The Trade-off of Consolidating Different Departments Under a Single Executive
Also in this issue: How to Choose a Digital Transformation Consultancy. Can FSIs Learn From Leading Fintechs?
The Trade-off of Consolidating Different Departments Under a Single Executive
Our newsletter frequently covers the challenges faced by enterprise-level executives in adding value to their FSIs. These roles are often the most challenging as they are two steps removed from the internal owners of digital use cases and three steps from the end users. Bridging this distance requires an extreme advisory-oriented mindset, a skill set that many lack. While these executives excel at alignment and functional expertise, their proficiency in serving and problem-solving could be limited.
Consequently, even the most well-meaning executives in charge of company-wide Data or IT functions tend to deploy digital solutions that don't scale right away. When investigating such instances, I typically start by interviewing the intended business owner. Often, this executive only has a vague recollection of the initiative, as their ownership wasn't mandated during the MVP and production stages.
These gaps in the operating model contribute to the mutual critical perception between FSI executives in lines of business and enterprise functions:
Instead of enabling enterprise-level executives to spend more time with each business line, some FSIs have opted to expand their company-wide operating responsibilities. A common root cause for such consolidation is a hands-off CEO who prefers shaping the vision and designing strategy rather than delving into the operational details of each enterprise function.
One of the most popular combinations is consolidating Operations and Technology under a single C-Suite executive. Numerous FSIs have attempted this over the last decade, only to reverse the decision later. A recent example is DBS, a Singaporean bank once regarded as a digital transformation pioneer, until its systems began failing, prompting a stringent regulator response.
In the post-mortem analysis, DBS recognized that the swift proliferation of operational processes and underlying technologies created a significant risk without adequate checks and balances. Having the head of Operations also overseeing Technology made it less likely for this executive to hold both a) technology groups accountable for the resilience of new systems and b) operations groups accountable for a manageable pace of introducing new processes:
FSIs must recognize that an operating model becomes more sophisticated as they progress in digital maturity, and clear internal user-support matching of executives for each business line, function, and shared service is the key success factor. Such clarity of focus for each executive with a minimum number of layers between the C-Suite and front-line employees ensures the culture of owners and doers.
If the CEO is incapable of managing the resulting higher number of executives, it means that they are not ready to lead digital transformation. The complexity and fragmentation of revenue-producing and supporting groups will only increase with time.
How to Choose a Digital Transformation Consultancy
"They estimated that we could generate an extra fourteen million in operating profit, but a year later we sold just one credit card," explained the Head of Ops and IT of a half-a-billion revenue bank. "How much did you pay them?" I asked. "About seven million, and now the CEO wants to bring them back," he responded with noticeable disbelief. Why would a relatively small FSI pay so much money to a top-tier consulting firm?
It is a typical story with large consulting firms assisting FSIs with digital transformations. Despite a mixed reputation with results, these firms keep getting hired. How come? As we discussed in another newsletter, many FSI executives are excited about digital transformation but want to avoid leveling up their operating muscles. So they are leaning on 3rd parties to accelerate their journey to the beautiful digital future.
And when a digital initiative fails, the typical blame is on front-line employees for being afraid of change. There is rarely a realization that the operating model is at a major fault. The FSI’s internal stakeholders must be hands-on owners of digital transformation, leaning on vendors and consultants for specific niche solutions and playbooks, not as a replacement for internal management.
Instead of taking on more ownership, some FSIs might choose another consulting firm, hoping for a better outcome. But is there a significant difference among major consulting firms in offering digital transformation services?
Forrester recently published its survey to answer that question. On the surface, there were no surprises. Dedicated management consultancies like McKinsey and BCG are ahead, while implementation-centric firms like Infosys and Cognizant are behind. However, the metric chosen for ranking these firms resulted in a curious phenomenon. Using "current offering" and "strategy" criteria was redundant, with none of the firms showing significant variability across these two dimensions:
"They were great - parachuted down around 30 people, including full-stack developers. In 6 months, we went from an idea to the full payment functionality in production," explained the Head of Digital for a top-10 US multi-line insurance firm about involving one of the leading digital transformation consultancies. "How much did you end up spending on them?" I asked. "Around $20 million before they left a few months ago," was his response. "Can you approximate how much in P&L impact you would now generate with this payment solution?" I probed, but the executive just shook his head.
Forrester's chart illustrates the main challenge in measuring the success of digital initiatives - using qualitative metrics that are not directly linked to P&L impact. As we often discuss, the inability to ballpark ROI on digital transformation efforts before they start or post-mortem is endemic across FSIs. But that is also the most important metric for engaging consultants. ROI on consulting fees is the only sure way for an FSI to know if that engagement was successful and if the same consulting firm should be engaged again.
The second most important dimension is the breadth of industry-specific use cases with client references. Rather than a more nebulous "stronger product offering," this dimension demonstrates if a consulting firm has deep expertise in transforming a specific function of a specific product of a specific FSI size in a specific geography. Otherwise, a consulting firm will be learning another flavor of digital transformation at the FSI's expense.
Can FSIs Learn From Leading Fintechs?
"Jane Fraser won't learn anything useful from Nikolay Storonsky," remarked a former FSI CEO and current VC investor. And it is probably correct not just because Citi and Revolut are of different sizes and business models, nor because of their differences in legacy technology and regulatory attention. More pragmatically, leading fintechs, after a decade, haven't yet proven that they could grow much faster and more profitably than leading traditional FSIs.
Some of you might be surprised by such a statement since you probably know profitable fintechs that still grow their revenues by 20% or more. But here is the tricky part: there are very few of them with billions in revenue, and they often keep growing by launching new products rather than in their core business, where they remain much smaller than incumbents.
In other words, those fintechs are starting to feel more like traditional mid-size FSIs except for launching entirely new products or expanding to other countries faster. How useful is that learning for a leading traditional FSI? A typical large FSI would already have a large product line-up, and players like Citi are cutting their global footprint.
What Jane Fraser might be interested in seeing is if Revolut was growing rapidly AND profitably in Citi’s core products in the US. Then, their agile playbooks, KPI-driven operating model, and technology stack might be something worth investigating. Well, Revolut finally published its 2022 annual report, and it was unprofitable in that year:
Revolut is promising to grow faster in 2023 AND generate a 10%+ net profit margin in 2023, so not all hope is lost.
More generally, 2023 was the year when a decade-old myth of fintech disruption was finally put to rest and should not be mentioned unironically again. Most of the leading fintechs are either still rapidly growing in their core business but unprofitably, or they are profitable but with rapidly decelerating growth.
One potential exception might be Stripe, which was recently reported to be accelerating growth to 35% at an annualized revenue of $4 billion while achieving an operating income of $200 million in the first nine months of the year. If they could keep it up for 2-3 years, maybe CEOs of top FSIs should evaluate Stripe’s operating model more seriously.
And that is our newsletter wish for 2024. We want to learn from traditional FSIs that are aspiring to be more like fintech across the enterprise. But, hopefully, some fintechs will finally embrace the challenge of growing fast and profitably in one specific product line and country, so they can generate repeatable scalable learnings for traditional FSIs to follow.
