A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

Corporate strategies in R&D in financial services

Presentation by Harpreet Khurana, Columbia University, 2004

Download original document (English)

What: The paper initially provides a definition in financial services and then compares the situation of the financial sector with R&D in industries such as telecommunications, computer system design etc. The presentations places emphasis on different strategies in R&D in financial services and finishes by presenting several case studies. Who: Relevant for anyone studying or teaching R&D. How: Can be used as a background reading.

Corporate strategies in R&D in
financial services


Harpreet Khurana
Columbia Business School
Columbia University
Geneva, Switzerland
January 24th, 2005




2


R&D in Financial Services Industry
(FSI) - Definition


• Classic R&D definition
– “Systematic” use of “existing knowledge” to produce


new products or services and/or increase efficiency of
existing products and services


• Our definition of R&D in Financial Services
– “Systematic” use of “existing process knowledge” to


produce new products or services and/or increase
efficiency of existing products and services




3


R&D examples across industries


z R&D is the service
z However, very little is related to


product or process improvements
related to services


Scientific
Research and
Development
Services


z Systems integration part of the services
z Integrates physical products and


devices
z Solves interoperability issues


Computer
systems design
and related
services


• Transaction cost to FSI
• Reduction in transaction execution time
• Customization of existing products,


introduction of new products/services
Financial services


z Conduct both R&D on physical devices
and systems integration


z R&D targeted mostly at provision of
telecommunication services


Telecom


Source: Michael P. Gallaher, RTI International, Presented at Panel to Review Research and Development Statistics at the National Science Foundation, July 24, 2003


Enablers
•Customer service and
support software


•Technologies to support
data mining and
warehousing




4


Parameters to measure impact of process
driven R&D in FSI


• Transaction cost to FSI
• Reduction in transaction execution time
• Customization of existing products,


introduction of new products/services




5


Financial services - Landscape


• Retail
– Retail banking, credit card companies, retail brokerage,


Insurance, Loans (home, auto), Mutual funds


• Institutional
– Investment Banking, Hedge funds (Prime brokers), Mutual


funds (institutional), Clearing houses (stock trades)


• Venture Capital (VC)/ Private Equity (PE) (Investors)
– Buyout and Growth funds




6


Process Driven R&D in FSI - (1 of 4)


Enabler and Drivers (Retail, Institutional)
• Enablers


– Lower costs and skill set availability in global locations
– Cheap telecom infrastructure
– Skill set clusters available in certain countries


• Drivers
– Increasing adoption of global sourcing by FSI firms
– Constant need to customize financial services products




7


Process Driven R&D in FSI - (2 of 4)


Drivers (Investors – VC/PE)
• Drop in exit valuations is changing return


dynamics
• Investors prefer much lower funding ratios -


efficient use of the capital
• VCs insist that companies should breakeven


much faster, less emphasis on top line growth




8


Process Driven R&D in FSI - (3 of 4)


Challenges
• Cost arbitrage focus can spell doom
• Intellectual Property Rights (IPR) issues
• Business Continuity Planning (BCP) issues
• High attrition rates– loss of key knowledge
• Expected shortage of skilled manpower
• Issues of cultural sensitivity and communication




9


Process Driven R&D in FSI - (4 of 4)


Organization Structure
• Key management team based in global locations
• Team members with global operational


experience, willingness to work across borders
• Develop middle management, encourage


decision making closer to ground




10


Process globalization - Framework


Processes plotted in the lower two quadrants are the most likely candidates for
globalization – is R&D in Financial Services in one of these quadrants?


Source: IBM Institute for Business Value analysisSource: Adapted from IBM Institute for Business Value analysis




11


Dynamic nature forces firms to
periodically evaluate their standing


1


2


3


Continual, internal process improvement
projects will drive efficiencies into sub
optimally performed processes until no
further performance gains can be realized
through internal means


Processes will gravitate downward
due to market competition, and to the
right as firms implement transformational
initiatives to enhance performance


Competitor strategic moves will over time
decrease the comparative advantage of
differentiating competitors; firms have to
find new ways to differentiate


Source: Adapted from IBM Institute for Business Value analysis




12


Is R&D in Financial Services in one of
these quadrants?


•Where does process
R&D presently reside on
the axis of strategic
criticality?


• Does the proposed
location provide the firm
with the greatest value
proposition?


• Is the existing
governance model still
feasible?


Source: Adapted from IBM Institute for Business Value analysis




13


Q&A


Harpreet Khurana
Columbia Business School,


Columbia University
HKhurana05@gsb.columbia.edu


(001) 917 232 4783


Rohit Arora
School of International and Policy Administration


Columbia University
ra2112@columbia.edu


(001) 201 328 4380




14


Case Studies and appendix slides




15


Case Study: Retail (1 of 4)


• Company Description
– Leading US credit card company with 3rd party


global service centers in India, Costa Rica ,
Philippines


• Timeline


Oct’00


Hired VP to
study feasibility
of service
centers in India
in anticipation
of increased
business


Launched
pilot with
Indian
service
provider


Two months
of pilots
completed –
SLA’s were
met –
decided to
ramp up


Customer
satisfaction
scores down
by 12-15%
from domestic
levels


Sep’01June’01 July’02 Nov’02


Customer
satisfaction
scores back at
par with domestic
levels through
increased
management
focus


Second service
center planned with
new service provider


Both service centers have
stabilized. Performance is
5-7% below domestic
levels. Firm deems this
acceptable due to
economics of operations -
opens service center in
Latin America


July’03




16


Case Study: Retail (2 of 4)


• Drivers
– Streamline processes - service from single point
– Projected US CapEx investment high (~100 M USD)
– Manpower availability in US


• Risk factors
– Compliance and information security risk
– Leader hazard (process innovation can be risky), laggard loss


(competitive pressure to innovate)
– Lack of standardized ratings for vendor management
– Drop in customer satisfaction




17


Case Study: Retail (3 of 4)


• Representative list of processes
– Customer support – Early bucket collections, inbound


telesales
– Collections
– Telemarketing
– Data entry
– Fraud Detection
– Recovery
– Dispute resolution
– Data Analysis




18


Case Study: Retail (4 of 4)


• Lessons
– Different processes at different points of readiness


to offshore
– In-house processes not codified, move towards


global service centers forces codification
– Decision making needs to be closer to the action




19


Case Study: Institutional
• OfficeTiger, a Chennai, India-based, business outsourcing provider, is one of several firms


that are enabling foreign investment banks to maintain a 24- hour equity research function


• It originally launched to provide document and presentation support for harried investment
bankers


• The firm extended its offering line to include financial and valuation analysis, business
intelligence support and a host of finance and accounting tasks


• OfficeTiger’s securities research and analysis staff has increased from 25-30 in 2002 to 150
professionals


• The company supports its investment banking clients by undertaking custom research
projects, rapid turnaround financial model creating and analysis and other junior investment
banking level work


• One-third of its work involves deadlines of less than one hour


Source: IBM Institute for Business Value analysis




20


Case Study: Venture Capital (1 of 3)


• Company Description
– Leading US based buyout fund focused on


improving the efficiencies of acquired companies


• Timeline
– Acquired a US based firm providing information


platform for corporate jet owners, managing fleet
maintenance information and providing web based
technical support




21


Case Study: Venture Capital (2 of 3)


• Drivers
– Cut operational costs as fixed cost needed to go down
– Extra money allowed firm to offer value added services
– Data collection work for new business by proactively calling clients


• Risk factors
– Managing of cross border operations
– Locating some senior management in India
– Drop in customer satisfaction due to global services centers


• Bottom line


Year 2000
Sales: USD 20 M
Free Cash Flow: USD 5 M


Year 2004
Sales: USD 20 M
Free Cash Flow: USD 10 M


Even though sales were flat from 2000 to 2004, firm survived
due to improved cash flow situation leading to better exit valuation




22


Case Study: Venture Capital (3 of 3)


• Lessons
– In-house processes not codified, move towards


global service centers forces codification
– Rise in valuation multiples as global sourcing


matures
– Limited partners (LPs) expect better returns through


globalization of R&D processes




23


Global Sourcing is no longer cutting edge; FSIs have been
employing the strategy for nearly a decade


Source: IBM BTO, company web sites




24


As global sourcing becomes mainstream, firms are
targeting components further up the value chain


Source: Rediff News, 12 Sept 03; Bloomberg News, 08 Aug 03; EIU – ebusiness forum, 18 Aug 2003; The Telegraph, 25 April, 2003




25


Global sourcing is evolving, as countries develop and
market their strong competencies in niche areas


Source: The Gartner Group, 06 Oct 2002




26Economics of global service centers (1 of 3)




27Economics of global service centers (2 of 3)




28Economics of global service centers (3 of 3)




Login