The future of Finance and Risk
Thijs Peeters, Mount Consulting – April 2020
Transforming to the effective information supplier
“It’s not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”, Charles Darwin once said.
Can we apply this quote also for the financial services industry, and more specific for the CFO and CRO?
It’s for sure that both functions are subject to a fundamental change to meet the various expectations, at least on average. Expectations from today and expectations from the future. From the market, from colleagues, and, last but not least, from talented employees.
Expectations from the market
A tsunami of regulations is suffering banks, insurance companies and asset managers and their CFO’s and CRO’s in recent years. Regulations and standards for financial reporting, regulatory reporting, accounting, process control, data quality and management, risk modeling and capital calculation, auditability…, these are all regulations which require the CFO and CRO to provide more information, more details, in higher frequency, and faster. While the regulator has developed a keen eye for accuracy and detail when monitoring the reports and data sets delivered.
Expectations from peers in the Board
Mid 2017, the IASB promised that after IFRS 9, IFRS 15 and IFRS 17, it would slow down for a while. The big chunk of issues on transparency and measurements will be tackled by the new standards, as said.
Such a slowdown is not offered by the ECB, the Basel Committee, or EIOPA. But even when regulatory pressure will reduce, the CFO and CRO and their teams will not be able to take the pause they might deserve. The business peers have been asking for a more ambitious business partnership with their CFO and CRO for over a decade. They want more from them than complying with accounting standards or Basel or EIOPA requirements and producing mandatory reports. The right business partner provides proper insight to improve business, decision making and performance and manages an infrastructure that is flexible enough to adapt new products and services, and territories smoothly, or won’t slow down expansion or change at least.
To become the right business partner, the CFO and CRO should be able to supply the information needed by the business: more detailed and granular, customized per user, more frequent, faster, online, 24/7, via self-servicing, and ad-hoc when needed. Of course, at lower costs, as margins are always under pressure.
Expectations from talented people
The overload of new regulations, its implementations, their strict deadlines, and the impact as addressed above, consumed most of the time of the CFO and CRO in the past years, and it still does. Implementation under strict deadlines usually mean loads of tactical solutions and work-arounds in the end-to-end data aggregation and reporting chains to comply with the regulatory requirements on time. Hardly anywhere have sustainable, robust, and future proof solutions been implemented.
Too many resources are required to run the monthly closing process and prepare reports and analysis without material discrepancies. Talented employees within the company are spending too much time on manual/operational data processing and aggregation, repairing data quality and fixing reconciliation issues. With no time left anymore to spend their intellect on high quality analysis and advisory tasks. As a consequence, intellectual capital dilutes and talent will leave the finance and risk functions, heading to a professional environment in which it can exploit its competences more effectively.
Adaptable to change?
With business and IT architecture lifecycles constantly changing, the finance and risk functions in financial institutions have taken initiatives to transform, with the ambition of getting to an ecosystem that enables the CFO and CRO to:
- Be the right business partner, providing value adding insights: fast, reliable, and accurate, at any time
- Have the company comply with regulations efficiently, timely and effectively
- Getting the ecosystem robust and flexible enough for a hassle-free adoption of additional regulations or accounting standards and changing demands from peers.
The transformation that is inevitable for most of the organizations, is huge, complex and requires high investment. Who is willing to align its destiny even when you consider that the initial costs are clear and direct, whereas the benefits are more difficult to quantify and will be realized in the longer term? This requires courage, vision and leadership. Examples of failed transformations in the market are abundant and regulatory deadlines often distract the company from a steady plan, impacting a cost effective and sustainable transformation.
How to get the right track
Based on our real-life experience, we advise our client the following: without a concrete and overarching architecture definition and transformation planning, a sustainable transformation is hardly possible.
It’s key to take the time and invest in a clear, shared and supported ‘to be architecture’ or ‘operating model’ aligning finance, risk and front office where needed. The ‘to be architecture’ is the horizon and guide for the transformation. To get to a tangible ‘to be architecture’, ready for implementation, we believe the following success factors to be critical:
- Business architecture (To Be) is the foundation for the IT Architecture, and not the other way around.
- In order to create a bearing surface for the realization of the ‘to be architecture’, all relevant stakeholders in the end-to-end chain should be engaged in the architecture design. So, engage business units. Engage Finance, engage Risk as well as Treasury and ALM.
- Invest in common language – understanding the different needs and requirements of the various parties in the end-to-end chain – and work on common data definitions. Create a common insight in the current architecture and the future business objectives driving the to be architecture.
- Create transparency in the current architecture, both business and IT. How does the end-to-end chain work, what are bottlenecks, what are root causes.
Make it visible and tangible. We mostly come across architecture booklets with more than 100 pages of process flows and data flows and applications schemes, not being connected.
Take data activities as the starting point. Sourcing, processing, aggregation and reporting of data do drive processes, and processes do drive the required IT support.
There is no ideal one-fits-all architecture, serving every stakeholder. There are various scenarios, whereby we recommend selecting the best scenario for your organization along the following three axis:
- Business Fit: to what extent will your business needs and change drivers be met and how flexible will your ecosystem be to embed new requirements.
- IT sustainability: what fits the IT organization best and ensures sustainability in the medium-long term, through commercial systems and applications, also taking into account whether these systems and application can be maintained by your IT department.
- Roadmap feasibility: against what throughput time, against which costs and against which risks can the ‘to be architecture’ be realized. Company culture will certainly play a role in this assessment.
How to stay at the right track
Now that the vision and horizon have been set and shared, it is crucial to find the best path and roadmap to get there.
To get the vision implemented, clear boundaries are needed, ensuring that future changes align to the vision. A governance set up should ensure that temporary and permanent change initiatives adhere to the same rules and principles and follow the common vision and ‘to be architecture’. Business and IT changes influencing the architecture go through an assessment against design principles and the ‘to be architecture’.
The ‘to be architecture’ won’t be realized using big bang go-lives. We recommend realization in increments, ensuring continuous implementation of tangible benefits, prioritized by burning issues and regulatory deadlines. As such the transformation roadmap is aligned with current and planned business targets and initiatives.