Innovation in Global Industries U.S. Firms Competing in a New World (Collected Studies) (2008) / Chapter Skim
Currently Skimming:
10 Financial Services
10 Financial Services
Pages 341-372
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 341... ...
The high-value-added business models of the full-service banks that dominated the retail financial service industry in the United States should have remained inviolate -- after all, they had local presence, scale of operations, and a formidable network of branches that straddled the retail markets from coast to coast. These banks were challenged in their backyards by a European bank, ING Inc., that decided to bypass the battle of the branches and reach out to retail market segments directly through nontradi 341
|
From page 342... ...
A second kind of innovation -- producing and delivering financial services in new ways -- including the use of technology in retail financial services and the adoption of global operating models has also resulted in European banks becoming centers of innovation. In other recent research reports, McKinsey & Company identifies that the drivers of success for offshore firms in the Indian and Chinese financial services markets would be the ability to deliver financial services through new and more efficient channels (in India)
|
From page 343... ...
The web-based banking services that the bank launched in Asia and the United States were based on creating a flexible suite of corporate banking products that would connect their clients to the bank's service delivery portals, provide a set of tools to the clients to automate and manage their accounts Citibank's e-Business Strategy for Global Corporate Banking, HBS Case Study, HKU197, 2002, Center for Asian Business Cases, University of Hong Kong.
|
From page 344... ...
As the technological capabilities offered by the Internet matured, the diffusion of the innovation in other markets such as Europe, India, and China was also accompanied by accommodations of local banking customs, market contexts, and numerous custom features that tailored the innovation to local market conditions. Thus, the expansion of multinational financial services firms into global markets has resulted in the globalization of innovation. Our definition of the globalization of innovation is one where the innovation that takes place is global in nature -- not that the output (e.g., the applications)
|
From page 345... ...
10 There are two reasons why this is not possible: As mentioned earlier, there is intense political sensitivity that surrounds offshore outsourcing and, therefore, senior executives are reluctant to provide any estimates that will result in media attention being focused on their firms. Second, measuring the economic significance of activities at the subprocess level requires the deployment of resources that represents a prohibitively high level of cost and effort, especially given the rapid growth of offshoring, which in turn creates a rapidly changing market that is not easily surveyed.
|
From page 346... ...
346 bitmap image financial-1.eps FIGURE 1 The size of the offshore outsourcing market.
|
From page 347... ...
Accounts payable Accounts receivable Actuarial analysis Asset pricing research: equity research and fixed income asset research Billing Cash flow analysis (including forecasting and related services) Cost accounting and analysis Electronic payments (in retail and institutional financial services)
|
From page 348... ...
Automated clearing house and/or electronic funds transfer Business and corporate credit card issuing and processing Cash management Check processing and imaging Claims processing Core banking Credit card issuing: retail financial services Credit card merchant processing: retail financial services Data warehousing (retail and corporate banking, insurance) Liability and asset account management (deposits, savings accounts, certificates of deposits, loans, etc.)
|
From page 349... ...
The ATM was introduced for the first time in 1939 in New York City by the City Bank of New York and was withdrawn soon after for lack of adoption by consumers.14 It was reintroduced in 1967 in London and has since become a standard feature of all retail financial service products. When the ATM was first introduced it lacked ease of use and was not connected to the savings accounts of the consumers.
|
From page 350... ...
Most products and services in the financial services industry are mature and as a consequence there is considerable competition among firms that offer all of these services. Almost all retail banks offer the spectrum of services ranging from savings and checking accounts through money market accounts and PFS including wealth management services.
|
From page 351... ...
in India but also in countries such as China and the Philippines. By the end of 2004 there were several thirdparty providers of these services as well as captive centers in several regions of the world including Sri Lanka, Jamaica, and the Philippines.19 The combination of competitive pressures in a maturing industry and the presence of technological factors of enablement made it possible for corporations to migrate the production of some financial services to offshore providers.
|
From page 352... ...
. Certain financial services such as bond pricing research, equity research, asset pricing research in general, cash flow analysis, financial statement analysis, tax management, and modeling are now executed offshore.
|
From page 353... ...
and U.K. executives rate process25 P8 as a low-complexity process while their Indian and Singaporean counterparts rate the process as being of relatively 20 Based on a survey of BPOs and captive centers undertaken by the author and his doctoral students.
|
From page 354... ...
The preceding findings can be explained when we analyze the factors that cause the divergence of opinions between the four regions. We found26 that when a process involved computational work, algorithmic execution, quantitative analysis, numerical analysis, or large dataset handling and analysis, the executives from the United States and United Kingdom tended to rate such processes as being highly complex, while their Indian and Singaporean counterparts rated 26 In interviews with executives that responded to the survey.
|
From page 355... ...
Domain Expertise and Domain Experience Domain expertise refers to an expert's understanding of a body of knowledge and ability to use a set of rules to execute some tasks in a given domain. For instance, an employee in a captive center in India may have acquired the expertise needed to do equity research and forecast a stock price window for a basket of stocks.
|
From page 356... ...
The Locus of Innovation To launch new innovative features in financial products or entirely new categories of financial products it is necessary for the designers of these features (or products) to have considerable domain experience.
|
From page 357... ...
As we mentioned earlier, product innovation requires considerable domain experience, making it a daunting challenge for providers of offshore services to release innovations for the Western markets.30 In addition to this, there are crucial differences between product and process innovation that explain why the offshore providers and their Western clients specialize in different chunks of the value chain. Our studies of the offshore financial services industry since 2000 indicate that there is what amounts to a rough division of innovation labor -- Western corporations increasingly look to product innovations to boost growth while their service providers (and captive centers)
|
From page 358... ...
Examples of such innovation include the introduction of web-based banking and web-based insurance delivery. However, once product innovation is introduced into the market, the extent to which the innovation has succeeded takes a far shorter time to measure and it can be measured through relatively well-understood and unambiguous measures of product performance such as extent of consumer adoption, market share, profitability indices (including measures of gross and net margins)
|
From page 359... ...
Process innovation is about making significant changes to how tasks are executed, changing information flows and workflows to achieve radical simplification of process execution in order to achieve greater process efficiency and more effective support of the company's market objectives. Process innovation supports product innovation by reducing complexity in operations, making information work and its output more predictable, and improving the alignment between a company's service and operations and its market objectives.
|
From page 360... ...
Unlike the case of product innovation, where critical success factors such as market share and gross and net margins often provide an accurate picture of the success of the innovation, in the case of process innovation not only are there few (if any) direct metrics, there is also considerable lag between introducing the innovation and measuring its effectiveness.
|
From page 361... ...
financial-3.eps TABLE 5 Product Versus Process Innovation Innovation Factor Product Innovation Process Innovation Locus of innovation Market facing Inside the firm, directed at back-office and service operations Principal goal Competitive advantage, higher Operational efficiency, redesign of market share and revenues operations Principal impact Increases operational complexity Lowering of complexity, increases service effectiveness Gestation time Comparatively long, often preceded Short; time lag between design and by elaborate (several months of) deployment is minimal R&D and market research efforts Metrics to measure Direct metrics, including market Only indirect proxies exist for effectiveness share, and gross and net margins measuring the effectiveness of the innovation Time for market Comparatively short; within a Much longer; it takes several validation couple of quarters of introducing periods of observation of indirect the innovation, CSFs can be proxies for success to arrive at measured some estimate of the innovation's effectiveness Prerequisite for Domain experience and Domain expertise, ability to manage innovation understanding of market and complexity and deal with rapid business context changes in business volume IP assets Proprietary in nature; companies Rarely, if ever, proprietary, companies guard these carefully share these in a nonzero fashion Contract structure Coordination between firms, clearly Collaboration between firms and defined boundaries and control between departments within structures firms; blurring of organizational boundaries
|
From page 362... ...
The gains of process innovation in financial services can be shared in a non-zero-sum fashion between the offshore provider and its Western clients. A final contrast between product and process innovation that we wish to comment on is that product innovation usually involves tight control via contract 36 The survey was conducted by Knowledge@Wharton in 2006.
|
From page 363... ...
We cannot risk sourcing innovative products and processes from 23 13% an overseas firm Other please specify 16 9% Total responses 179 TABLE 7 Product and Process Innovations and IP Assets Product innovation usually results in valuable intellectual property (IP) assets that need to be protected Strongly disagree 3 2% Somewhat disagree 3 2% Neither agree nor disagree 7 6% Somewhat agree 51 40% Strongly agree 62 49% Total 126 Process innovation, rarely, if ever, results in proprietary IP assets Strongly disagree 11 9% Somewhat disagree 17 13% Neither agree nor disagree 19 15% Somewhat agree 48 38% Strongly agree 31 25% Total 126 The company that brings an innovative product to the market often takes ownership of the innovation Strongly disagree 1 1% Somewhat disagree 8 6% Neither agree nor disagree 11 9% Somewhat agree 59 47% Strongly agree 47 37% Total 126 Gains from process innovation are often shared in a zero-sum manner Strongly disagree 31 25% Somewhat disagree 33 26% Neither agree nor disagree 49 39% Somewhat agree 11 9% Strongly agree 2 2% Total 126
|
From page 364... ...
Some of the most successful examples of offshore process innovations feature close collaboration between the client in the United States/United Kingdom and the provider located in India/Sri Lanka/ China. The work that occurs on OfficeTiger's premises involves a high degree of collaboration between the clients in the United States and United Kingdom and OfficeTiger's Asian offices.
|
From page 365... ...
Finally, financial services firms have a culture of measurement and use of metrics to track the critical success factors of their major initiatives (whether in their end-customer markets or having to do with offshore suppliers)
|
From page 366... ...
Second, too rigid a controlling structure results in the service provider being reduced to execute against specifications and not try to formulate process innovations that may complement the client's product innovations and address the problems of complexity. The optimal governance structure that allows both the sourcing of process innovations and delivers on contractual terms is a hybrid governance structure that has some measure of flexibility built into the contract while giving the client sufficient monitoring capabilities.
|
From page 367... ...
Another example of this phenomenon is the company EquinoxCorp.42 EquinoxCorp provides services across the mortgage finance value chain that range from simple loan processing to predictive analytics leading to customer profitability gradient and retention. The company has created a network of partnerships along the mortgage processing value chain so that it is able to offer predictive analysis and customer retention services based on the use of a proprietary platform that captures data from several stages of the mortgage financing process.
|
From page 368... ...
Conclusion The diffusion of innovations in financial services across the regions of the world has been propelled by the twin forces of market participation by financial services firms and by the sourcing of process innovations that emerged as a result of global sourcing of financial services. A key factor that drives the division of labor in bringing innovations to market is the divergence in perceptions of process complexity.
|
From page 369... ...
Process and product innovations have a lock-and-key structure, where process innovations hold the key to resolving the problem of complexity that is unleashed by the introduction of new products. Finally, the sourcing of innovations in financial services requires forms of governance that are very different from the contractual, command-and-control mechanisms used for the procurement of more routine and highly codifiable forms of work such as call centers and data processing.
|
From page 370... ...
Free-trade agreements between the United States and Singapore and between the United States and Australia, as well as the integration of Eastern European countries into the EU, have all resulted in increased market participation in global markets by financial services firms the world over. Technology has brought instant transparency to business practices and product strategies adopted by firms in different regions and markets.
|
From page 371... ...
FINANCIAL SERVICES 371 Roxburgh, Charles.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.