Utility Solutions in Capital Markets: Paving the Way for Operational Transformation
Cutting cost to boost suboptimal levels of RoE is becoming essential for capital market firms in the backdrop of tepid revenue growth and regulatory changes. Moving beyond short-term measures, fundamental restructuring of operations through adoption of shared service and industry utilities would enable long-term cost reduction.
In the report Utility Solutions in Capital Markets: Paving the Way for Operational Transformation, Celent discusses the emergence and adoption of the utility and shared service model in capital markets. Traditionally capital market firms managed their operations in-house or through outsourcing arrangements with service providers, resulting in redundancies and duplication of effort at an industry level, especially for non-core and non-differentiating activities in the mid and back office. Under the utility and shared service models, individual firms can greatly outsource these activities to a central provider, who can achieve economies of scale and cost reduction through provision of services to a group of institutions on a multi-tenant basis.
There are significant benefits. Multi-tenancy and sharing of costs across a group or industry level offers great potential for cost reduction. Individual institutions could convert all operational costs into variable costs. This would give them flexibility to scale up or down their operations as well as faster time to enter new markets and products. It is also easier for the utility provider to keep track of and adapt the solution to the ongoing regulatory changes, compared to individual financial institutions. All of these would free up significant resources — both financial and human resources — and allow firms to focus on building differentiating capabilities and client service.
“Regulatory and cost pressures are likely to continue for capital market firms well into the future,” says Arin Ray, an analyst with Celent’s Securities & Investments practice and author of the report “Adoption of shared services and industry utilities has the potential to bring down costs, improve efficiency, and transform operations that would be key for improving profitability and return on equity for capital market institutions.”
Celent has been tracking the utility landscape for the last two years with its coverage of the utility solutions in the Know Your Customer (KYC) space. The objective of this research is to expand our coverage of the evolving operating models by analyzing several new utility/shared service solutions. In doing so, we aim to understand the rationale behind the development and use of these utilities, their target users, functional features, and delivery models. We analyze the benefits these solutions bring to their users, as well as the key challenges they pose for both the providers and users. Based on this analysis we offer our views regarding the prospects of this new model of offering in the capital market.