I was recently on vacation in the South and West of Ireland. When one spends their holiday in Ireland, it is naive to expect sun soaked days, balmy nights and the smell of suntan lotion wafting through every bar and restaurant. Instead, you need to focus on vigorous outdoor activities, ensuring that you have the appropriate clothing and rewarding yourselves by spending the evenings in one of the multitude of gastro-pubs enjoying the superb food and drink and even better banter with other holiday makers. It was on one such evening that the topic of discussion turned to the topic of change in the business environment. This topic brought to mind a friend of mine, Georges Van Cauwenbergh who is a Lean Six-Sigma Master Black-belt. Georges is always reminding me that change is the only constant in business. If this is a truism then why is it gaining so much focus in industries such as financial services? After consuming some pints for mental stimulation we managed to generate the following question that seemed to frame our challenge - “In the financial services industry what does disruption mean and how do decision makers help their firms master change”.
Disruption has become something of a buzzword in financial services but is the term being used correctly? Do people mean innovation and do they understand the difference between disruption and innovation?
In simple terms, innovation is about improving a process or service and making it faster, more reliable and cheaper to run. Innovation typically leads to a 10% or 20% improvement and is deemed rational in nature. Every industry — including financial services — is engaged in innovation.
Compared to innovation, disruption is like a rebellious relative and involves dismantling a whole business model or way of doing things. Harvard Business School’s Clayton Christensen first coined the term “disruptive innovation” and it didn’t take long for it to spread. According to Christensen’s theory, new entrants start with a simple offering and then move upwards, eventually displacing the incumbent. So it could be said that all disruption is innovative but not all innovations are disruptive.
There’s a paradox for financial service firms as regardless of size, they spend too much time looking inwardly, preoccupied with trying to protect their past success rather than acquainting themselves with technical and business model advancements. Even in a highly regulated industry such as financial services, firms will need to change their business and operating models in this age of disruption.
Are the IFS firms expected to navigate their own way through this disruption minefield? In short no. At a national level, the Irish government has recognised the importance of the IFS sector and commissioned the study “IFS2020: A Strategy for Ireland’s International Financial Services sector 2015-2020”
The study highlights strategic priorities of the Irish government as follows:
1. Promote Ireland as a Location for International Financial Services & world class innovative products & services
2. Drive continuous improvement in the operating environment & competitiveness of Ireland's IFS sector
3. Drive Research, Innovation & Entrepreneurship in the IFS sector, with a particular focus on financial technology & governance, risk & compliance
4. Develop job-creation opportunities from emerging IFS sub-sectors & new markets
5. A new implementation framework for IFS2020
Although some of these strategic goals reside at a national level, goal No.3 lies within the circle of influence of individual firms. It clearly states that there is an onus on all firms to focus on the possible benefits that can be attained through the use of advanced technology to simplify and semi-automate operational tasks and to enhance the existing risk and compliance management models.
In order to better prepare for this changing business environment, firms will require a significant mind-set shift towards embracing the concept of controlling through collaboration, move away from rigid hierarchies to integrated networks and by realising that privacy and transparency are not mutually exclusive.
Unlike large organisations, small firms often have a “can do” culture, habits and ways of working that give them an edge over their much larger and more rigid and entrenched rivals. However, regardless of scale most IFS firms are overly restrictive by only focusing on 10% increment improvements rather than looking at their true potential for efficiency and cost reduction. Imagine that you have a client approvals process that takes 10 days to complete. A 10% improvement might save a day of time. What if you think more creatively and utilise technology, standardised operating processes and compliance models that are easier to understand and automate? Is it unreasonable to contend that the automation of manual procedures in the approvals process could attain a 30% reduction of costs? In order to achieve these greater returns, firms don’t need to think like Sir Richard Branson and have a “screw it, let’s do it” mind-set but decision makers do need to look up and recognise the potential of innovations.
So how do we recognise the potential for change? Attributed to the strategist Vijay Govindarajan, the three-box leadership model is a clever way to showcase the innovation management lifecycle.
Box One (preservation) is about managing the present and sustaining what’s great about your firm. Industries with high barriers to entry and where the speed of unpredictable change is lower (such as financial services) are more likely to remain in Box One. It’s easy to spend too much time directing resources and talent in Box One on how to follow predominantly manual procedures and processes.
Box Two (destruction) is about selectively letting go of outdated ways of operating (mainly manual in nature) before it’s too late. This is the most difficult box to manage — or get trapped by a culture of wilful resistance.
Box Three (creation) is about building the future. It requires big picture thinking, imagination and of course, fast execution skills. Where can small firms go to help them see the big picture?
Here at AML Quest we want to play our part in assisting IFS firms to attain their strategic goals, particularly in attaining compliance with the latest EC Anti Money Laundering Directive (MLD4). Through our WiseBOS AML system we offer an automated risk evaluation solution that assists the Compliance Departments of firms to profile, evaluate and document the details of their clients.
Call us directly at 01-4927000 or email us at info@amlquest.ie if you would like to learn more about WiseBOS AML and how it can assist with your firms compliance posture while lowering the cost of doing so.