The hidden cost of postponing innovation

Fintech president tells advisory practices why it’s in their best interests to embrace innovation

The hidden cost of postponing innovation

by Michael Dignam
President of Canadian Securities Processing Solutions, Broadridge

When I began my financial career, ­back-office processes were manageable, regulation was bearable, customer expectations were meetable, and most important of all, competition was between similar firms with similar services. Every aspect of that equation has changed.

Front-, middle- and back-office processes designed for those days are now straining and cracking at the seams. Not to mention, they’re causing their owners to haemorrhage operations dollars, as the industry becomes ever more competitive and demands notch upwards. In the midst of this pressure on creaking legacy systems, financial leaders are faced with many questions: which battle should I wage first? Should I update systems in-house with my own team? Or should I outsource them to a technology provider? And if so, which provider is the best for us?

All this puts leadership teams in a tight vise. Current systems are inefficient, costly and constraining, while new digital initiatives are capital-intensive, easy to run aground, and require a challenging degree of stakeholder consensus to even initiate, much less execute with success. 

Making a case for innovation
Faced with this dilemma, and typically not pushed by their board of directors to move hard on a digital plan, financial institutions continue to rely on millions of lines of legacy code. Things are working as they are – returns are reasonable – why disrupt? And why on my watch?

Studies increasingly show the immense costs of not moving forward. According to the Roubini Thoughtlab report, Wealth and Asset Management 2022: The Path to Digital Leadership, based on comprehensive global research, investment firms that have already reached an advanced digital stage report dramatic results, including: 8.6% increase in revenue; 11.3% rise in productivity; and 6.3% improvement in market share.

Those who are lagging technology-wise are unlikely to narrow the ever-growing gap. In fact, the report predicts that those that move too slowly stand to lose $79 million per billion dollars of revenue per annum.

Integrating new technology doesn’t just earn bottom-line dollars by stopping the financial drip from costly inefficiencies. It also presents top-line opportunities, through up-to-date ways of doing business. Additionally, it increases engagement with employees and customers, in turn helping to attract the best and the brightest.

Weighing the Costs and Risks
Despite the overwhelming case for adapting new technology, companies may still be hesitant to allocate the necessary resources. For example, McKinsey and Company research reports 70% of all major corporate transformations fail. Other studies regularly quote even higher numbers for failure.

This suggests that the likelihood of success should carry more weight than the estimated cost of any major initiative. To state it another way, a technology choice that costs significantly more – hypothetically 25% more – is worth it if success is noticeably higher.

While the in-house choice may the cheaper of the two options, it often presents higher risk and in return a higher expected cost. As we’ve seen from experience, the reliable provider who already has a working solution has a lower expected cost, due to the decreased risk. This is particularly true for financial firms as the pace of change is so fast and the future is so uncertain.

Keys to success
I offer two recommendations today: plan and outsource.

Plan a detailed and relentless march forward
If the decisions that lead your organization towards growth and away from grinding legacy code are left in the hands of one or more disconnected leaders, the default will be to stick with what’s “working” now. Punishment can accrue for sticking one’s neck out, and the previous manager didn’t make that change – why will this one?

The only way to overcome this tendency is to gather the related stakeholders and invest whatever time it takes to create a serious digital plan. One with deadlines, commitment to investment, cultural change provisions, regular reviews and a vision for leadership. Note that it is critical to get stakeholder buy-in; this will have a considerable influence on cultural change which in turn is essential to long-term success.

Outsource – because it’s the better investment 
People often view outsourcing as the expensive option; the costs are visible, upfront, and ongoing. But given the studies showing the failure rate of major corporate initiatives, and the increasing complexity of our industry, in the long term it is certainly less costly to choose a solution that is already proven, supported and maintained by an expert team. Increasingly, the business world is becoming a networked system of experts. For organizations large to small, sourcing an appropriate, tested, proven provider becomes easier and more critical every day.

The bright side is that platform-based companies can mutualize investment on behalf of a large set of customers, thereby decreasing cost. Rather than reinvent the wheel, banks, brokers, dealers and asset managers can gain the benefit of the network effect, not to mention offloading the stress and demands of keeping up with technology. We’ve already seen this network effect allow for shortened settlements and greater liquidity in the bond market, through services such as the Bloomberg Terminal, Amazon’s AWS cloud-hosting service and Broadridge’s own proxy platform. As data accumulates and analytical tools increase in sophistication, this trend will only continue.

Prepare for Change
As you make the regular decisions required by your corporate technology plan, remember to take open architecture into consideration. A platform or service with open architecture allows you to react and respond more easily to new developments – always a benefit in times of fluent innovation and change.

At Broadridge, we’ve developed an interactive quiz that helps you gauge your company’s path to digital leadership.