accenture CEO study of nearly 1,000 respondents globally canvassed C-suite views on sustainability, as previously highlighted. CEOs were questioned why there was ongoing support for sustainability despite the difficult economic conditions. One reason given for the growing support is that during such a time of hardship, businesses have been forced to examine closely how their sustainability activity delivers core business value measured in terms such as cost reduction and revenue growth. A second reason for the growing commitment to sustainability is cited as an increasing demand for sustainable products and services.
The UNGC Accenture CEO study found that 72% of CEOs cite brand, trust and reputation as one of the top three factors driving them to take action on sustainability issues.x Looking ahead, further regulation will create a vicious circle, where responsibility and innovation will not be supported, and bankers will spend more time finding loopholes which will necessitate further regulation. In this environment, although no guarantee of success, a strong reputation will provide banks with a fundamental licence to operate. This provides strong incentives for ethical behaviour across the industry, with a view to embedding responsibility and self-regulation.
(ii) Increasing and protecting revenues A recently completed Accenture study forecasts the levels of finance required in the EU25 alone that will be required from 2011 to 2020 to finance the transition to a low carbon economyxii, expected to be an order of magnitude greater than the than that of the internet and telecom revolutions of the 1990s. Similarly, the Green Investment Bank Commission estimates an amount of 550 billion could be required for investment in supply chains and infrastructure in order to meet UK climate change and renewable energy targets between now and 2020xiv. A significant amount of this capital invested will be funded through the banking system. The opportunity for investment banks is enormous when thought of at a global scale. As an example of the instruments required
These assets have traditionally been funded from the public purse; however with governments under significant pressure to reduce sovereign debt, the funding burden will be transferred to the private sector. As these technologies mature and stable government policy is implemented, all these investments will be in businesses and infrastructure that are secured by assets, with cash flows that will provide an expected return that can be risk adjusted (similar to the alternative investments made by investment banks today). There is no such thing as green investment, there is only investment.
HSBC provides an example of what this can mean in practice. Outgoing executive chairman, Stephen Green, vigorously re-enforced the banks public commitment to be a leading brand in sustainability and this objective remains core to its strategic aims. HSBCs success in rebuilding public trust saw it surge up Fortunes Global 500 Accountability Rating reaching third place in 2008, up from 43rd place in 2006.
for the purchase of low carbon assets banks could provide bond issuance, integrated project finance, asset-secured debt and loans, unsecured loans and/or asset leases. This level of investment is expected to enable CO2e emission savings that will bring the EUs 2020 emissions on track to meet its targeted 20 percent carbon emissions reduction by 2020. Additionally, cost savings from the reduction in energy consumption and emissions are forecast. Outside the low carbon technology sector, Deutsche Bank estimates that water infrastructure globally will require up to US$22 trillion of investment up to 2030xv.
(iii) Optimising and protecting assets Some investment banks have already launched significant programmes focused on valuation correlation for carbon intensive sectors. Goldman Sachs GS Sustain initiative is one such initiative. Providing an objective, quantifiable framework linking the impacts of structural trends in the global economy, society and environment on global industries to investment conclusions on a sector-bysector basisxvi, this recognises the shift in environmental and social pressures, as well as the expectations of investors on companies to address these issues and report on their performance.
More broadly, banks face substantial social and environmental risks in the management of their loan and investment portfolios. And while the tools needed to help manage and quantify this risk are not there yet, they are definitely on the way. Guidelines such as the Equator Principles and UN Principles for Responsible Investment have now secured mainstream acceptance. And while much work remains to define how these are applied, both frameworks provide a set of protocols for incorporating sustainability issues into funding decisions. Investors are also focusing on material issues of sustainability, in particular climate change especially since some estimates suggest that as much as 40 percent of some companies EBITDA could be at risk from emerging carbon constraintsxvii. Investors worth US$65 trillion in assets under management have demanded greater disclosure of carbon emissions performance through the Carbon Disclosure Project (CDP)xviii, who collect, distribute and motivate companies to take action to prevent dangerous climate change.
(iv) Driving environmental efficiency Finally (and perhaps most relevant in the current economic climate), sustainability can provide valuable enterprise-wide focus for rapid and sustained cost management. From working with clients in parallel industries, and taking into account investment bank cost bases, Accenture estimates that combined initiatives in Smart Buildings, Smart Logistics and Green IT can remove between 1-2 percent from the cost bases of most investment banksxix. It is of course essential that banks do not jeopardise their ability to operate and respond to clients through reduction in operating capacity. This is about removing low level inefficiencies in the business. Getting this right will support building trust and maintaining the licence to operate. To sum up, far from being a marketing exercise, sustainability has an increasing and demonstrable business impact. Indeed, it stands out as a vital component in building and protecting long-term trust and business value. As such, instead of treating sustainability initiatives as nice to haves, disconnected from their core business, investment banks are starting to view them as tangible, risk-adjusted business opportunities.
Accenture conducted a study that highlights the capital required to support the transition to the low carbon economy. A robust model was built that identifies the technologies that will be implemented and their corresponding financing requirements. This is further supplemented by the financing instruments required to channel funding to both the developers and purchasers of low carbon technology. In addition the study quantified the emissions reductions and amount of cost savings that result from the roll-out of the low carbon economy. Benefits to the client and Accenture This seminal report demonstrates leadership in facilitating the transition to the low carbon economy. Key stakeholders can be quickly and easily engaged to understand the level of financing required and the emission reduction potential from the roll-out of the low carbon technologies identified. Additionally there is a deep understanding of the barriers in the provision of funding for the roll-out of this low carbon technology, and more importantly, an understanding of how these financing barriers can be overcome. Figure 2 highlights some of the outputs on the model and highlights the financing initiatives that are expected to channel the funding required to accelerate roll out of low carbon technology as part of the transition to the low carbon economy.
In practice
Accenture report with a global financial institution quantifying the role of banking in the transition to a low carbon economy
Figure 2: Financing initiatives that are expected to be employed to channel funding to enable the roll out of low carbon technology.
Carbon reduction potential
Strong commercial potential (market demand & banking capabilities alignment)

High 110%
9
8
List of considered financing initiatives

7 1
14
3 73% Medium 10
13 4 15
12 5 6
11
Low 35%
Low 20% Medium 70% High 120%
Public Markets 8 Green bonds - Low carbon labelled bonds available to wide range of investors and eligible for tax benefits 10 LCT ETF & Index - Financial exposure products to Low Carbon Technology debt / equity Direct capital provision 7 Energy Efficiency Lease - Energy cost-savings used to calculate repayment of LCT lease and loans 3 Tax-equity/debt schemes - for direct investments in large scale renewables infrastructure 9 VentureCapital Investment arm - LCT tailored venture capital funds (owned by banks) supported by matched & capped government funding Advisory services 2 LCT Sector Research - Dedicated & customized Investment banking and research services for LCT sector 15 LCT IPO Services - Dedicated M&A and IPO servicers for companies in the low carbon technology sector Asset & Wealth Management 1 Tax-credit LCT investments - Low carbon technology dedicated debt / equity investments qualifying for capital gain tax credits
Applicable market potential for C&I bank
i Green Investment Bank Commission report, available at
Accenture experts To discuss any of the ideas presented in this paper please contact: Peter Lacy Senior Executive, London peter.lacy@accenture.com +44 20 7844 3427 +44 75 0010 2928 Shaun Richardson London shaun.a.richardson@accenture.com +44 20 7844 4982 +44 79 1033 0933 Justin Keeble London justin.keeble@accenture.com +44 20 3335 0682 +44 78 1800 1688
http://www.climatechangecapital.com/news-andevents/press-releases/green-investment-bankcommission-report-ccc-e3g-joint-announcement.aspx ii Accenture analysis, based on capital requirements presented in GIBC iii "Cost of tackling global climate change has doubled, warns Stern", The Guardian, June 2008 iv Bloomberg New Energy Finance v New York Times, June 2010 vi United Nations Global Compact (UNGC) Accenture CEO Survey, July 2010 vii Social Investment Forum, available at http://www.socialinvest.org/resources/sriguide/srifacts.cfm viii Bloomberg New Energy Finance ix 2010 Edelman Trust Barometer, available at http://www.edelman.com/trust/2010/ x United Nations Global Compact (UNGC) Accenture CEO Survey, July 2010 xi Fortune Global 500 Accountability Rating xii Accenture analysis xiii Accenture analysis xiv Green Investment Bank Commission report, available at http://www.climatechangecapital.com/news-andevents/press-releases/green-investment-bankcommission-report-ccc-e3g-joint-announcement.aspx xv WBCSD Vision 2050 report available at http://www.wbcsd.org/Plugins/DocSearch/details.asp?Doc TypeId=33&ObjectId=Mzc0MDE xvi GS Sustain: Goldman Sachs Change is coming: A framework for climate change a defining issue of the 21st century May 2009 xvii GS Sustain: Goldman Sachs Change is coming: A framework for climate change a defining issue of the 21st century May 2009 xviii CDP 2010 Global 500 Report available at https://www.cdproject.net/CDPResults/CDP-2010SP500.pdf xix Accenture experience and analysis
Delivering Valuable Transformation

In the wake of the financial crisis, investment banks are undertaking large-scale programmes to deliver transformational benefits and build market share. Additional impetus for these initiatives comes from ongoing regulatory reform, with further impacts looming in both the EU and US. However, the results to date are mixed, with much duplication of effort, conflicts between initiatives and wasted resources.
Challenge 7: Delivering Valuable Transformation
You can have the best vision in the world, but if you cant put it into effect, you are wasting your time. Success in business is 25% strategy, but 75% execution.
Accenture
Background
Most investment banks have mixed track records where large-scale change programmes are concerned
According to Accenture research, leading investment banks each spent an average of US$570 million on transformational change the bank initiatives during 2010. The same investment profile is predicted for 2011, indicating that changes promised during the crisis have not been delivered. Furthermore, some banks are still awaiting tangible benefits from the investment they have committed to date. There have been and continue to be multiple motivations for these transformation programmes, including: Emerging market growth: Achieving business growth ambitions in emerging markets Post-merger integration: Realising the benefits from bringing the capabilities of multiple businesses together Cross-asset views and services: Developing consolidated client level, cross-asset records to support portfolio optimisation and to focus on client needs Cross-asset distribution: Enabling cross-asset distribution from global markets divisions to banks private, corporate or retail banking customers Enhance risk management: Strengthening risk monitoring infrastructures in response to broader and more intricate regulatory demands
With an increasing focus on their cost base as well as the expectation to deliver on promises made in tougher times, there are multiple challenges that banks must face and overcome to accomplish their aims
Finance transformation: Improving control and performance within product control and general finance One Bank initiatives: Standardising products, services, technology and processes across the bank, on a global scale Post-crisis regulatory change: Responding to the regulatory tsunami, highlighted by OTC Derivatives market reform and Basel III This broad sweep of factors may be broadly framed across two dimensions; those incentivised by increasing revenues or decreasing operational costs, and those caused by regulatory pressure.
However, wherever the motivations for change programmes originate within banks, current investment profiles suggest banks ambitions to realise their stated benefits within the required timeframes exceed their ability to deliver. With an increasing focus on their cost base as well as the expectation to deliver on promises made in tougher times, there are multiple challenges that banks must face and overcome to accomplish their aims.
Figure 1: Transformational programme drivers
Emerging market growth
Post -merger integration
Revenue
Cross - asset views and services
Benefit Delivery
Cross -asset distribution
Enhanced risk management
Cost
Finance transf ormation
One Bank initiatives Low Regulatory Pressure
Post-crisis regulatory change
High
Few bank transformation programmes have achieved acceptable returns on investment.
Key challenges
Satisfying the regulators while continuing to satisfy shareholder expectations

The investment banking industry is in flux, with ongoing change a fact of life for all participants. In this environment, the overriding challenge for banks is to stay abreast of developments and implement co-ordinated change programmes that comply with regulation and, wherever possible, boost performance.
Few bank transformation programmes have achieved acceptable returns on investment. Objectives for these efforts are typically overly complex, with benefits poorly defined and difficult to measure. To improve the performance of future programmes, banks will need to address some or all of the following challenges: Leadership and Governance Programme sponsors are clear though lower level responsibilities for project delivery and task completion are not uniformly appreciated Ownership of project activities, including functional contacts, IT leads and business SMEs are not consistently understood There is often a lack of ongoing prioritisation of project activities or change requests by the business Change managers fail to engage with broader programme objectives A lack of drive to meet timescales in some areas, with delivery dates missed
Benefits Realisation An absence of clarity around how projects deliver business impact beyond being broadly valuable Uncertainty as to whether long term business requirements are being comprehensively met Unclear linkage of architecture workshop activities to business projects and how requirements are feeding into IT, who are often already working on their future state architecture Delivery Focus A reliance on a small number of individuals for SME input who do not have sufficient capacity to complete all requested tasks and may not even be the person closest to the issues at hand Unclear product scope that hampers high level objective setting and development of the ultimate solution
Misalignment around objectives between project stakeholders can drive a perception of slow delivery, which may not reflect actual progress Project lists defined in the initial strategy phase not being tested on an ongoing basis, preventing uniform agreement on the programmes priorities Uncertainty around which individuals should be consulted for requirements input and SME insight Departmental and Regional Silos Business functions and regions are involved in projects to varying degrees and inconsistently Change initiatives are often launched at departmental level with no overarching framework for coordinated delivery Some projects are not making sufficient progress due to a lack of engagement with key SMEs and business functions
Methodology Programmes not having the flexibility to accommodate developments in a rapidly changing business and / or regulatory environment Project individuals are not sure what artefacts are required and by when Different projects employ different communication tools Not all projects have documented, formalised, signed off and communicated objectives, approach and scope
For change programmes to realise their objectives and deliver business benefits, business-led, empowered leadership is essential
Our perspective
Strong business-led project management is essential to effective change programmes

For change programmes to realise their objectives and deliver business benefits, business-led, empowered leadership is essential. Programmes unable to secure this run a high risk of failure - even where there is full commitment and involvement from middle management, authority to drive through large scale change will be lacking. Portfolio-based investment management of the project should deliver the best results. This requires a portfolio manager to allocate funds out to projects based on delivery of interim milestones, rather than a more traditional approach of allocating entire budgets at the start of the financial year. This approach will lead to regular draw down of funding during the year, predicated on demonstrating that tangible progress has been made. Subsequently, portfolio-based management ensures stringent oversight on the value for money delivered by the project and provides the ability to take aggressive corrective action when problems occur. The checklist for a successful transformation programme should comprise the following actions: Figure 2: Stakeholder commitment
Continuous and intensive communication ensures that the stakeholders proceed to the next commitment level and ultimately maintain full commitment to the programme. Poorly executed communications remain the number one cause of transformation failure. Before a specific audience group is convinced by a change, it will go through different stages, as shown in Figure 2. For each commitment stage, there are different outcomes possible, i.e., progression to the next stage or regression to a negative commitment level.
Level of Commitment
Edu
Inform
cat
BUY IN Buy into the goals of the change journey
Co mm i
COMMITMENT Acceptance and personal ownership of the change
Change Aborted
UNDERSTANDING Understanding of the nature AWARENESS High-level awareness and intent of the change of the content and content of ther channel journey
Resistance
Negative Perception Confusion

Time & Effort
Source: D. Conner Managing at the speed of change (1993)
Senior and visible business sponsorship; business sponsors must remain engaged throughout the lifecycle of the project to maintain effective business prioritisation against other projects competing for scarce resources Development and circulation of a business benefits roadmap (building on the high level roadmap from the initial strategy phase), based on detailed requirements to ensure transformation objectives and benefits are measurable and easily understood by all Identification of quick wins and early benefits helps to gather and sustain momentum Clearly defined accountability for delivery, including performance objectives aligned with bonuses and pay that reflect successful transformation outcomes Staff retention schemes for key project members, as appropriate, as the employment market recovers Embedded flexibility in the transformation programme to withstand a rapidly evolving regulatory and business landscape Cross-departmental steering committees and forums to ensure senior management have visibility of all initiatives and can therefore recognise potential duplications, conflicts or synergies Integration of all geographies and business lines involved in the planning and business case generation to enhance buy-in and commitment An appreciation of local complexities from legal, tax and compliance standpoints. One size fits all will not always deliver a valuable outcome.
Provided the change framework and supporting systems are in place, banks will be able to adapt these as necessary to ensure rapid responses and seize first-mover advantage
Initiating transformational change in such a volatile environment is challenging. For those leading these programmes, it is important to emphasise that change should be delivered incrementally, rather than through a big bang approach. As well as helping to secure enterprisewide acceptance, phased implementation allows for ongoing flexibility. Such flexibility is particularly essential when the mid-term regulatory outlook remains unpredictable. Provided the change framework and supporting systems are in place, banks will be able to adapt these as necessary to ensure rapid responses and seize firstmover advantage. Finally, banks should actively seek out ways in which direct business benefits can be derived from any changes that have to be made, whether for regulatory reasons, or through operational restructurings and reorganisations.
In practice
Driving through a focused business case for change

A global investment bank needed a new front-office operating model to help it defend and grow market share through globalisation and business harmonisation. The intended transformation was designed to deliver US$200 million of benefits over three years through revenue protection and reductions in cost and operational losses. The bank asked Accenture to help it to define the strategic vision for this initiative and deliver a new Target Operating Model. With senior business sponsorship from the global front office COO and CFO, the project team began by convening a series of workshops with key stakeholders across the business to identify current constraints and develop an overall strategic vision, providing the foundation for the planned transformation.
Guided by the strategy and current state understanding, the team developed the Target Operating Model to deliver the programmes objectives, and a robust business case needed to secure funding and measure benefits realisation during transformation. At every stage, representatives from the principal global centres were invited to provide input to ensure regional buy-in and full visibility of local complexities. Governance structures, communications plans and benefits tracking frameworks were put in place and a programme office set up to project manage prioritised initiatives. An incremental delivery approach was followed, providing flexibility and the opportunity to deliver quick wins. This approach was designed to build momentum by realising benefits throughout the programme lifecycle rather than in a big bang style at the end. Transformation objectives were prioritised to form programme initiatives, which were assigned measurable benefits and owners accountable for their delivery. The initiatives were designed to conclude within 12 months to tie in with the bonus cycle. Benefits delivered On completion, the bank benefited from improved client service and sales effectiveness at a global level, as well as reductions in cost, operational risk and complexity. Above all, the delivery approach allowed the bank to achieve its strategic objective within 12 months, delivering a return on investment in excess of the business case baseline.
Accenture experts To discuss any of the ideas presented in this paper please contact: Laurie McGraw Senior Executive, New York laurie.a.mcgraw@accenture.com +1 267 216 1313 +1 917 687 7237 Suresh Kanwar Senior Executive, London suresh.kanwar@accenture.com +44 20 7844 8177 +44 77 7551 7627 Rob Deakin London rob.m.deakin@accenture.com +44 20 7844 1191 +44 79 8057 5954
Harnessing Innovative Technologies

Although innovative technologies create exciting opportunities for accelerating speed, efficiency and profits, the challenge for investment bank CIOs is increasingly: How can we leverage maximum value from our new technology investments by harnessing them for the benefit of the whole business?
Challenge 8: Harnessing Innovative Technologies
Cloud computing... is building serious momentum on Wall Street

Wall Street & Technologyi
Background
Harnessing new technologies for the benefit of the entire enterprise

Industry leaders are using new technologies to enable interdependent business functions, from front-to-back trade processing to enterprise risk management.
Investment banks rely on advanced technologies in the front office to enable high-speed, high-frequency trading. Until now, the upfront benefits from this activity have been so enormous that the complexity and inefficiency of post-trade processes and systems have often been overlooked. That is changing fast. The highest performing investment banks are now using their front-office technologies in bold, innovative ways as a source of competitive advantage for the whole business. By concurrently enabling interdependent business functions, such as risk management, settlement and financial reporting, these technologies are transforming the way organisations think, react and operate. There are a number of reasons for this trend: Management is demanding integrated, proactive technology infrastructures that can anticipate the impact of new market and regulatory developments CIOs are under mounting pressure to get a return on their massive investments in technology by using these assets to drive down costs, as well as driving up revenues (traditionally the principal focus for front-office technologies) This increasing emphasis on ROI means CIOs need to develop flexible IT assets that, by adapting to business change, can appreciate in value over time.
Advanced elastic path optical networking, deployed in virtualized networks, is being used to settle trades across borders, regions and global market centres
We see the industry leaders adopting a portfolio approach to their technology investments demanding the best possible return from them, both as standalone assets and as part of an integrated capability. These organisations are leveraging pioneering technologies to powerful effect, creating a renewable source of business benefit from new toolkits comprised of flexible architectures, virtual networks and genetic programming. These new technologies, historically sewn into front-office applications, are now being harnessed for the benefit of the middle and back office, and on a larger scale, to drive the global infrastructure in various innovative ways, including: Thinking machine algorithms, underpinned by morphic architectures, are being used to bring risk management into the front office, enabling pre-trade analytical decision-making Advanced elastic path optical networking, deployed in virtualized networks, is being used to settle trades across borders, regions and global market centres Cloud computing, combined with multi-core graphics processing units, is being used to reduce the surging cost of adding new hardware to cope with geometrical increases in data volumes.
The CIO has a tough remit: boosting the profitability of the application portfolio by melding revenue-driving technologies with those that are designed to reduce costs.
Key challenges
Doing more and doing it more profitably

Investment bank CIOs are struggling to cost-effectively build and maintain applications that can provide both compute and data intensive processing. The difference between the two refers to the timeframes within which data is processed. The first type involves using large amounts of computer processing cycles to act on data at different times during a trading day; the second type involves processing data continuously throughout the day; for example: compute-intensive processing is applied to macro stress-test an entire set of client portfolios in one day, and data-intensive processing is applied to analysing pre-trade data many times per second with as little latency as possible.
While the trading systems architects are wrestling with these intensity challenges on a functional level, the enterprise architects are combating escalating data management requirements across the bank, attempting to drive scale efficiencies from mature technology investments. In other words, the CIO has a tough remit: boosting the profitability of the application portfolio by melding revenue-driving technologies with those that are designed to reduce costs. Or to put it another way, as well as being expected to do more with less, the investment bank CIO must also start to demonstrate a return on existing and new technology investments.
The crux lies in effectively integrating new front-office technologies with systems across the rest of the organisation to transform business efficiency, effectiveness and insight while dramatically driving down the costs of complex technology renewal.
In todays environment, investment banks must continue to use emerging technologies in a much more convergent manner to drive improvements in pre-trade analytics, enterprise risk management and aggregate trading profits.
Our perspective
Successfully leveraging a portfolio approach to technology investments
Figure 1: Emerging Technologies for Risk Management

Sources Data Management Storage Valuation Risk Assessment Analytics Reporting
Data Servicing Provisioning
Processing Cubes
CMS EMS Risk Management CEP Clearing Finance Factory
Federated / Multi Channel Dynamic Risk Portal
Reference Data Trades
Web
E - mail
High Speed Messaging >>
Counterparty Data Position Security Master
Reporting Network
The crux lies in effectively integrating new front-office technologies with systems across the rest of the organisation to transform business efficiency, effectiveness and insight, while dramatically driving down the costs of complex technology renewal. This will provide vital functions (Risk Management, for example) with the processing power and flexibility they need to analyse vast quantities of enterprise-wide data and the agility they need to adapt to business and/or regulatory change.
High Speed Messaging >>
Web
Service Supply Chain Governor
E - mail Reporting Network
Source: Accenture
Once they start to use technologies in a convergent manner, investment banks will be able to generate a single version of the truth, a vital resource for enhanced internal efficiency and for external competitive advantage. Crucially, by following this approach, bank CIOs will be able to analyse their technology portfolios, before rapidly, flexibly, and cost effectively making whatever adjustments are needed to drive maximum value. That way, they will consistently demonstrate ROI from their technology investments, as well as helping the organisation to work harder, smarter and more efficiently.
Provided the following building-blocks are used, we envision a future-state architecture that amplifies the historically point benefits of these technologies to the span of the entire enterprise:
The foundation for these applications must be rooted in flexible, morphic computational architectures The methods used to develop, deliver and maintain these assets should respond well to a complex, adaptive environment where hardware, software and networking are becoming more fluid and interwoven The assets must be continuously monitored to assess their ongoing contribution to business value.
In practice
Integrating the power of analytics in the cloud with Monte Carlo simulations
A leading investment bank required an elegant solution to a very challenging (and commonplace) problem. How to price and value increasingly complex portfolios rapidly, accurately and cost effectively?
The traditional Value-at-Risk (VaR) calculations had used Monte Carlo methods to determine probability distribution and confidence intervals. However, in order to calculate VaR on the most exotic derivatives (e.g. Himalayan options), the group needed to execute Monte Carlo (for VaR) on top of further Monte Carlo simulations (for instrument pricing). The number and complexity of calculations had become computationally prohibitive, even when the latest technologies (including grid computing and in memory data caching/fabrics) were employed. See Figure 2. Accenture was asked to solve three variables: Create a working prototype of an advanced valuation methodology that replaces nested Monte Carlos with a unique solution Prove that the new method achieves VaR calculations with the same statistical confidence Develop a Point of View on how emerging technologies can be employed to drive a quantum leap in computational efficiency for risk analytics.
Activies
Model Changes to reduce compute time
Figure 2: Model selection for optimal performance
Model selection for optimal performance

Market, Liquidity/ Counterparty Reports
Sample Size
Historical Volatility VaR
Stochastic Volatility
Reports
Parameter Tuning Portfolio VaR
Heston Implied Volatility Market Data Sampling Rate Dupire Derman & Kani
Monte Carlo Risk Matrices Sample Size Counterparty Credit
Hardle
Liquidity
Reports Pricing Models Interpolation methods Bootstrapping Merton 1-factor 2-factor Calibration Parameters 3-factor P&L
Focus Areas
Heath, Jarrow Morton
Benchmark Rates
Parameter Tuning
Interpolation Methods
Source: Accenture.
The Accenture team used a newlydeveloped proprietary solution, MonteCloudo, a software library that integrates the effectively limitless power of cloud computing with Monte Carlo simulation. Handling all cloud-related technical aspects of the project (from provisioning and management to result collection and visualisation) MonteCloudo enabled the client to focus on modelling and parameter setting, hugely accelerating the speed and effectiveness of the simulation. See Figure 3 As a result, the Accenture team delivered a working prototype for pricing complex derivatives over multiple states and time horizons. Because it harnesses the power of cloud computing, MonteCloudo enables the bank to switch computing capacity on and off as needed. Instead of demanding further investment in expensive technology hardware, this compute-intensive project used analytics in the cloud to get the results it needed, quickly and cost effectively.
The benefits were clear-cut, spanning: End-user productivity fast and accurate decisions Low entrance barrier to cloud no need to know about cloud implementations High Performance dynamic resource allocation and load balancing.
Figure 3: Option Pricing Case Study

Option Pricing Engine
European option GARCH model for stochastic volatility Two random variables: W t and Y t
The maths?? Symbols
Case study for correctness check

Option name: Marks & Spencer Type: Call option Option price: $63.500 Result of calculation: $63.389 10,000 time intervals Run the simulation until the expected error is lower than 0.5% of the estimated option price (w/ 99% confidence)
Name of option Option type Strike Price () Start Date Expriry Date Interest rate
Marks & Spencer Call Option 130 15/11/00 29/12/00 6 0.133542407 0.43208172 2.271729357
Source: Accenture
Accenture experts To discuss any of the ideas presented in this paper please contact: Lloyd Altman Senior Executive, New York lloyd.altman@accenture.com +1 917 452 0004 +1 917 514 1655 Kristina Klapper Senior Executive, Frankfurt kristina.klapper@accenture.com +49 61 73 94 67306 +49 17 55 76 7306
iWall Street & Technology, 2 December 2009
Scott Reed New York scott.reed@accenture.com +1 917 452 0020 +1 516 655 4121
Engaging Effectively in Emerging Markets

Many investment banks and their clients - have identified emerging markets as a key part of their strategy to grow revenues in the future. To make the most of these opportunities, banks must identify targets that go further than just those experiencing rapid growth, to identify sustainable opportunities for the long term, including, but not limited to talent availability, infrastructure investment, regulatory environments and competitor concentration. Pinpointing the requirements needed for successful, sustainable and profitable entry, and then incorporating these objectives into a truly global operating model will determine future success.
Challenge 9: Engaging Effectively in Emerging Markets
The future belongs to the emerging markets.

Euromoneyi
As emerging markets move out of poverty, then double and double again their GDP, they have the real potential to drive growth and revenues for investment banks. These opportunities are in direct contrast to developed markets, weighed down by economic uncertainty and stifled by intense competition; emerging markets are identified as a key component of banks future growth strategies. Looking ahead to 2011, the attractiveness of these markets can only grow. Banks have aggressive growth targets in place for boosting returns on equity targets that simply cannot be met solely through operations in mature markets. At a higher level, global economic growth will be concentrated in emerging markets, where the middle classes are now bigger than the consumer base in developed markets. In India alone, the middle class (already 180 million strong) is forecast to grow by 10 percent each year. With increasing amounts of income available to invest, these consumers will drive higher demand for financial services, both as individuals and through the demands they place on companies, which will be meeting their consumer demands. The result is new business opportunities for banks across multiple sectors. The priority for banks now is to ensure that their global strategies fully incorporate opportunities presented by emerging markets, while providing the flexibility needed for newly established operations in these markets to generate returns on investment.
Background
The quest for superior returns

Seeking opportunities for revenue growth, many investment banks have sought, or are actively seeking, to build offices and branches in a wide range of emerging markets.
Prior to the financial crisis, investment banks typically achieved returns on equity of 20 percent or higher. Now, they are struggling to generate returns of 15 percent in the post-crisis operating environment. In a world where leverage is going to be held to more conservative levels and proprietary trading more limited, banks are naturally seeking growing economies where their services will be in demand, and that usually means targeting emerging markets. Figure 1: Emerging Market GDP per capita growth
US$ per capita 25,000 GDP per capita 2007A 20,000 GDP per capita 2007A
15,000
10,000 5,000 0
ile
sia
ico
ia
ia
ka
in
di
re
ey
il
in ra Uk
az
lys
ric
Ch
an
an
Ch
ne
In
Ko
nt
ex
Ru
rk
Br
Af
ala
ail
do
ge
iL
Tu
Ar
In
Source: IMF, World Economic Outlook Database (April 2009), Accenture analysis
So
ut
Sr
Th
Vi
et
na
in
ss
Key challenges
Developing relevant, coordinated offerings

Where their emerging market strategies are concerned, most investment banks have reached base camp. But very few have progressed much further and only a handful have deployed an integrated emerging market strategy. As they seek to take advantage of these new opportunities, banks will face a number of strategic, operational and cultural challenges:
1. Rigorous target market selection Target markets must be subjected to rigorous competitive and cost benefit analysis, with clear milestones in place for progress review and close management of ongoing business development. Indeed, whilst GDP growth is an important economic indicator, it rarely correlates with the attractiveness of a market for investment banks and it should only be taken into consideration along with the availability of talent, ongoing infrastructure investment, government policy regarding foreign investment and the ability to translate global strengths locally, in order to identify successful targets which can and should lead to focus on some unexpected countries.
Given the high (and growing) level of regulation surrounding the banking industry, an invitation from the host government is critical in order to mitigate and correctly ascertain cost and resource issues.
2. Market-relevant products Banks must invest in researching and developing market-relevant products that mesh precisely with client demand both new local clients and current clients expanding internationally. These will inevitably differ (often dramatically) from developed world products. Service levels may need to be much higher, for example, with face-to-face interaction often an essential consideration.
3. Integrated operating models Emerging market offices and branches must be properly integrated into the business, not run with bespoke operating models (which can lead to greater risk, higher costs and reduced oversight by senior management). The infrastructure supporting the emerging markets business must be continuously checked to limit nonstandard systems and tools. 4. Regulatory awareness Careful strategic planning will be needed as regulatory requirements in particular markets vary hugely, and may be subject to rapid change. Given the high (and growing) level of regulation surrounding the banking industry, an invitation from the host government is critical in order to mitigate and correctly ascertain cost and resource issues.
Companies often need to go to multiple markets to find what they need, be it talent, capital or technology.
Our perspective
Setting the stage for successful growth stories

Evidence from our research demonstrates that high performance banks distinguish themselves with a globalization strategy that is conceived and executed in a new and consistently different way. They discover new fulcrums of growth, cost efficiency and risk management, develop them and work them into the fabric of their businesses. Across all dimensions, high-performance banks are guided by three central maxims:
Create geographic options High-performance banks proactively and continually explore new geographic sources of value. They constantly look outward, sensing their business environment (and that of their clients) and making focused choices about where to compete and whom to engage. No two markets are the same. Companies often need to go to multiple markets to find what they need, be it talent, capital or technology. Lessons from high performers: Reach out to potential clients in overseas markets with new business models, channels and infrastructure investment that unlock otherwise latent demand. Source talent wherever it may exist geographically, as well as from sectors of the population that may have been overlooked previously, such as women and rural workforces. Identify emerging centres of excellence in different technologies, products and processes around the world. Build resource input security via term contracts, upstream acquisitions and investment in diversified geographical sources to minimize cost fluctuations. Improve access to capital and diversify risk by updating knowledge, relationships and financing models to reflect the new map of global investment flows.
Be authentically local Although searching for value in emerging markets is a cross border task, unlocking that value is a local exercise. As tastes, customs, regulationsand political environmentsdiffer widely; high performers embed themselves with full commitment in their chosen local and regional markets as they execute their strategies. Lessons from high performers: Identify critical local differences in client preferences and usage and, in response, tailor products and services to new client segments. Develop and mould local talent for today and tomorrow by investing across the skills spectrum. Embed innovation activities into local research and development and consumer environment, working in tandem with industry peers and policymakers. Optimize resources strategy under differing economic, cultural and regulatory constraints across markets and harness incentive regimes, such as carbon trading, for current and new business. Be willing to draw on a broad suite of investment models tailored to the characteristics of different markets.
Network the organization Acting on knowledge from around the world and executing company strategy in multiple locations requires the ability to transfer people, resources, capital and know-how to the right places at the right time. Creating organizations that are permeable, both internally and externally, enables flows of people, ideas and best practices. Lessons from high performers: Create structured channels to allow rapid diffusion of ideas and knowhow across geographic regions. Build a global backbone of standardized data, systems and processes. Ensure global leadership to cultivate a global mindset from the top down.
Figure 2: Three maxims for emerging-market growth

New clients
Reach out to potential clients in overseas markets with new business models, channels and infrastructure investment that unlock otherwise latent demand
Talent
Source talent wherever it may exist geographically, as well as from sectors of the population that may have been overlooked previously such as women and rural workforces Develop and mold local talent for today and tomorrow by investing across the skills spectrum
Innovation
Identity emerging centera of excellence in different technologies products and processes around the world
Resource Sustainability
Build resource input security via team contracts, upstream acquisition and investment in diversified geographical sources
Capital
Improve access to capital and diversity risk by updating knowledge relationships and financing models to reflect the new map of global investment flows
Create geographic options
Be authentically local
Identity critical local difference in clients preferences and usage and in response, tailor products and services to new client segments
Embed innovation activities into the local research and development and client environment, working in tandem with industry peers and policymakers
Optimize resources strategy under differing economic cultural and regulatory constraints across materials and harness incentive regimes, such as carbon trading for current and new business
Be willing to draw on a broad suite of investment models tailored to the characteristics of different markets
Create structured channels to allow rapid diffusion of ideas and know across geographic regions
Network the organisation
Build a global backbone of standardised data, systems and processes Ensure multi-polar leadership to cultivate a global mindset from the top down
Source: Accenture Institute for High Performance
In practice
Creating a local operation: an exercise in managing complexity

Our experience shows that it is all too easy for investment banks to underestimate the complexities involved in setting up or expanding securities operations in an emerging market. Crucially, they must not expect to apply the same implementation approach as in the major developed markets where they already operate. Also, they should be aware that the higher complexity of designing and delivering emerging markets operating models applies across the key domains of the business, operations and IT. There are four main priorities that investment banks should focus on to get their local operation up and running as efficiently and rapidly as possible, and to seize the highest available market share among their target clients and product segments. These four priorities are:
1. Realising business opportunities It is critical to allocate sufficient financing and resources to maximise the new unit's chance of success. This means securing enough investment to tackle several challenges that affect all satellite operations, but more especially those in developing markets. In particular, it is important to move quickly and achieve high speed to market once the opportunity has been identified, since the first mover will often corner the lion's share of the local market. This means it may be better to launch now with good-enough' offering, than to wait until the fullyengineered service is ready. A further key challenge is optimising the product mix and scope for local market conditions. In some markets, product definitions and regulatory frameworks are different from what is normal in major hubs a couple of examples from the Russian market illustrate this point:
A further key challenge is optimising the product mix and scope for local market conditions.
FX options are not illegal but are also not legally enforceable in Russia. Therefore, although some international banks have built the capability to trade FX options locally, there is no market in FX options at present What is referred to as a Repo' in the Russian market is in fact a sell/buy back' rather than the single Repo transaction subject to a master agreement typical in major markets - hence different processes and operational requirements apply. In other locations, it is the market dynamics that are distinct. For example, rates trading in key Asian markets (e.g. Hong Kong) remains predominantly voice rather than electronic and so investing in building a fully automated electronic bond-trading platform before market entry may simply result in a bank missing the boat in terms of market share. These challenges underline the importance of investing in local skills and knowledge to avoid wasting time and money down blind alleys.
2. Delivery complexity While most investment banks are organised and managed globally on the basis of relatively segregated product silos, setting up emerging markets operations is typically a cross-product implementation. Therefore, organisations that are normally highly effective in delivery and execution within a product silo often face new implementation challenges in emerging markets where far more cross-product collaboration is required. Furthermore, the critical importance and rapid growth of wealth management in emerging markets raise major questions about how and how closely to integrate wealth management services with investment banking. Investment banking and wealth management have different origins and heritages in the global hubs which have led to largely separate operational infrastructures. However, in setting up emerging markets operations there are opportunities to address the significant operational redundancies and duplications between investment banking and wealth management operations (e.g. in securities settlement) that are common in global hubs. This requires new ways of thinking about the operating model to more effectively share infrastructure between the investment and private banking arms of the business. Inevitably, addressing these issues increases the complexity of development, testing and roll-out.
3. Regulatory, legal and market practice framework From day one of the project, it is crucial to focus on developing a full understanding of local regulatory requirements, accepted modes of market behaviour and the legal environment, and to incorporate these factors at the design phase rather than trying to bolt them on later. This applies especially to new locations where the bank lacks an existing presence or experience on the ground. In these entirely new sites, compliance, tax, legal, anti moneylaundering (AML) and other regulatory functions should be addressed as early as possible. It is also important to remember that products based on a similar concept and designed to fulfil a similar objective in two different markets may be based on fundamentally different legal definitions. Examples might include financing agreements made under Shariah law as compared to Western interest-bearing loans.
4. Technology Implementing the optimal IT infrastructure in a satellite operation involves addressing a wide array of issues. At first sight it may appear that the cheapest and easiest approach is to plug the unit into the bank's global IT systems, but this may limit the new operation's flexibility and responsiveness to customer needs. For one thing, its systems will need to meet local demands such as Sunday trading in the Middle East or use of the Cyrillic alphabet in Russia that may not fit easily into the global IT template. For another, a small satellite operation may find its IT change requests to the global hub receive much lower priority than those submitted by an established unit in a major developed market. Such factors mean that traditional developed market-centric thinking about IT may not apply, and require careful consideration of the balance between using in-house systems and third-party (possibly specialist local) vendors.
Challenge 1: Responding to the regulatory Emerging Markets Challenge 9: Engaging Effectively in maelstrom
Accenture experts To discuss any of the ideas presented in this paper please contact: Jos Villar Senior Executive, Madrid jose.m.villar@accenture.com +34 91 546 9229 +34 61 924 9936 Wei Min Chin Senior Executive, Shanghai wei.min.chin@accenture.com +86 212 3053 832 +86 138 1781 0675 Dinesh Sharma London dinesh.k.sharma@accenture.com +44 20 7844 8288 +44 79 0991 5895
iSource: Euromoney
10
Picking the right battles

Having weathered the financial crisis, investment banks are seeking to capitalise on their current positions and move up the rankings to establish themselves as market leaders. Aiming high makes sense strategically but, by definition, not all banks can be top-three players. Particularly now, when resources are limited and time is tight, the priority is to focus on winning the right battles.
Challenge 10: Picking the right battles
We're focusing on the markets where we have a right to win.

Michael Geoghegan, Group CEO, HSBCi
Figure 2: Defining factors in investment bank high performance

Global Breadth Evenly distributed revenues across Europe, Americas & APAC regions Top 10 players in BRIC, Mexico & Korea Significant presence in second tier emerging markets (Eastern Europe, Latin America) Client Centricity Clear client strategy based on segmentation Client aligned Operating Model Provider of integrated investment bank/ wealth/ asset management clients solutions Product Depth Recognised consistent strength across FICC Equities M&A Prime Services Sustainably profitable in all chosen markets and products Source: Accenture research
Background
In a resource-constrained environment, banks need to choose where they can compete and win
Top-three banks outperform across three key metrics global breadth, client centricity and product depth
Particularly in todays straitened operating environment, it is surprising that so many banks are actively aspiring to top bank status (see figure 1). Of course, each of the three key metrics of high performance Global Breadth, Client Centricity and Product Depth are as relevant as ever, but banks need to be selective about where they can realistically compete and win. Competing across all three simultaneously can only result in under-resourcing, overbudgeting and, perhaps most damagingly, incomplete execution.
Two years ago, the banking sector was in turmoil. Now, with the dust settling on the financial crisis, investment banks are seeking to take advantage of market dislocation to seize market share and propel themselves up the league tables. It is not wrong to aim high. In fact, this is in itself an effective way of defending current market positioning. But the priority must be to focus on winning the right battles across the three metrics shown in figure 2. That way, financial strength targets can be realistically identified and emphatically achieved. To compete across this framework represents a valid ambition, but only a few (very few) players will be able to achieve it and banks will need to choose where to compete.
Figure 1: Number of times Top Bank Aspirations mentioned in global press

1,000,000
Global Press Articles
800,000 600,000 400,000

200,000
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e Year
Source: Dow Jones Factiva/ Accenture Research
The principal challenge, in such a resource-constrained environment, is to identify the correct growth strategy across multiple axes, covering products, clients and geographies.
Key challenges
No shortage of options but where to focus?

Market dislocation creates exciting opportunities for seizing market share. The principal challenge, in such a resource-constrained environment, is to identify the correct growth strategy across multiple axes, covering products, clients and geographies. No less demanding for investment banks, once the chosen growth strategy is underway, will be effective management of the organisation-wide transformation needed to secure results.
Depending on their starting point, each bank will have a number of possible routes for achieving its strategic goal. In the example below, the bank is targeting an ambitious endpoint (4) of Geographic Client Segment Expansion into three core regions Latin America, Asia Pacific and the four BRIC economies. The challenge is how best to get there with the resources available? This raises a number of broad-based questions, each of which must be answered well in advance of any strategy development: How do we know where to focus first? Which are the principal battles along the way? Can we focus on more than one target? Whats our optimum route from current state to target position? Having addressed these broad strategic issues, management needs to intensify its focus on the key external and internal issues: External: Ensure the right way to go to the right markets, in the right order, at the right time and with the right clients
5 3
Figure 3: Strategic matrix

LATAM / APAC / BRIC 4 Geography EU / UK / US Segmented Client Segments 2
Internal: (a) Determine the right people, doing the right processes with the right technology and the right investment and (b) take steps to ensure that the banks culture is maintained throughout the planned transformation.
Comprehensive
1 Broad
Narrow Products / Services Source: Accenture research
Our perspective
Being in the right place, at the right time

Weve shown how vital it is for banks to focus their efforts and resources on getting results. But what does this mean in practice? Based on Accenture research and experience, we know that high-performance businesses have remarkable clarity when it comes to setting their strategic direction. Put bluntly, they always seem to be in the right place at the right time. Figure 4: The building blocks of high performance
Source: Accenture Institute of High Performance
When one market matures, theyre ready with the next big thing; when buying trends send clients in a different direction, theyre waiting at the end of the path; when they acquire new businesses, they do so wisely and tend to them well. Add it all up and it means that high performers excel when it comes to their market focus and position the where and how to compete aspects of business strategy and one of the three building blocks of high performance (see figure 4).
Market Focus and postitionmaximising business results by targeting the right place at the right time
Performance Anatomy-out executing through consistent, competitive mindsets

Source: Accenture Institute of High Performance
Distinctive Capabilitiesdeveloping offerings that create a unique business
By adopting the economic principles of non-cooperative game theory and applying it to scenario analysis, leading firms are able to determine the correct actions to be taken.
By adopting the economic principles of non-cooperative game theory and applying it to scenario analysis, leading firms are able to determine the correct actions to be taken. This approach yields several significant benefits over more traditional approaches, where taking a view based on a snapshot in time can be misleading: Realistic understanding and definition of the context in which the company operates and wishes to operate in the future Identification of all the companys possible reactions to pursuable strategies Consideration of not only win-lose solutions, but also win-win options Ability to catch imitation advantages: being unique is not a prerequisite for success Conversion of uncertain situations into certain ones (or with reliable probability distributions) throughout the introduction of rational hypothesis on players behaviour Support of an optimal strategic solution which maximizes the economic result for the company An ability to re-visit initial decisions, easily and quickly with minimal disruption when environmental factors inevitably alter.
So how do they do it? If you were to read management books, you would probably find a matrix telling you to balance a measure of (risk adjusted) profit potential against a measure of internal capability strength and to proceed within that framework. However, this ignores the many complexities of the real world, where every decision must be taken in the context of the economic environment, and where for each action there is a reaction of competitors to be foreseen and interpreted visible and invisible. How do you decide between growing share of wallet in your current market and earning client loyalty against expanding the client base in emerging markets? Both have large profit potential, but to focus on both could be a costly mistake that few can ill afford right now.
Each chosen strategic lever will have different implications on the game elements and being aware of these impacts will help identify strategies that bring about a change of the game to the companys advantage. Understanding the importance of different players is crucial to focusing on the right games, whilst a clear understanding of ones own business is the first step to identifying the correct strategic change. Analysis of different scenarios which are looming ahead leads to evaluation of payoffs coming from each combination of actions and reactions, pointing to the best course of action, given interactions with other players in a dynamic environment.
Figure 5 illustrates the theory of scenario analysis, but often facts are unclear or ill defined (e.g. OTC Derivatives regulation) and actions/ reactions are made not only simultaneously, but before the first move can be completed often through public statements rather than proven execution; making the reality of scenario analysis significantly more complex than the theory.
Figure 5: Illustrative three-step game

Timeline My Bank moves Bank X acts Enter
Enter
Payoffs Government Acts

Same behaviour
Scenarios
My Bank: p1A Bank X: p2A

Cut prices My Bank: p1B
Bank X: p2B My Bank: p1C Bank X: p2C My Bank: p1D Bank X: p2D
Cut prices Enter
Bank X
Same behaviour
Enter
Not Enter
My Bank: p1E Bank X: p2E My Bank: p1F Bank X: p2F My Bank: p1G Bank X: p2G
My Bank
Same behaviour
Not Enter Bank X
Enter in
Enter
Cut prices My Bank: p1H
Bank X: p2H My Bank: p1I Bank X: p2I My Bank: p1L Bank X: p2L My Bank: p1M Bank X: p2M
Not Enter
Same behaviour
Enter
1 2 3 4 5 6 7 8 9 10 11
Assignation of a probability distribution to each option Payoff valuation for every Scenario derives from a specific combination of action-reaction, through: forecasting of future cash flows during the years if the analysis discounting back to present the stream of future profits NPV has to be assessed for the company and for each of the other player takes part in the game
My Bank decides to enter or not enter the market
Bank X reacts to MY Bank strategy, deciding to enter or not the market
Government reacts to banks strategies deciding its behaviour
Source: Accenture Research
Additionally, the approach circumvents a significant and often overlooked aspect within strategic decision making - political buy in within organisations by ensuring engagement across the organisation, from Trading and Risk to Legal and Settlement, incorporating all asset classes and business lines. Successful competitive war gaming will produce five key results: 1 A comprehensive understanding of the competitive landscape of a specific franchise, market or opportunity 2 Understanding of value drivers as well as own position and competitiveness of portfolio of assets 3 Determination of successful strategic plans and bold tactical moves in a protected environment against scenarios to be tested, such as New product/ market launch or major lifecycle management measures Competitors launch of new (superior) product or market, additional indications and incremental product innovation Planned merger, acquisition or collaborative deals Commercial market changes, such as pricing decline or shift in market growth (or both) 4 Training of participants in predicting the behaviour of key competitors during their daily operations 5 Refined plans and business cases based on new/improved assumptions Typical Team Composition
In practice
Competitive War Gaming

War gaming is an interactive strategic gaming approach to develop market leading strategies, that allows banks to make the right choices in times of uncertainty or where hard choices need to be made due to resource constraints. It consists of structured, interactive workshops, enabling access to the strategic mindset of competitors, whilst enabling a creative way of thinking about threats. It allows the testing of plans, tactics and unconventional views of the market, resulting in an emphasis on what decisions need to be made.
War game simulations are typically run with five to nine different teams: 1 Home Team Represents own company - intention to test certain strategies or tactical moves Need to focus on early identification and execution of dominant strategies to succeed during war gaming simulation (and then later in the marketplace) Results can sometimes be unpleasant for home team (e.g. when it is unveiled that strategy to be tested has a low probability of being successful/competitive) 2-5 Competitor Teams Represent and simulate real competitors in the marketplace (i.e. peer group) Need to leverage competitors assets and strategic intent As teams consist of executives from own company they typically know more than the market (i.e. strategy of home team to be tested is understood in great detail) 1 Market Team Represent and simulate the reaction of different customer groups or other stakeholders (e.g. hedge funds, asset managers, internal desks, acquisition targets) Team will determine how market reacts on strategic moves from Home and Competitor teams Represent and simulate the reaction of oversight bodies i.e. governments and regulators Team will determine political views on strategic moves from Home and Competitor teams 1 Regulator/Government Teams Represent and simulate the reaction of oversight bodies i.e. governments and regulators Team will determine political views on strategic moves from Home and Competitor teams Dependent on relationship strengths, the team will consist of direct participation from oversight organisations 1 Control Teams Consists of Accenture consultants simulating outcome of strategic moves (e.g. market share, profitability, shareholder value) through a financial market model specifically designed for each war game individually
Success Factors It is worth bearing in mind that carrying out competitive war gaming in itself will not produce sufficient results; there are four key factors that banks must pay attention to, to ensure success: Build creative and engaged teams with cross-functional participants (e.g. including Trading, Sales, Operations, Risk, Compliance, IT, Legal, Financial Control, with appropriate cross-asset class representation) Embed exercise into overall strategy development process to create a menu of tactics to refine strategic planning and commercial targets Invest sufficient time prior to the workshop to conduct sufficient competitive and market research to on-board teams in a very structured way 2-3 weeks before the exercise Ensure effective war-gaming postprocessing in order to come up with clear implications and actions
Figure 6: Typical Competitive War Game Methodology Competitive war-gaming workshops follow four major methodology steps:
Methodology Steps 1 Setting the landscape and immerse into role Description Market characteristics and strategic intent of represented company will drive goals and tactics Success Factors Understanding of own strategic priority and intention Understanding of key differentiating factors
2 Undersatnd scenario and work out soluation
Feasibility of solution is required, i.e. do not ignore basic causeeffect relationships about market access, cost and profit
React as your company would enables everyone to draw correct conclusions which work in real life
3 Observe how competitors react, learn and adapt your strategy
Complexity increases but lets you proactively pursue your strategic goal instead of reacting based on what competitors do
Thorough understanding of competitors products, strategies and presence in the market
4 Decide implications and develop roadmap
Collect and discuss lessons learned Translate competitors behavior into take-aways for own company Apply insights to tactical product marketing/commercialization plan (i.e. refinement)
Successful completion of previous steps Ability to apply war gaming tactics to own product s strategic plan
Accenture experts To discuss any of the ideas presented in this paper please contact: Lupus Maltzahn Senior Executive, London lupus.maltzahn@accenture.com +44 20 7844 8544 +44 77 6887 1919 Ryan Westmacott London ryan.m.westmacott@accenture.com +44 20 7844 5259 +44 78 1030 4031 Ronan OKelly London ronan.okelly@accenture.com +44 20 7844 0155 +44 79 4671 2749
i Michael Geogahan, Chief Executive, HSBC (speaking to Cantos, 2nd August 2010)
The Top 10 Challenges series To help investment banks plan and execute with success, Accenture has used its research, industry expertise and client insight to create a series of papers detailing the ten key challenges confronting investment banks as they enter 2011, of which this paper is one. The Top 10 Challenges for Investment Banks 2011 1 Responding to the regulatory tsunami 2 Dealing with OTC derivatives reform 3 Embedding effective risk management 4 Refocusing on client needs 5 Maximising client profitability 6 Taking sustainability seriously 7 Delivering valuable transformation 8 Harnessing innovative technologies 9 Engaging effectively in emerging markets 10 Picking the right battles
Copyright 2010 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
Accenture is a global management consulting, technology services and outsourcing company, with approximately 204,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com
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Top 10 Challenges for Investment Banks

Top 10 Challenges for Investment Banks 2011

Introduction Navigating Through Uncertainty

Introduction: Navigating Through uncertainty

Figure 1: Real GDP Growth (% growth year-on-year)

US EU Emerging & Developing economies

Source: IMF, World Economic Outlook Database, April 2010

Focusing on the future:

Introduction: Navigating Through Uncertainty

Figure 2: Effective Targeting of Client Offerings

Marginal Value of Provision

Access to Capital & Select Investments Access to Analysts

Access to Core clients

Introduction: Navigating Through uncertainty

Top 10 Challenges for Investment Banks 2011

Responding to the Regulatory Tsunami

Challenge 1: Responding to the Regulatory Tsunami

Challenge 1: Responding to the Regulatory Tsunami

Radical (and often uncoordinated) overhauls of financial sector regulation

Figure 1: Global regulatory landscape

Rating Agency Regulation

Hedge Fund Regulation

Increased Liquidity reserves

Too connected to fail

OTC Derivative Central Clearing Exchange Trading

Enhanced Capital Requirements

Challenge 1: Responding to the Regulatory Tsunami

Challenge 1: Responding to the Regulatory Tsunami

Reassuring regulators while continuing to satisfy shareholder expectations

Challenge 1: Responding to the Regulatory Tsunami

Figure 3: Expected impact of proposed financial services regulation

40% 27% 48% 31% 11% 70% 61%

Source: Accenture researchiv

8.5-11% 8.5% 6% 2.5% 2.5% 2.5%

Countercyclical Capital Buffer

Proposed Basel III Regime

Source: Basel Committeeii

Challenge 1: Responding to the Regulatory Tsunami

Enabling a continuous cycle of risk and control enhancement

Figure 4: Regulation-related costs over three years

Source: Accenture research

Challenge 1: Responding to the Regulatory Tsunami

Challenge 1: Responding to the Regulatory Tsunami

Challenge 1: Responding to the Regulatory Tsunami

Developing a single operating model view for regulatory capital reporting

Challenge 1: Responding to the Regulatory Tsunami

Top 10 Challenges for Investment Banks 2011

Dealing with OTC Derivatives Reform

Challenge 2: Dealing with OTC Derivatives Reform

Challenge 2: Dealing with OTC Derivatives Reform

Reforming the maligned derivatives industry

Challenge 2: Dealing with OTC Derivatives Reform

Figure 1: The regulatory outlook for OTC derivatives

Inability to customise (important for hedging) Standardisation of swaps Increasing volumes

US only Majority of market is exempt from requirement (IRS=72%, FX=8%)

Increasing trading costs Increased focus on efficient capital allocation

Tightening spreads Daily margin calls Higher OTC trade costs

Price transparency Standardisation of swaps Reporting infrastructure implications

Sources: Deutsche Bank, Shearman & Sterling LLP, Accenture analysis

Challenge 2: Dealing with OTC Derivatives Reform

Strengthening the core to execute market strategy

Challenge 2: Dealing with OTC Derivatives Reform

Figure 3: Summary of challenges facing investment banks