Accenture Top10 Challenges 2011

OUTER
2011
for Investment Banks
Top 10 Challenges
Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
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Top 10 Challenges
Introduction
Navigating Through
Uncertainty
With leverage no longer an easy option
to drive returns on equity, and
proprietary trading now seen as risky by
both regulators and shareholders alike,
investment banks are faced with the
difficult task of identifying new ways to
propel their returns on equity back to
something close to pre-crisis levels. In
such an uncertain operating
environment, assessing risk, making the
most of existing revenues, and
capitalising on new opportunities have
never been more important.
Introduction: Navigating Through uncertainty
Figure 1: Real GDP Growth (% growth

year-on-year)
10 US
EU
Emerging & Developing economies
8
-2
-4
-6
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
20
Source: IMF, World Economic Outlook Database, April 2010
Focusing on the future:

Investment banks are increasingly operating in a volatile,
resource constrained and highly regulated environment.
Rigorous focus on strategic and operational priorities
provides the key to high performance.
The world economy is emerging from its While banks managed to dramatically
most severe recession in over 50 years. improve productivity over the past two
And the mid-term prognosis is still far years, a new wave of banking
from rosy. Recoveries from credit- innovation and revenue generation has
induced recessions take time. Often yet to arrive. The most encouraging
twice as long, in fact, as recoveries from signs of growth are in the emerging
recessions sparked by interest rates markets highlighted by the IMF for
hiked to contain inflation. their exciting catch-up growth
potential. In many of these markets,
Signs of real structural strength are in escalating levels of wealth point to
short supply. In the US, although accelerating demand for financial
recovery is underway, underlying services and products an exciting
fundamentals remain relatively weak. opportunity for investment banks,
The governments stimulus package has provided they can tailor their offerings
not delivered as significant a boost as to suit local requirements.
had been hoped. Meanwhile, in Europe,
the likelihood of any sustained
recovery from the worst downturn in 30
years remains at best uncertain. For
the moment, bank lending continues to
be constrained by new regulation such
as Basel III, as much as by now cautious
bankers just when it is needed most.
Introduction: Navigating Through Uncertainty
1.Demographic challenges
Widely reported, most developed
economies are struggling to come to
terms with seismic demographic
challenges. To varying degrees, these
No surprise that investment banks are are set to transform the way people
still scrambling to adjust to the realities live and work. Life cycle savings
of this new normal. In a straitened and ageing populations point to the
operating environment where the only need to save in developed economies,
certainty is increased regulation, making asset management an
pre-crisis returns on equity (RoE) of, increasingly vital source of revenue
on average, 20 percent look extremely growth for investment banks.
optimistic.
2.Emerging markets growth
As banks seek to identify (and exploit) Economies experiencing rapid growth,
every revenue opportunity, they need combined with little well established
to ensure a rigorous focus on strategic competition, offer exciting
and operational priorities. If they do opportunities for investment
not, they risk undertaking a series of banks. But the risks, and operational
broad-based transformations that challenges, of expansion into these
achieve little other than squandering new geographies are still being
precious resources and dulling potentially underestimated.
competitive edge.
3.Technology commoditisation
To help achieve the focus that we Technology has repeatedly
believe is essential to high demonstrated its ability to
performance, Accenture has developed commoditise banking offerings
a list of the top ten challenges facing particularly in non-relationship based,
investment banks today. Although low value added areas. With
these may not apply to all with equal commoditisation increasingly
weight, each represents a major dominating flow businesses, clear-
concern (and source of opportunity) sighted strategic decision-making is
for the industry going into 2011 vital. Banks must either make the
and beyond. substantial investments in straight-
through processing capabilities
Fundamental macro trends needed to achieve economies of scale,
As they face up to the challenges that or concentrate on areas such as
lie ahead, investment banks need to advisory, that cannot be
keep the following six macro trends commoditised.
front of mind. Each of them, we
believe, will play a crucial role in
shaping the future operating
environment:
4. Ultimate value to investors Investment banking three themes Driving the client agenda
Investment banks have to concentrate for the future With proprietary trading operations
on services and offerings where they With these macro trends in mind, we being limited by regulators and
deliver value to their clients, not just have divided the challenges facing questioned by shareholders, the
margins to themselves. This makes it investment banks into three broad importance of building (and
essential for banks to develop deep, themes: maintaining) a successful client
real-time insights into the risk/reward franchise is now critical to the
balance of their products and services. Responding to regulation bottom line. So too is the need to
Of course, banks must still take risks drive greater efficiencies from
5. Re-evaluation of capital to achieve their targeted RoE, but existing revenues. From now on,
Savings deposits may be the most they must now do so through a banks must focus on providing
desired form of capital, undemanding complex (and still evolving) integrated client services to attract
and sticky, but those attributes also regulatory framework. Beyond and retain client business, as well as
make it rare and likely to become rarer. question, responding to the post- developing the deep analytical insight
Investors have many more choices on crisis wave of regulation presents a needed to monitor and maximise
where to place their capital and the major compliance challenge for all client returns, and undertaking
amount placed in savings has been one investment banks although new realistic assessments of the costs and
of the slowest growing of all areas for opportunities will be created from the benefits of the services that they
over a decade. With this in mind, market dislocation that is already provide. As figure 2 shows, the results
investment banks need to re-evaluate underway. From now on, robust risk of this discipline will allow them to
capitals importance in any service of management will be a crucial pinpoint where to invest to achieve
product and charge accordingly. demonstration of intent to regulators, economies of scale, and where to aim
as well as allowing banks to shape for high-touch differentiation.
6. Resource constraints regulation and protect shareholder Lastly, now more than ever, by taking
Mounting resource constraints point to value. If one lesson can be taken sustainability seriously, they
gradually rising input costs becoming a away from the crisis, it must be that have an opportunity to regain trust
universal backdrop to all business and previous risk governance models were (amongst clients and throughout
banking activity. With oil approaching largely inadequate to shield wider society), while delivering
peak output, and basic commodity costs investment banks from the onslaught returns to their core business through
responding to wide demands of of systemic turmoil. Going forward, responsible business practices.
emerging markets, a reordering of therefore, banks must commit to
economic priorities looks to be the likely adopting and embedding a culture of
result. Sustainability is now on the managing risk throughout the
agenda (as a serious business issue) organisation (particularly in the
across all business sectors and front office).
investment banks must overcome their
institutional cynicism and follow suit
(as well as capitalise on the
opportunities presented).
Figure 2: Effective Targeting of Client Offerings
Value of Client
Banks can find new revenue through effectively
segmenting clients and determining where value is delivered Access
Realistic assessment of cost and benefits of services need to Core
to be undertaken
Marginal Value of Provision
clients
High Touch
Result indicates where to invest to achieve

economics of scale and where to aim for high
touch distinction
Services may well be denied even where marginal
costs are low in order to privide distinction Access to Capital &
Objective is not to focus on top 20% to the exclusion of all Select Investments
else, but to be aware of costs and benefits of eack client
Access to Analysts
Low Touch
Broker reports
Electronic Trading - Direct Market Access

Client Coverage (%)
Source: Accenture Research
Preparing for the new normal Responding to regulation
Whilst banks must remain resolutely 1 Responding to the regulatory
focused on the many challenges tsunami
of today, they also need to keep an 2 Dealing with OTC derivatives reform
eye on tomorrow. That way, they 3 Embedding effective risk
can ensure they are positioned to management
take advantage of the next wave of
growth instead of having to react Driving the client agenda
to it. The banks that successfully 4 Refocusing on client needs
capitalise on future strategic 5 Maximising client profitability
opportunities will possess acute 6 Taking sustainability seriously
strategic insight, be early adopters of 7 Delivering valuable transformation
emerging technologies and, critically,
be able to make measured Preparing for the next horizon
assessments of tomorrows key 8 Harnessing innovative technologies
battlegrounds and their chances of 9 Engaging effectively in emerging
success in each of them. markets
10 Picking the right battles.
Unknown unknowns may be
proliferating in todays operating In this paper, we explore each of the
environment. But one basic fact Top 10 Challenges in detail. For each
remains there are still really only one, we describe the background and
three ways to make money in context, as well as providing specific
investment banking: take risks, grow examples of the challenges faced by
revenues and control costs. This years many investment banks today and the
report explains why we think banks can reasons why these will be front-of-mind
and should keep each of these truisms issues for 2011 and beyond. We also
in mind albeit, inside a wrapper of provide Accentures perspective based
customer centricity, operational on our research, experience and
flexibility and risk awareness. insight in the market. Finally, we show
how our proven services and solutions
Pinpointing the core challenges have already delivered benefits to
In such a competitive marketplace, clients, helping them to overcome these
investment banks must move swiftly to challenges in a real world context.
plan and execute optimal responses to
the complex challenges they face. To
help them, Accenture has used its
research, industry expertise and client
insight to pinpoint and examine what Accenture Experts
we believe to be the ten key challenges
currently confronting the industry. We Dean Jayson
have surveyed over 2000 of our capital Senior Executive, London
markets professionals across the globe, dean.l.jayson@accenture.com
and over 200 senior clients, to +44 20 7844 8295
determine the Top 10 Challenges for +44 79 5841 4692
Investment Banks 2011:
Ryan Westmacott
London
ryan.m.westmacott@accenture.com
+44 20 7844 5259
+44 78 1030 4031
James Sproule
London
james.r.sproule@accenture.com
+44 20 7844 3387
+44 78 6680 8366
Introduction: Navigating Through uncertainty
1 Responding to the
Regulatory Tsunami
2 Dealing with OTC

Derivatives Reform
3 Embedding Effective
Risk Management
4 Refocusing on Client
Needs
5 Maximising Client
Profitability
6 Taking Sustainability
Seriously
7 Delivering Valuable
Transformation
8 Harnessing Innovative
Technologies
9 Engaging Effectively in
Emerging Markets
10 Picking the Right Battles

Top 10 Challenges
1 Responding to the
Regulatory Tsunami
Fears in the financial services sector
of a drastic increase in regulation at
a national and supra-national level
have been realised. With so much
game-changing oversight being
introduced, it is increasingly difficult
for investment banks to ensure
complete compliance while
continuing to make money in an
uncertain market.
Challenge 1: Responding to the Regulatory Tsunami
The recent financial crisis has resulted in

a plethora of governmental and regulatory
actions. As the financial markets begin to
stabilize, governments are now seeking
to develop an improved regulatory
environment. Shearman & Sterling LLP
And there is little prospect of a more

joined up approach being adopted for
the foreseeable future. In the hope that
they can prevent a similar crisis from
happening again, the tangled web of
regulators and supervisors across the
UK, Europe and the US have all been
introducing significant changes to their
regulations. And in the face of ongoing
economic volatility, national
governments are likely to continue to
plough their own furrows as they strive
to garner political support through new
regulatory initiatives, instead of
focusing on a more systemic approach.
Beyond question, fears in the financial

services sector of a drastic increase in
Background regulation have been realised, with
Radical (and often uncoordinated) overhauls ongoing scrutiny of both strategic and
more technical, low-level requirements.
of financial sector regulation The non-exhaustive list in figure 1 gives
an indication of the range of regulations
Shifting from light touch regulation towards a more intrusive focus currently being implemented around
on both strategic and low-level technical requirements the world.
As the dust has settled on the financial

crisis, it is clear that politicians and Figure 1: Global regulatory landscape
regulators are keen to make up for their
Regulatory landscape
perceived lapses in control in previous
years. However, notwithstanding Market changes
commitments made at the G20 European
Financial Summit in April 2009, for a Supervision
Authority
unified approach, national changes in Rating Agency
Regulation
financial services regulation since Financial Stability
then have been uncoordinated, often Board
even contradictory. FSA / BoE
Hedge Fund Regulation
OTC Derivative Remuneration

Central Clearing
Too
connected
Increased to fail Exchange
Liquidity Trading
reserves
Securitisation
Treatment
Enhanced Capital Risk reporting

Requirements and disclosures
Living Wills /
Volcker Rule Orderly Liquidation
Banking Requirements
There has been a pronounced shift

away from light touch regulation
(considered adequate pre-crisis),
towards a much more intrusive role
for regulators. Dodd-Frank, Basel III,
Capital Requirements Directives 2 and 3
and OTC derivative clearing regulations
on both sides of the Atlantic, all
examples of this stance, are each game
changers in their own right.
However these are layered with other

ongoing developments including
increased risk and reporting
requirements, stringent oversight of
remuneration and far-reaching changes
in the shadow banking sector. The
combined effect of this onslaught is
difficult to digest and, because
regulations are in continual flux, hard to
plan for with any certainty.
At a high level, bank CEOs and CFOs will have

to develop effective relationship-based links with
the regulators
The writing is on the wall. With little

warning and at short notice, C-suite
bank leaders will increasingly have to
be equipped to provide macro-level
assurances on the state of their risk
and control environments. Inevitably,
Key challenges
therefore, the compliance director
Reassuring regulators while continuing to (who will need to support this
relationship-based approach) will
satisfy shareholder expectations become increasingly influential.
At a more granular level, the key

There are strong indications that in the regulations are set to have a major
future, regulators will move away from impact on the business operations and
deep dive transaction-level audits behaviours of investment banks
towards a more macro approach. This worldwide. In the current economic
will be geared to gauging the resilience climate, it is already hard enough for
(or otherwise) of banks strategic risk financial services firms to remain
and control frameworks. In the UK, the profitable, without the added burden
abolition of the existing tripartite of market changes, costly regulatory
regime between the FSA, Bank of programmes and further restraints on
England and HM Treasury (effectively their business models. In fact, an
scrapping the FSA) is symptomatic of Accenture poll of 101 financial industry
this trend. executives found that nearly half
(49 percent) thought their profits
So what challenges does this shift would decline as a result of the
create for investment banks? At a high Dodd-Frank Acti.
level, bank CEOs and CFOs will have to
develop effective relationship-based
links with the regulators. This looks
inevitable and there is already evidence
that some banks are becoming more
proactive in this respect. These new
relationships see bank CEOs
communicating their in-depth
understanding of existing front-to-back
infrastructures and processes, as well as
whatever plans have been developed to
address weaknesses from both tactical
and strategic perspectives.
The scale of organisational challenges

should not be underestimated. The
combined effect of this new regulation
will require significantly enhanced With so many high-profile regulatory
business and product transparency. changes hitting the banks, there is an
Costly overhauls and upgrades of existing enormous amount of pressure on them
infrastructures will be unavoidable. to manage these developments as
Additionally, clear control functions, quickly and effectively as possible. As if
effective risk management and well- this was not challenging enough, they
defined processes and procedures will be must do this while satisfying increased
important not just to have, but to demands for the creation and delivery
continually maintain and improve. of robust shareholder value.
The recent Basel III proposals, although Accenture predicts that the industry will
less onerous than originally expected, spend between $3 billion and $5 billion It is clear that there will be winners and
demonstrate how deeply the new over the next three years to implement losers as banks emerge into the new
regulations will be felt (see figure 2). The Dodd-Frank Wall Street Reform and world of regulation. The winners will be
The agreement sets a new Core Tier One Consumer Protection Act aloneiii, and a those banks who have been able to view
ratio of 4.5 per cent, more than double recent survey of financial services the changes in a strategic way,
the current 2 per cent, plus a new executives across the US revealed that 70 understanding how their business
capital conservation buffer of a further percent believed that proposed regulation models need to change, either in terms
2.5 per cent, so the rule sets an effective would increase costs. of divesting or closing business, or
floor of 7 per cent. Further to this, there through regulatory arbitrage across
is likely to be local variation as national geographies.
regulators determine countercyclical
capital requirements and additional Figure 3: Expected impact of proposed financial services regulation
requirements for systemically-important
What impact on your company do you anticipate as a result of proposed regulation?
institutions. However as with all of
these announcements, the devil is in the
detail and along with the increased
Will weaken competive position 40%
ratios, the Basel committee has also Will stengthen competitive position 27%
tightened up the rules around what
Will decrease profitability 48%
can be used as core tier one capital.
This has the potential to cause serious Will increase profitability 31%
pain as banks are forced to shrink their
Will decrease costs 11%
balance sheets and assess the future
viability of business lines with high Will increase costs 70%
capital consumption. We will see Will have great impact on long term business
strategies 61%
increased levels of retained earnings,
and even capital-raising, to ensure Source: Accenture researchiv
sufficient capital buffers, all of which Various hurdles stand in the way of
suggests a challenging proposition for achieving these goals. As far as
investors (and employees) as dividends satisfying the regulators is concerned,
and compensation packages poor data, limited understanding of
are squeezed. processes and lack of senior
management sponsorship are common
Figure 2: Building up to Basel III issues in most investment banks. As a
direct result, regulatory change takes
Tier-One Ratio 8.5-11% much longer than it should. It also
Core Tier 1 Ratio consumes far more costs and resources
0-2.5% 0-2.5%
8.5%
than would otherwise be necessary.
6% 2.5%
Core Tier1 =7%
2.5% 2.5% 2.5%

4%
4.5% 4.5% 4.5%

2%
Current Increase to Capital Countercyclical Proposed

Basel II Core Tier-One Conservation Capital Buffer Basel III
Regime Buffer Regime
Source: Basel Committeeii

Our perspective
Enabling a continuous cycle of risk and
control enhancement
Regulatory change is notoriously
difficult for investment banks to
implement. In large part, this is because
the timescales are immovable
something that banks find extremely
difficult to work with. In fact, the only
variable that banks can change is the
budget available for regulatory projects.
And in our experience, throwing money
Figure 4: Regulation-related costs over three years at the problem is commonplace, with
projects often running at least two to
Discipline Costs (US$m) FTE (per year)
three times over budget.
Data 90 90
Finance 230 280
According to our estimates, over the
Risk 260 360
past three years an average bank will
Operations 200 290
have spent up to $900 million on
Technology 120 115
regulatory change-related programmes,
Total 900 1135
as well as tying up huge numbers of
Source: Accenture research
resources. With such large numbers at
stake (see figure 4), poor delivery can be
very costly indeed.
The problem is the current wave of regulation is

bringing several regulatory programmes of this scale
together at the same time.
History has shown us that

implementing a single regulatory
change, such as MiFID and Basel II, has
caused major problems for
implementation, with many banks still Based on Accentures extensive
struggling to integrate the changes into experience in implementing large-scale
their existing systems. Successful regulatory change programmes, we
responses to these regulations were have developed a framework for
those that tackled the challenges translating and mapping regulatory
through a strategic and co-ordinated change requirements to improved
response that embedded the changes system architecture and process
within both business and operating changes. By using this approach, banks
models, rather than implementing can ensure that they are driving
short-term tactical solutions to through their implementations as
the regulations. efficiently and effectively as possible.
The problem is that the current wave of With a delivery methodology specifically
regulation is bringing several regulatory designed for strategic regulatory and
programmes of this scale together at operational implementation across
the same time. More than ever, banks financial services organisations, we
need to ensure that they fully enable banks to create, develop and
understand the new regulations and the deploy new governance structures, risk
effect on their business. and control frameworks and processes
for ongoing monitoring and
effectiveness assessments. As well as
satisfying regulators demands for
ongoing oversight, these structures and
processes inject discipline and rigour
into the change process.
The objective is not just to make the

required changes on time and within
budget, but also to do so strategically.
That way, it will be easier to manage The objective is not
further regulatory change as part of just to make the required
a continuous cycle of risk and control
enhancement.
changes on time and within
budget, but also to do
so strategically.
Additionally, the bank needed to

increase its Regulatory Capital
Reporting capability to achieve daily
reporting for multiple asset types (from
an existing monthly reporting basis).
Using Accenture Target Operating Model

design and Basel II Regulatory Capital
assets, the Accenture team identified
the key objectives of this project:
Achieve a common Target Operating

Model design (encompassing Risk and
Finance systems, data process and
governance) to simplify and
consolidate the reporting process,
enabling a daily reporting capability
Bundle aspects of the Target
Operating Model design into logical
In practice
projects and agree the prioritisation
Developing a single operating model view and plan for project delivery
Secure long-term funding approval
for regulatory capital reporting for change and deliver projects.
Accenture supported the bank by

A major European investment bank facilitating workshops and deep-dive
urgently needed to develop a common analysis geared to achieving a common
operating model view across multiple Target Operating Model design across
areas of the enterprise, including Risk, multiple stakeholders each with their
Finance and Technology, as well as own business priorities. As a result, the
putting in place and delivering a multi- team achieved a single and agreed
year strategy and plan for delivering on delivery prioritisation schedule and plan
that model. spanning a number of years, as well as
securing senior buy-in and funding
There were two principal drivers for this and implementing a multi-year
project. First, having evolved over time, delivery programme.
the banks Basel II Regulatory Capital
Reporting environment (spanning By using the proprietary Accenture
technology, data, process and assets, the team was able to successfully
organisation) was fragmented, with implement numerous technology and
multiple tactical systems, parallel process change projects, including:
processes, data issues and control gaps.
The net effect was unnecessary Migration to a single Regulatory
production pressure and significant Capital platform and reporting
regulatory risk. process redesign
Delivery of multiple risk system
enhancements
Migration to daily reporting process
across multiple asset classes
Mechanisms put in place to identify
and remediate regulatory
compliance gaps.
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Chris Thompson
Senior Executive, New York
chris.e.thompson@accenture.com
+1 917 452 4986
+1 917 378 1409
Peter McCloskey
London
peter.mccloskey@accenture.com
+44 20 3335 0876
+44 77 4079 9130
Samantha Regan
New York
samantha.regan@accenture.com
iSource: Accenture
(US Financial Regulatory Reform: Cost or Opportunity?,
+1 917 452 5500
June 2010) +1 404 790 7378
iiSource: Basel Committee Press Release
(BIS, September 2010). Note = capital ratios refer to
proposed ratios as of 1 January 2019, and are subject to
phase-in arrangements. Proposals are draft and are
subject to ratification by national authorities.
iiiSource: Accenture
(US Financial Regulatory Reform: Cost or Opportunity?,
June 2010)
ivSource: Accenture
(US Financial Services Regulation Survey, June 2010).
N=102 (33% C-suite, 20% VP/SVP/EVP, 24% MD/Director,
24% Senior Manager/Manager)
Top 10 Challenges
2 Dealing with OTC

Derivatives Reform
Banks are seeking to develop cohesive
responses to ongoing OTC derivatives
reform in the US and Europe. Although
the combined impact of these reforms
is still unknown, it is clear that the
industry landscape will be significantly
transformed.
We will see derivatives moved through

clearing houses [and] traded
on exchanges.
Senator Chris Dodd, April 2010
Challenge 2: Dealing with OTC Derivatives Reform
The Wall Street reform bill will for the

first time bring comprehensive regulation
to the over-the-counter derivatives
marketplace. Gary Gensler, Chairman, Commodity Futures Trading Commissioni
Background
Reforming the maligned derivatives industry
Although the end-state of the OTC derivatives market following
this major regulatory thrust is still unclear, there is no questioning the
commitment to major reforms on both sides of the Atlantic
Accounting for 90 percent of the global In July 2010, President Obama signed
US$605 trillionii derivatives market, the into law the Dodd-Frank Wall Street
over-the-counter (OTC) derivatives Reform & Consumer Protection Act.
market was widely viewed as a catalyst This introduced an extensive set of new
of the financial crisis. Light on both risk regulations that focuses on both
mitigation and risk management, it is reducing counterparty risk and
blamed for facilitating the build-up increasing transparency. The Act
of excessive exposures, as well as mandates the establishment of a new
operational inefficiencies, complexity regulatory structure, limits on
and an overall lack of market proprietary trading and the reshaping
transparency. of regulation on swaps trading
(including the spin-off of certain swaps
trading operations into separately
capitalised businesses). Amongst other
consequences, the Act may have a
negative impact on capital efficiency,
as well as significantly reshaping banks
operating models to ensure greater
market transparency and reporting.
What is clear, however, is that the

combined effect of these major reforms
will significantly transform the industry
landscape. The challenge for investment
banks is one of staying ahead of the
The Act is extensive in its scope, though regulatory curve as it continues to
the focus of this discussion is around evolve. The focus throughout this
the ongoing shift of bilateral and transitional phase and beyond must be
uncollateralised transactions towards on ensuring agile decision-making
regulated markets and central processes. These will be key in enabling
counterparty (CCP) clearing. This move rapid responses and gaining competitive
seeks to lower systemic risk in the OTC advantage in a fast-evolving
derivatives market. However, while the marketplace.
Obama Administration is clearly
applying pressure on Wall Street, and
encouraging similar action from the
European Commission, it is still too early
to evaluate the exact impact of this
concerted effort to reform the OTC
derivatives market on investment banks.
Figure 1: The regulatory outlook for OTC derivatives
Regulation Implications US EU
Central Clearing Financial Companies to centrally clear swaps Liquidity demand of high initial margin
(grandfathering of existing swaps) Daily variance margin
Exception: Non-financial companies Cash form of margin
(end-users) exempt
Exchange Trading All standardised swaps to be exchange-traded, Inability to customise (important for hedging)
where an exchange/ASEF exists Standardisation of swaps
Exception: Non-financial companies Increasing volumes
(end-users) exempt
Swaps Certain swaps trading operations to be US only

Push-Out transferred into separately-capitalised Majority of market is exempt from requirement
non-bank entities (IRS=72%, FX=8%)
Exception: Hedging own risk, IRS, FX, and some
metals (gold, silver, etc.)
Capital Requirements Conservative requirements for dealers and Increasing trading costs
major swap participants for cleared swaps Increased focus on efficient capital allocation
Higher capital requirements for dealers on
OTC positions
Margin Requirements Stringent initial margin requirements with Tightening spreads

clearing houses Daily margin calls
Further daily variance margins Higher OTC trade costs
Minimum margin requirements under debate
for OTC
Post-Trade Reporting Real time price and volume reporting Price transparency
(T+1 for OTC) Standardisation of swaps
Existing swaps also to be reported Reporting infrastructure implications
Overseen by CFTC/SEC in US and new
ESMA/ESRB in EU
Sources: Deutsche Bank, Shearman & Sterling LLP, Accenture analysis

In executing their chosen market

strategy, we believe banks immediate
efforts should be focused on External
Positioning and Internal Strengthening:
External Positioning
The priority here is to develop a focused
business response to the fundamental
market change brought about by the
Dodd-Frank Act. The consequences of
the Act are still to be fully understood
within the industry, though the need to
clear OTC derivatives through central
counterparties (CCPs) indicates that this
topic alone will demand strategic
thinking at the C-suite level of
investment banks.
The scale of work involved in shaping

Key challenges
banks market responses should not be
Strengthening the core to execute under-estimated. Accenture Research
suggests up to 65 percent of industry
market strategy OTC derivatives could be eligible for CCP
clearing by 2013iii. Given this significant
scope of trades that could be eligible
These regulatory developments place for CCP clearing and as greater market
extreme and far-reaching challenges on transparency drives compression of
investment banks (see figure 3). Already margins, banks must be prepared for a
struggling to address wider financial decline in the revenues generated on
sector reforms, the priority for banks a per trade basis. The upside for
must be one of determining a viable investment banks will be the significant
strategic response to the shifting increases in trade volumes driven by the
regulatory environment for OTC shift of OTC derivatives to clearing
derivatives, and understanding the through CCPs and the likely mid-term
internal transformation across people, consolidation amongst clearing houses.
process and technology required to The industry experience of the
bring this to life. electronification of exchange-traded
derivatives in the early 2000s serves to
Figure 2: Revenue opportunity presented by the shift of OTC derivatives corroborate this hypothesis;
to clearing through CCPs commoditisation following
electronification led to volume growth
Client trading of over 400 percent from 2000 to 2010,
revenue whilst average spreads felliv.
Execution only
Agency service provider
commission
Revenue
Full service
opportunity
Clearing provider
commission
Clearing only
service provider
Interest
income
Note: Illustrative only. Relative shares of revenue source will vary by Investment Bank.
The main challenge for investment

banks is one of developing a client
offering that protects existing revenue
bases whilst capitalising on new market
opportunities driven by this evolving
regulatory landscape. The first challenge
that banks face, then, is to determine
their strategic response.
Internal strengthening
Investment banks must ensure a rapid
response to developments being driven
by regulators (including greater use of
electronic execution, mandatory use of
CCPs for all eligible products,
Strategically, banks are deciding registration of all trades in central data
between two key responses to the depositories and enhanced risk
market changes: whether to develop management). Particular areas for
clearing capabilities or outsource this attention include:
service to third party providers.
Upgrading ageing and inflexible
Building clearing capabilities opens up legacy applications to increase system
the market opportunities of offering a capacity that will enable growth
full service to clients across both under a new market infrastructure
execution and clearing, or acting purely
as a clearing broker for those clients Understanding the complex change
that opt to execute their trades with in operations needed to address the
other market players. This latter shift of various asset classes onto
response seeks to capitalise on the exchanges and electronic trading
market dislocation and the creation of venues for subsequent clearance
what is effectively a new market for and settlement of CCPs
derivatives clearing services. These
services include clearing access, cross-
margining, multi-asset risk
management, and client reporting. For
those banks unwilling to develop these
capabilities, outsourcing the clearing
process to a third party provides a
viable option to staying in the market
whilst stopping short of investing in
capabilities that will deliver a full
service to clients.
Regardless of the strategic response

adopted, the revenue opportunity from
the shift of OTC derivatives to clearing
through CCPs is significant
(see figure 2).
Challenge
Challenge
2: Dealing
2: Dealing
with OTC
withDerivatives
OTC Derivatives
ReformReform
Figure 3: Summary of challenges facing investment banks
Function Challenge Impact
Front-office Systems Integrate with new market models More change whilst BAU (Business
as they evolve and with downstream As Usual) continues to add complexity
applications
Trade Capture/Booking Multiple affirmation & matching Uncertainty around which trade venues,
system connectivity matching venues and affirmation
platforms and clearing houses to support
Pricing & Valuations Use in-house derived prices for Different exchanges will close at
valuations or EOD (End of Day) different prices though a standardised
exchange prices (exchange arbitrage) approach across the bank must
be implemented
Margin Calculation & Collateral Listed products vs OTC who Process split between Prime Brokerage
will reconcile the collateral calls and OTC
and margins?
Client Reporting CCP model increases collateral activity Strain on legacy processes as trade
and valuations volumes increase and clearing specific
information is required, including trade
level detail to align with CCP reporting
Settlements Multiple clearing house methodologies New processes and controls need to be
designed and integrated
Product Control Clear handoffs between Product Control New processes and controls need to
& Finance required be designed and integrated
Legal Differing legal frameworks in Increased complexity in client

different jurisdictions onboarding
Credit Risk Management Managing all the moving parts new Co-ordinated effort required to leverage
collateral types, ISDA agreements, inflexible legacy applications
individually-negotiated Netting rules
Default management Will banks be forced to cover Variation

Margin for clients who declare
bankruptcy?
Finance & Accounting Balance sheet reporting Controllers need to clearly define
reporting flows for Agency vs Principal
trades, as this has a direct impact on
upstream business and technology
processes
Risk finance integration How will banks update their models and
ensure that market risk is integrated at
the point of execution for OTC client
cleared trades?
Confirmations and Documentation BAU or new process Modification of existing controls and
processes required to preserve straight
through processing
Fees and Billings New reconciliation requirement One size fits all approach isnt viable
flexible rules & tables, legacy
applications
Processing New internal front-to-back processes, New ways of working required

controls and hand-offs to be understood,
documented and signed off
To capture this prize, banks will

have to successfully manage
complex operational change.
A first step for some may be to
conduct a cost-benefit analysis to
ensure the projected volume of their
derivatives business makes
investment worthwhile. Assuming
Our perspective compliance does make sound
Market opportunity abounds, economic sense, the key to
competitive advantage will lie in
but diligence in managing operational successfully building scalable
solutions for electronic execution and
complexity will be essential cross-asset clearing processes around
trade capture, collateral and netting
Accenture is currently working with Winning outcomes will hinge on banks

seven of the top ten global investment adopting and embedding strategic
banks on business change projects responses (rather than pursuing tactical
driven by the shift of OTC derivatives to approaches that vary by asset class).
clearing through CCPs. Based on our Such strategic responses will include
experience, we believe that: delivery against a global cross-asset
vision that focuses on improving client
New market opportunities are access to services and the development
available and must be seized. of a scalable set of capabilities that
As the buy side is forced to clear OTC support all existing and future
trades through CCPs, new revenue electronic trading venues, affirmation
opportunities will be generated from platforms, CCPs and other key market
clearing commissions and margin infrastructure players. In particular, the
interest. The increased securitisation following capabilities will be essential:
of trades is also set to drive up both
liquidity and trade volumes.
Accenture estimates that the market
for derivatives clearing services across
Credit, Rates and FX could be worth
US$10 billion by 2013v
Scalable Trade Capture and

Processing & IT Infrastructure
Securing connectivity to market-wide
tools that enable optimum trade capture
across products and increased
automation in core trade processing
engines to improve efficiency will be a
key requirement. This infrastructure will
provide the foundation on which banks
can industrialise their offering to
manage the high volumes that will
ultimately generate scale economies in Global cross-asset collateral
the clearing and trading of OTC management
derivatives on exchange. Optimised collateral management across
OTC and CCP clearing, with cross-
Global cross-asset risk policy product netting leveraged wherever
Banks must develop an intra-day risk possible, will be a key facet of the client
monitoring capability that ensures proposition. Banks will effectively need
proactive management of banks to develop a consolidated ledger to
exposures to individual clients and CCPs. report and control both the collateral
Identification of exposure limits in line placed by clients, and in turn the
with banks own policies and regulatory collateral placed by banks with the CCPs.
mandates will be fundamental, as will
the use of consistent methodologies to Optimised balance sheet and
measure risk exposure across asset risk-weighted asset (RWA) usage
classes. and funding
Optimised balance sheet and RWA usage
will inform banks allocation of scarce
resources to the most profitable client
relationships. Producing detailed, client-
level management reporting will ensure
ongoing diligence in these allocation
decisions and the subsequent refreshing
of banks client portfolio as appropriate.
Accenture worked with the client to

define a robust strategic response that
was geared to achieving three primary
objectives:
Articulating and quantifying the

client value proposition and business
opportunities arising from the shift
of OTC derivatives to clearing
through CCPs
Defining the new Target Operating
Model and the changes to people,
process and technology that would
enable this
Defining a transformation roadmap
of projects needed to execute the
business strategy
The programme helped drive the client

In practice towards its vision of becoming a
leading provider in this space through
Seizing the opportunities from OTC-CCP four key areas or work:
1 Client value proposition: The bank

Fuelled by escalating regulatory was able to define its market
pressure, widespread uptake of CCP differentiator to prospective clients,
clearing for OTC-traded products is ensuring it could win new business
expected by 2013. To seize the that supported its growth objectives
opportunities flowing from this across asset classes
paradigm shift, a global investment 2 Revenue model: The bank understood
bank plans to expand its franchise the size of the prize across each
through its leading Exchange-Traded main asset class, and could therefore
Derivatives (ETD) and FX businesses into calibrate its go-to-market approach
Rates and Credit. accordingly to fully exploit the
available opportunity
3 Target Operating Model: The bank
could develop a new way of working
that would provide the foundation
for its operations and growth under
the industry shift brought about by
OTC derivatives reform
4 Transformation roadmap: The bank
could mobilise a multi-year change
programme to deliver its target
capabilities
Accenture experts
Dean Jayson
Senior Executive, London
dean.l.jayson@accenture.com
+44 20 7844 8295
+44 79 5841 4692
Anastassia Khomenko
Paris
anastassia.khomenko@accenture.com
+33 1 53 23 61 85
+33 6 32 27 08 90
Ben Shorten
London
benjamin.j.shorten@accenture.com
+44 20 7844 7212
+44 77 3661 0252
i Source: Financial Times, 11 August 2010

ii Sources: Bank for International Settlements (December
2009), Quarterly Review
iii Source: Accenture research
iv Source: Bank of International Settlements (September
2010), Quarterly Review
v Source: BIS, DTCC, Euromoney, Accenture research.
Assumes product CCP eligibility by 2013 of 90% for
credit, 70% for rates, 15% for FX.
Top 10 Challenges
3 Embedding Effective
Risk Management
Regulatory demands for enhanced risk
management are now a fact of life for
investment banks. However, instead
of adopting reactive approaches to
these demands, more fundamental
reappraisals of enterprise risk
management (ERM) are needed. Until
joined-up ERM cultures are embedded
throughout the organisation, the
business value that can and should be
generated from substantial risk-related
investments will not be realised.
Challenge 3: Embedding Effective Risk Management
The best enterprise risk management

practice is to have business managers,
profit centres, business unit heads and
functional heads really assuming full
responsibility and accountability for the
risks they take. Axel Lehmann, Chief Risk Officer, Zurich Financial Servicesi
Background
Moving towards true enterprise-wide risk
management awareness
Although multiple tools have been developed to address identified risks,
these are still far from integrated.
One inevitable consequence of the However, while most investment banks

financial crisis, and the regulatory now recognise risk as a major feature
deluge that ensued in its wake, has been on board-level agendas, only the most
a complete reappraisal of risk mature amongst them have truly
management. As well as playing a vital embedded a culture of risk management
performance-related role, risk throughout their organisation.
management is acknowledged to play As a result, although multiple tools have
an essential part in vouchsafing banks been created to address identified
wider role in society. risks, these are far from integrated.
This is supported by independent
research:
According to a recent Economist

Intelligence Unit reportii, only
13 percent of respondents believe
their organisation to be very
effective at instilling broad-based
risk awareness.
This is at odds with management
thinking outside the industry, where
60 percent of companies see
embedded ERM as the critical
objective of any risk management
programmeiii.
Accentures recent survey of financial

services firms found that the
primary strategic planned response to
regulatory change was to further
tighten risk management processes
across the enterprise. See figure 1
The reality is that most investment

banks continue to see risk management
as a process for managing management
or worse, managing regulators.
This ignores the clear benefits that flow
from enterprise-wide risk management For as long as top-down approaches to risk management fail
cultures, both in terms of improved to connect with bottom-up tools development programmes,
business decision-making and as the
foundation for strategic agility and risk management will fail to deliver the level of protection
commercial success. (and business benefit) that it can and should provide.
For as long as top-down approaches to
risk management fail to connect with
bottom-up tools development
programmes, risk management will fail
to deliver the level of protection (and
business benefit) that it can and should
provide.
However, while investment banks are Figure 1: Expected strategic responses to proposed regulatory reforms
only too aware of the disconnect
between front-office risk management Tighten risk management 54%
and back-office risk control, the Implement cost reductions 44%
challenges that must be overcome on Change pricing structure 39%
the road to joined-up, enterprise-wide Focus more on core competencies 31%
risk management are substantial. Launch new product or service lines 29%
Enter new market or customer segments 28%
Implement change management program 26%
Divest business or geographic units 25%
Decrease Headcount 24%
Merge or acquire other companies 21%
Launch new business or geographic units 20%
Increase headcount 18%
Shut down product or service lines 16%
Relocate headquarters or business unit locations 10%
No strategic change 5%
Other 1%
0% 10% 20% 30% 40% 50% 60%
Source: Accenture (US Financial Services Regulation Survey, June 2010).

While each of these is significant,

because the tone of an organisations
risk management culture is set at the
top, senior management sponsorship
and board-level commitment should be
viewed as the foundation for any
successfully embedded ERM
programme. Board buy-in establishes
priorities, sanctions resource allocation
and, crucially, is a key factor in building
the appropriate top-down approach.
In other words, top-down impetus is

vital. So is bottom-up implementation.
However, all too often poor data, weak
reporting and inadequate analytics
obstruct the quality and flow of risk
management information needed by
Key challenges
professionals throughout the
Weak integration across risk-related data, organisation and particularly at mid-
level, the stratum where day-to-day
reporting and analytics activities are most likely to be exposing
the business to risk.
Multiple challenges confront banks So although investment banks are

efforts to embed enterprise-wide risk continuously reacting to new regulatory
management cultures. Individually and demands, their responses are seldom
combined, these have undermined the grounded in integrated, enterprise-wide
success of many initiatives to date. risk management behaviours.
AONs Global ERM Survey 2010 Beyond the behavioural level, challenges
identifies four high-level challenges: abound in the storage, management
Lack of skills necessary to embed and analysis of data. Specifically, how
ERM (according to 34 percent can investment banks meet the
of respondents) requirements of the various consumers
Lack of senior management of risk management information in their
sponsorship (31 percent organisation? This means confronting
of respondents) a number of issues, including:
Lack of any clear implementation
plan (28 percent of respondents)
Failure to communicate the case for
change (27 percent of respondents)
Board buy-in establishes priorities, sanctions

resource allocation and, crucially, is a key factor in building
the appropriate top-down approach.
Talent fighting off competition from

other banks and/or regulators for
highly-skilled, but limited resources
(including analytics experts) Last, but certainly not least, the impact
Consolidation integrating systems of substantial and ongoing regulatory
architectures that are still change will reduce firms profitability
fragmented along traditional silo, risk while consuming costs and other scarce
and business lines resources (in Accentures 2010 risk
Quality building accountability for survey, 70% of respondents expected an
data quality throughout the increase in costs, 48% expected a
organisation so that end data, when decrease in profitability). The challenge
used, can be completely trusted here is to balance the requirements of
Structure constructing appropriate regulatory compliance with the wider
feedback loops for controlling transformation needed to embed risk
risktaking behaviours, including management at all levels while
compensation-linked incentives. minimising long-term cost impacts.
Figure 2: Impact of regulation on profitability Figure 3: Impact of regulation on costs
Increase: 31% Decrease: 48% Increase: 70% Decrease: 11%
35% 32% 60% 56%

30% 50%
24%
25%
21% 40%
20%
14% 30%
15%
20%
20%
10% 12%
6% 9%
5% 2% 2% 10%
2% 2% 0%
0% 0%
Increase Increase Increase No Decrease Decrease Decrease Increase Increase Increase No impact Decrease Decrease Decrease
more 11-20% 1-10% impact 1-10% 11-20% more more than 11 -20% 1-10% 1-10% 11 - 20% more than
than 20% than 20% 20% 20%
Source: Accenture (US Financial Services Regulation Survey, June 2010). Source: Accenture (US Financial Services Regulation Survey, June 2010)
FF FF
Challenge
Challenge
3: Embedding
3: Embedding
Effective
Effective
RiskRisk
Management
Management
The traditional view of risk

management as policeman
or second line of defence
must be continually
challenged.
Collaboration decision-makers
across the business must have
access to appropriate risk metrics so
that risk management can be
included in all decisions
Internal controls rather than
resenting the constraining effect of
Our perspective
risk management programmes, it is
Truly mature ERM demands a proactive important that managers must
recognise these as enablers of
approach from the organisation. business objectives
Individual and organisational goals
ensuring that individuals needs
As investment banks move towards are aligned with the wider needs of
embedding enterprise-wide risk the business, especially through
management, Accenture believes their compensation structures
approach must embrace Culture & Performance measures defining
Performance, Risk Functions and pragmatic measures that
Leading Practice. acknowledge risk taking and problem
prevention, balancing future goals
Culture & Performance with an effective early-warning
The traditional view of risk management system.
as policeman or second line of
defence must be continually
challenged. The objective must be to
replace this outdated view with deep
enterprise-wide collaboration and
feedback loops that reinforce proactive
discussion and implementation.
The following stand out:
Risk Functions
The Risk departments traditional
functions data gathering, reporting
and analysis must be subjected to
constant review. This should focus
on a number of priority areas:
Organisation high performing

investment banks continually strive to
break down silos between mid and
back office
Data gathering to ensure that all Embedding leading practice
parts of the organisation receive a We know that truly embedded ERM
single version of the truth, data moves from a reactive approach to
acquisition must be standardised a more mature and proactive
and simplified (without losing configuration. Accenture regularly
the flexibility needed to reflect assists organisations in evolving from
business changes) the former state (where risks are simply
Reporting uncluttered with identified as hazards that interrupt
irrelevant detail, reports should routine operations) to the latter
enable effective business decisions, (where more sophisticated threats
while being available rapidly enough and opportunities can be identified). Accenture regularly assists
to support trading and management Based on this experience, we can point
decisions to the following as hallmarks of
organisations in evolving
Common analytics able to learn organisations with an advanced and from the former state
from unexpected and/or extreme deeply embedded understanding of risk: (where risks are simply
events, the models used must be
updated accordingly and subjected Constantly scanning for shifts in identified as hazards that
to continuous stress-testing (calling market/stakeholder expectations, interrupt routine operations)
for closer integration with front regulatory developments and new
office risk management systems models of leading practice
to the latter (where more
and processes) Continuously assessing the robustness sophisticated threats and
Strategy risk must be aligned with and integrity of their risk profile opportunities can be
other key management decision- Accurately measuring whether their
making and corporate governance risk management actions are identified).
processes (particularly with CFO and actually reducing exposures
CEO-level processes). Using post-implementation reviews to
show whether or not lessons are
being learned and integrated into risk
profiles, especially after extreme
or unexpected events.
As well as benchmarking the status of

their current ERM capability, this tool
allowed the bank to identify the gaps
between its As-Is and To-Be target
maturity levels) and supported the
creation of the roadmap needed to
In practice achieve the key objectives.
Enabling sound, risk-based decision-making More broadly, the Accenture team

championed deeper awareness of risk
culture throughout the bank, developing
In common with many of its peers, risk To facilitate this process, the team performance-linked long-term metrics
and compliance functions in this used Accentures Risk Management to incentivise behaviours. To ensure
leading global bank were run as silos, Maturity Model (see below). This tool sustainable and fully-integrated ERM
fragmented under each business line. helps organisations assess the transformation, the team embedded
And at a more fundamental level, maturityof their ERM capabilities the performance management process
technology infrastructures were overall, and across the five key areas within the change management function.
fragmented across Credit Risk, Market crucial to enabling sound, risk-based
Risk, Finance and Treasury. decision-making Organisation &
Governance,Process, Analytics,
Struggling with losses of over US$60 Reporting and Data Management.
billion related to subprime lending,
management recognised that the
current operating model was Risk Management Framework
fundamentally flawed. Accenture was
Key Components for Risk Based Decision Making
asked to develop a new risk
management operating model, Organization / Risk management Risk analytics Reporting Information Mgt /
integrating previously siloed functions Governance process Data Governance
into an enterprise-wide capability. Performance Management
Enables
Risk Culture
Working with the board down, the Systems and Technology
Regulatory Compliance
Accenture team introduced
industrialised real-time reporting,
aiming to equip decision-makers with
relevant metrics that could be trusted to
provide accurate insights.
Accenture experts
Steve Culp
steven.r.culp@accenture.com
+44 20 7844 4855
+44 77 7581 8701
Ashley Davies
London
ashley.davies@accenture.com
+44 20 7844 0058
+44 77 6850 5950
Takis Sironis
London
takis.sironis@accenture.com
+44 20 3335 0457
+44 77 4094 9497
iThe Economist Intelligence Unit, Rebuilding Trust:

Next steps for risk management in financial services, 2010
ii The Economist Intelligence Unit, Rebuilding Trust:

Next steps for risk management in financial services, 2010
iii Aon Global Enterprise Risk Management Survey 2010

Top 10 Challenges
4 Refocusing on
Client Needs
Driven by shareholder demands and
regulatory pressure, investment banks
are going back to basics shifting the
emphasis from complex product
innovation towards increased client
intimacy. The priority now is to better
align service offerings with clients
needs a significant challenge for the
majority of banks that have neglected
client service-based investments in
recent years.
Our first priority is and always has been to

serve our clients interests. Goldman Sachsi
Challenge 4: Refocusing on Client Needs
Background A renewed long-term focus on

agency business over proprietary
Banks that can truly understand and trading (fuelled by the need to de-risk
meet client needs will stand out from and repair balance sheets, and in
response to regulatory developments)
their competitors Key client segments increasingly
value trusted relationships over the
Post-crisis, a number of trends are driving leading investment banks continued innovation and
to refocus on client relationships proliferation of complex products.
Reduced buy-side willingness to trade
complex high-margin products has
In the years leading up to the financial forced investment banks to refocus
crisis, investment banks moved away on some of their more commoditised
from their historical role as offerings (e.g. execution of exchange-
intermediaries, concentrating instead on traded securities). With little
developing complex products and taking product/service differentiation in
on risk through proprietary trading these areas, banks have an
activity. Now, however, spurred by opportunity to seize competitive
shareholder demands, regulatory advantage through superior
pressure and a transformed competitive client service.
landscape, banks are refocusing on The rise in multi-asset trading,
client relationships. Major drivers the attractiveness of emerging
behind this trend include: markets and the proliferation of
electronic trading platforms are
driving clients' demands for banks to
deliver an integrated service offering
spanning regions, products and
channels. The varied needs of
different client segments (institutions
versus hedge funds, for example) only
make this a greater challenge.
Key challenges
Investment banks need to integrate their
client strategy across regions, business units
and channels
In recent years, most investment banks This strategy shortfall extends to
have neglected investments in their channel considerations. Unlike their
client service offerings. As a result, counterparts in the retail-banking
many of them are struggling to develop sector, many investment banks have yet
greater client intimacy by better to develop cohesive channel
aligning service offerings with management strategies that integrate
client needs. voice, face-to-face, electronic and self-
service channels. Defining entitlement
Based on our experience, we see banks and service levels across channels (by
facing systemic difficulties in four major client segment and priority) are critical
areas: in ensuring clients service expectations
are met profitably.
Client Strategy
Many investment banks lack an Many investment banks also still lack a
integrated client strategy spanning consistent and complete set of metrics
regions, business units and products. for managing the sales organisation.
Hampered by siloed departmental Without this there is a lack of common
structures, they are struggling to meet and truly effective incentives to
mounting client demands for uniform promote client focus and greater levels
service levels across geographies and of cross-selling.
product segments. Additionally, because
few banks have a deep understanding of
client profitability, most of them are
unable to assess their clients true value
to the bank meaning that they
continue to over-serve and under-value,
as well as failing to manage the long
tail of unprofitable clients.
Integrated technology support has a key

role to play in supporting relationship-
based client insights, enabling data
capture across the various client touch
Client service delivery points and powering sophisticated
processes need to be analytical capabilities. However,
sufficiently adaptable so solutions such as CRM tools are still
sometimes seen as inhibitors rather
that exceptions can be Client Service Delivery Model than sales enablers, despite such
accommodated for high- Servicing clients is no longer just about systems offering potential beyond
sales. Instead, it increasingly means contact and call-sheet management.
value clients, whilst ensuring providing a seamless front-to-back and Leading CRM platforms provide rich
that the majority of clients cross-product service. Sales teams in client management information,
many banks are, however, not well supporting sales/trading team
can be processed (eg. equipped to facilitate this. This is collaboration and issuing actionable
onboarded) and serviced because investment banks still view client alerts based on market
efficiently. client service delivery as a discrete set of developments.
processes, rather than considering the
end-to-end service proposition across At many banks CRM remains
all stages of the client life-cycle (from insufficiently integrated with other
client prospect to client exit). systems (trade data, onboarding, etc.)
and common desktop applications
Client service delivery processes need to (Outlook, Excel, etc.). This limits the
be sufficiently adaptable so that ability to automate the tracking of sales
exceptions can be accommodated for interactions, a fundamental requirement
high-value clients, whilst ensuring that for building client insight and tracking
the majority of clients can be processed whether service delivery is aligned with
(e.g. onboarded) and serviced efficiently. strategic priorities.
Client Insight and Relationship Additional challenges arise from

Management usability and system performance
Sales mentalities focused on pushing issues, both of which continue to
product present a significant barrier to present significant barriers to CRM
understanding client needs. In adoption at investment banks.
particular, this can mean that client Salespeople have come to expect these
issues are not properly understood at an tools to match the simplicity and
institutional level, with no mechanism customisability of Web 2.0 applications
in place for identifying and validating (e.g. social networking platforms),
client needs. Client insight is also whereas few custom-built CRM
limited by the fact that banks often fail applications match this capability.
to sufficiently institutionalise their
client insight, with client relationships
often owned by individual sales staff
who can be easily lost to competitors.
A limited understanding of client needs

and their service history across markets
and products limits the ability to target
advisory services and cross-sell
additional products. Cross-selling is also
often hampered by salespeople having
insufficient knowledge across products
and asset classes, and lacking the
incentives to develop it.
Our perspective
Embedding top-down commitment to the
new strategy
Developing an integrated Flexibility is key. The integrated client
client strategy strategy should not inhibit a degree of
Only an ambitious client strategy that local adaptation, nor should it prevent
covers the banks regions, client product desks from developing their
segments and product areas can deliver own client prioritisation criteria. Instead,
on the crucial objectives of integrated the strategy should provide an
and consistent service delivery, deeper overarching framework, creating a
client insights and improved client common purpose while enabling
penetration. Any drive towards this goal individual product areas to maximise
must start at the top with committed their own revenue potential.
senior-level engagement. At large
banking groups, consideration should be
given to whether or not to extend the
investment bank client strategy to
The client strategy, often group level. But any decision to do so
best led by a Head of Client must not be taken lightly even leading
banks have struggled for years to make
who is not product aligned, this work effectively.
must mesh priority client
segments with overarching The client strategy, often best led by a
Head of Client who is not product
product and channel aligned, must mesh priority client
strategies. segments with overarching product and
channel strategies. This approach needs
to consider access levels to advisory
services, and other premium services
by segment.
Aligning the client service

delivery model
If they are to better meet client needs,
banks must re-evaluate their front-,
middle- and back-office processes. As
things stand, many have already made
good progress in tailoring client-facing Developing deeper client insight
front-office processes to different client Investment banks have to understand
segments (e.g. meeting hedge funds the evolving needs of client segments
cross-product requirements). But and those of individual clients. Recent
because too many middle- and back- experience shows what can happen if
office processes are one size fits all, they do not. For example, many banks
they are unable to meet the needs of were too reactive in recognising the
particular types of client. rising trend of hedge funds using
multiple prime brokers to reduce their
Banks should also consider the overall single counterparty risk, which caused
client experience across all aspects of some players to lose market share.
service delivery and all stages of the Leading banks are not only able to
client lifecycle. Only a delivery model anticipate such trends, but also have
that spans and integrates all these concrete client insight and data to
elements will attain outstanding levels inform their response and monitor
of client service. See figure 1 developments in their clients activities.
Customer Relationship Management

Figure 1: Effective client service is about much more than sales a wide range (CRM) tools are a vital element in
of supporting functions and sales enablers must be considered providing the front office with access to
such client insight. Rich client
management information is required at
Strategic Marketing and Sales every stage of the client lifecycle, and
Selling Flow Product Structured Product and Research and Advisory at every stage of the sales process.
Function and Channel Sales Channel Sales Services Leading CRM platforms, whether
inhouse developed, or customised
Service Delivery Management
vendor suites (e.g. Salesforce.com,
Microsoft Dynamics, Oracle CRM)
Service Delivery aggregate client data across multiple
Service data sources to provide a rich single
Trading CreditControl Operations view of the customer. Increasingly,
Delivery
the same tools are being used across
Compliance the front office and support functions
such as Credit Risk and Operations who
Client Onboarding / Maintenance Culture, Incentive and Reward can review client profiles using a
Client custom view. It is hugely useful for staff
Enablement Client Data and Document Management Information Acquisition and Analytics working in these areas to be able to see
the same data on, for example, a clients
onboarding status or assigned
prioritisation segment. Work processes
become less fragmented, duplication
of effort is avoided and a more
seamless customer experience ensues.
Developing a high performance CRM capability is much more

than a technology challenge.
Increasingly, sophisticated analytics are

being used to give salespeople greater
insight, helping them respond more
rapidly to changes in client needs,
For the front office to directly benefit identify cross-selling opportunities
from CRM and to drive broad adoption, and match trade ideas with customers.
it is important that these systems
provide functionality such as: Developing a high performance CRM
capability is much more than a
Automated tracking of client technology challenge. Such tools will
interactions across all channels only deliver success when they are
(voice, email, chat, etc.) through aligned with a clear and embedded
back-end integration. Client profiles client strategy within a culture that
that are developed over time can be strongly encourages adoption and an
mined for trends and shared across incentive system that rewards it. Senior
the organisation management buy-in, with a strong
Allowing salespeople to manage mandate that all client contacts must be
a client project across structuring tracked electronically, is vitally
and trading by collaborating on important to ensure the necessary
a single platform momentum is sustained.
The ability to manage and service
clients directly from within a single
application (e.g. to distribute research
content directly to a client when
viewing their client profile)
Reporting and other management
information that provides salespeople
with insights into how they are
spending their time and how this
corresponds with actual sales/trades
Benefits delivered
As well as enabling the bank to segment its
client base and vastly improve its
understanding of clients cross-product
requirements, this project also meant that
In practice the banks change portfolio could be
mapped against a refreshed target
Enabling enterprise-wide client insight operating model.
Additional benefits included increased

This global investment bank lacked a understanding of client profitability and
client strategy that clearly articulated through the new CRM platform seamless
how its service proposition would adapt integration between distribution and
to meet evolving client needs. Having communications channels. Because this
conducted extensive interviews with platform delivered a simpler (but more
senior global management and some of powerful) user experience, aligned with
the banks key clients, Accenture built analyst/salesperson workflow, it also
on these insights to develop an significantly lowered barriers to CRM
integrated client strategy, including adoption across the organisation.
prioritised objectives and metrics and
a target operating model, before
undertaking detailed process
engineering and enhancement.
Core to this project was the

development and implementation of a
new technology architecture for cross-
product CRM. To achieve this, Accenture
undertook in-depth evaluations of
vendor and custom-build technology
options to support integrated CRM
capabilities. Having canvassed detailed
requirements, the team designed and
implemented the CRM platform
supporting a 4,000-plus user-base.
Accenture also took responsibility for
managing the global deployment of this
solution, as well as coordinating all
user training.
Accenture experts
James Woodhouse
james.woodhouse@accenture.com
+44 20 7844 4415
+44 78 3623 3985
Cathinka Wahlstrom
cathinka.e.wahlstrom@accenture.com
+1 917 452 5897
+1 917 414 1055
Robin Martin
London
robin.martin@accenture.com
+44 20 7844 6464
+44 77 3914 2895
iSource: Goldman Sachs, Annual Report 2009

Top 10 Challenges
5 Maximising Client
Profitability
Facing reduced leverage and with
proprietary trading revenues in decline,
investment banks are refocusing on
client business. In this environment,
increased client profitability will prove
crucial to achieving pre-crisis levels of
profitability.
Regulatory changes could significantly

lower investment bank profitability.
J.P.Morgani
...tiering customers by profitability

would give us a deeper understanding of
their requirements and help us to actively
manage our client base. Standard Bankii
Challenge 5: Maximising Client Profitability
Background
Investment banks will increasingly depend
on client business to generate profits
There is mounting pressure on leverage and proprietary trading
two of the principal pre-crisis drivers of profitability
Increasingly today, banks are focusing Reduced leverage

on client portfolio optimisation. This is While banks will continue to use
because, with reduced leverage and leverage, the higher cost of debt means
proprietary trading in decline, client that leverage rates will inevitably fall.
business represents an attractive source This will make it harder for them to
of future profitability. maintain their historic return on assets.
A reduction in leverage from 95 percent
of capital to 66 percent, for example,
could reduce average return on equity
(ROE) from approximately 15 percent to
10 percentiii. Figure 1 below illustrates
the continuing trend of deleveraging in
Figure 1: Selected banks leverage ratios the industry as banks return to a stable
long-term average leverage ratios, and
2500%
begin to face the challenge of restoring
Average Leverage pre-crisis revenues in the absence of
2000% this leverage.
Top 5 Average Leverage
1500%
1000%
500%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bloomberg, Accenture researchiv

Loss of proprietary trading revenues

Part of the recently enacted Dodd-Frank
Act, signed into law by President Obama
in July 2010, the Volcker Rule sounded
a death knell for proprietary trading by
investment banks. Of course, these are
early days. There is continuing
ambiguity around the precise definition
of proprietary trading (excluding, as it
does, market-making activities, risk-
mitigating activities and activities on
behalf of customers). Furthermore,
potential opportunities for regulatory
arbitrage have been created by the
exclusion of foreign trading (outside
of the US) by non-US banking entities.
But despite current uncertainty over

the substance of regulation, banks that US$2.5 billion and US$12 billion of
generate a significant proportion of proprietary trading revenues are at risk
revenues from proprietary trading can across the five largest US investment
be certain that they will face significant banks as a result of the Volcker Rulev.
challenges to these revenue streams. The impact of the regulation on foreign
A number of banks including banks operating in the US is not yet
Goldman Sachs and J.P. Morgan clear, but could be even wider than
have already announced the closure initially expected.
or reorganisation of their proprietary
trading desks in response. Indeed, In sum, headwinds from regulation
Accenture estimates that between and market forces are challenging two
key drivers of profitability from the
pre-crisis era. This is leaving banks with
a stark choice: either accept a future
of reduced earnings, or approach
client business with renewed focus
on understanding (and maximising)
client profitability.
Key challenges
Most banks have only limited understanding
of client value
Improved client profitability will be key The challenge is considerable. Accenture The causes of these inter-desk variations
to replacing those revenues previously analysis of a sample of three leading typically differ from bank to bank. That
derived from high leverage ratios and investment banks showed that: said, differences in client types
lucrative proprietary trading desks. (corporate vs institutional), desk-level
Clearly therefore, a key challenge facing 20 to 50 percent of clients in those client data sophistication and
investment banks is that of how to organisations were unprofitable; technology maturity are all common
increase client revenues whilst reducing 10 percent of clients generate over explanations. Each points to an urgent
client cost-to-serve. 80 percent of revenues, on average; need for tailored client servicing
very significant variations in client requirements by desk. It should,
profitability exist between desks. however, be noted that where clients are
trading cross-asset, client profitability
should be viewed holistically, at an
Figure 2: Illustrative Client Revenue Segments enterprise level.
The long tail of unprofitable clients (see

High value; generate >80% net revenues Figure 2) presents some tough questions
Cumulative Client Revenues
to management. Can these profit-

eroding clients be transformed into
valuable relationships? Or should they
Low value; generate <20% net revenues
be terminated in a way that maintains
brand value and reputation?
Erode value;
Erode revenues
value; below
revenues breakeven
below threshold*
breakeven threshold*
*Breakeven threshold to be determined based on core costs

# Clients of annual KYC and credit check
At the same time, the fact that most

banks rely on a small proportion of their
clients for the majority of their revenues
gives real cause for concern. As clients
can easily be lost in such a competitive
environment, banks should be
mitigating this risk by developing a
broader and more diversified client base Of course, many banks have attempted
in tandem with more effective client to address the issue of client
retention strategies. profitability over the years. But success
has been limited. Only a few such
As they move to address these issues, programmes have resulted in any
banks are hampered by the lack of any ingrained understanding of client value
holistic approach to client relationship or, crucially, of the data architecture and
management. Because sales are management information (MI) needed
rewarded according to revenues (sales to support this on an ongoing basis.
credit) and not profitability, the typical They will also have concerns over
view is that any client is a good client. Based on Accentures experience, we top-down approaches to client
Additionally, clients have, until now, believe that a successful outcome portfolio optimisation that ignore
been given little incentive to hinges on banks recognising (and more diffuse aspects of client value
concentrate their share of wallet with addressing) two key implementation (such as flow generated from high-
fewer sell-side providers. challenges from the outset: volume clients and managing client
prospects). Because any successful
Hazy management view of client attempt to address client portfolio
base. Very few banks have the issues must first secure buy-in from
detailed MI needed to understand Sales, the solution must explicitly
their client base. Even fewer have a address these concerns.
data architecture capable of mapping
trade-level client costs to revenues.
This lack of insight into client
portfolios must be addressed before
any optimisation can begin.
Stakeholder scepticism. Because

previous attempts to address this
issue have failed, resistance to
change is a major issue. Key
stakeholders (particularly in Sales)
As clients can easily be lost
have not historically been in such a competitive
incentivised to consider client environment, banks should
profitability or client value, making
them sceptical of client profitability be mitigating this risk by
data especially where it diverges developing a broader and
from the sales credit data on which
their remuneration is typically based.
more diversified client base
in tandem with more
effective client retention
strategies.
Accenture experience has shown the single greatest

obstacle to success in optimising client portfolios is a lack
of senior sponsorship from Sales and Trading
Given the profound challenges facing

banks in this critical area, Accenture
proposes a two-phased solution for
maximising client profitability. The first
Tactical phase is geared to securing
stakeholder buy-in and proving the
case. This provides the foundation for
the second Strategic phase which
establishes a detailed client
segmentation structure, supported by
Our perspective
robust client data, reporting and
Banks must combine tactical and long-term governance frameworks.
solutions to maximise client profitability Phase 1: Tactical

In the short-term banks should focus on
achieving stakeholder sponsorship and
proving the case as the foundation for
a more comprehensive strategic
solution. Accenture experience has
shown the single greatest obstacle to
Figure 3: Client Cost Matrix success in optimising client portfolios is
a lack of senior sponsorship from Sales
and Trading.
High
Clearly, data is key here without

Client-Specific Costs Trade-Level Client detailed trade-level cost data, a true
e.g. Attributed Costs view of client profitability is hard to
Sales costs e.g. Operations, IT, assemble. But management needs to be
Finance costs pragmatic throughout this phase.
See Figure 3
Data complexity
Universal Client Costs Client-Specific Costs

e.g. KYC, credit check e.g. Minimum Sales
margin
Low
High Consensus on cost allocation Low

This dataset can be used to raise a

number of questions with Sales,
providing them with an opportunity to
rectify unprofitable relationships with
light-touch actions:
1 Identify erroneous costs e.g. clients

who are supposed to be e-execution
only and are calling up Sales
and Research
2 Discuss high volume yet unprofitable
Pragmatism in this context means clients with Sales. Are there pricing
beginning with simple data that is tactics that can be taken forward Phase 2: Strategic
commonly agreed upon by stakeholders rather terminating relationships? In the long term, banks should have in
across the business. We propose a 3 Identify marginal clients who may place a robust approach to client
simple methodology that combines be pricing with the bank but not profitability that incorporates focus on
widely accepted client costs (Universal transacting, and identify Total Client Value (TCV), rather than just
Client Costs in Figure 3) and maps these opportunities to improve revenue revenues. This focus must permeate the
against revenues. KYC (Know Your capture entire organisation from
Client), credit check and other management, to Sales and Trading and
indisputable client costs are combined Once there is common agreement on support functions.
to determine a minimum breakeven a set of unprofitable clients, the first
point that can provide a revenue battle has been won, and this sets the In practical terms, this means extending
threshold from which to identify stage for developing a wider-reaching Phase 1 into a sustainable client
known unprofitable clients. Before any segmentation programme. segmentation programme. Using the
discussion of revenues, we recommend minimum breakeven methodology,
gaining consensus on this breakeven revenue thresholds should be agreed
point; rarely will senior stakeholders (and reviewed on an ongoing basis) with
dispute these costs, and once they are varying levels of service, and therefore
mapped against revenues there can be cost, at each level. These thresholds
little room for disagreement. should remain the basis for determining
segments which, at their most basic,
should correspond to those highlighted
in Figure 4.
Figure 4: Identifying baseline segments

Illustrative
Revenue Band Response Proposed Action
> US$100k Protect & Focus on protecting and growing relationships

Grow with the most valuable clients. Premium offerings
High-value include higher sales/client ratios, increased
solution-driven sales, and full access to research
materials.
US$50-100k Industrialise Focus on minimising the cost-to-serve of this
low-revenue client base. Initiatives include
restricting access to high-cost Sales staff,
Low-value referring client queries to a low-cost service
centre. Restriction of trading to e-channels
for eligible products. Restricted access to
research materials.
< US$50k Offboard If client remains in this segment for two

consecutive years, the relationship should be put
Unprofitable into a dormant state (credit checks and KYC
allowed to lapse, uncompetitive pricing, no
proactive Sales contact).
The benefits delivered by adopting a

holistic, strategic approach to client
segmentation include:
1 Client costs reduced: Client cost-to-

serve can be substantially reduced
because costly clients at the bottom
of the value chain are removed
(reducing credit check, KYC, sales and
other enterprise costs), and the cost 3 Refocus on profitability: Internally,
base of low-value clients is minimised banks will benefit from an enterprise
through industrialisation. Lower cost focus on profitability rather than just
channels are mandated, replacing the revenues. Sales can now be
need for expensive salespeople for incentivised to deliver against
this segment. profitability targets rather than sales
2 Client revenues increased: Because credit, and management can benefit
higher revenues carry the promise of from significantly enhanced insights
better service, clients are incentivised into client portfolios, which can aid
to move up the value chain. Sales decision-making and ensure a laser
can positively market to clients the focus on value creation.
advantages of consolidating their
broker relationships so the bank A number of considerations arise from
achieves a greater share of wallet, the proposal to segment clients. We
and the client achieves improved have recommended solutions for these
service. in Figure 5.
Figure 5: Recommended Solutions
Challenge Solution
Salespeople will be incentivised to propose their clients The approach to managing client prospects needs to be addressed in a holistic
in higher value segments to ensure the best service for fashion, to avoid the distorting effects of incentivisation. Revenue targets for the year
Sales
their clients, and potentially secure higher sales need to be agreed and monitored, and Sales staff remunerated not only on sales credit
Incentivisation credits/remuneration for themselves. achieved, but also on meeting pre-agreed sales targets. Senior Sales
management should sign off the assignment of clients to segments.
In determining client profitability, a number of cases A comprehensive exception methodology needs to be developed as part of the governance
for exceptions are likely to emerge. For instance, for client segmentation. Prior to offboarding clients, a number of mandatory checks
Managing a client may be unprofitable at the investment bank should be performed to confirm that there is no profitable relationship with another
Exceptions level, but have a highly profitable relationship with the business line or client entity that could be jeopardised.
corporate banking division that may justify maintaining A robust methodology should be in place, providing clear guidance on how to approach
relationships. such exceptions.
Banks may question the reputational benefits Clients should be made aware of the client offerings at each segment level, including
(and costs) of client segmentation, particularly when an articulation of the benefits of consolidating broker spend and moving up the segment
Incentivising competitors may be less sophisticated and operate ladder. The offboarding process should be kept confidential, and should be executed using
Clients without segmentation. It is therefore important to be the soft-boarding approach outlined above to avoid any negative impact on clients.
aware of the carrot as well as the stick for clients.
Whilst boosting top-line revenues by incentivising As part of the offboarding process, exact targets for cost reduction must be identified
increased client share-of-wallet, there is a risk that and delivered upon. For example, if KYC and credit check costs are identified as a key cost
Realising Cost banks do not complete the process by realising cost saving from offboarding unprofitable clients, then actual savings must be realised in these
Savings savings from offboarding and industrialisation. departments to deliver the overall profitability benefits. Similarly, industrialisation
programmes for the low-value segment will require a reorganisation of Sales staff to
deliver tangible cost savings.
The project was then able to use this

threshold to determine the proportion
of the client base likely to be
unprofitable (with revenues under this
threshold for two consecutive years),
and thereby identify the optimisation
opportunity. As part of this study, the
team developed an Access tool to
consolidate revenue extracts from
multiple desks, regions and systems and
combine this with cost thresholds to
provide concise management reports,
enabling critical management decisions
Having identified the opportunity and

socialised the findings with key
stakeholders in the business, a proposal
for client portfolio segmentation was
prepared, including recommendations
around the client service offerings for
each segment. The project team
In practice
prepared a roadmap for delivering this
Client profitability assessment and segmentation and presented the client
with a robust business case for
strategic portfolio optimisation roadmap the investment.
Benefits delivered
A global investment bank engaged Accenture presented the client with
Accenture to help it understand client a clear view of its client portfolio across
profitability, recommend quick-win asset classes, and a reusable tool for
solutions and develop a roadmap for the consolidating client revenues and costs
strategic optimisation of its client base across desks and systems. The analysis
to enhance profitability across asset confirmed managements hypothesis
classes. Although this client had a concerning the large tranche of
limited understanding of its client base, unprofitable clients, and went on to
management believed that the bank was quantify the optimisation opportunity.
serving a large tranche of unprofitable The project team prepared a robust
and low-value clients. proposal and roadmap for client
segmentation, along with a business
The Accenture team initially focused on case for carrying the project through
investigating the current state of client to delivery and realisation of client
profitability, developing a light-touch profitability enhancement.
methodology that would be readily
accepted by sceptical Sales and Trading
stakeholders. This involved agreeing a
minimum acceptable breakeven point
for a profitable client based on known
client costs of annual KYC, credit check
and attributed sales costs.
Accenture experts
Joakim Mellander
joakim.mellander@accenture.com
+1 917 452 2267
+1 917 539 9266
Thomas Syrett
Paris
thomas.syrett@accenture.com
+33 1 56 52 71 20
+33 6 83 66 03 80
iSource: JP Morgan research note
iiSource: City Fios:
Ronan OKelly
http://www.cityfios.com/pdfs/City_Fios_Standard_Bank_ London
Case_Study.pdf ronan.okelly@accenture.com
iiiSource: Accenture Research, June 2009
ivSelected Banks = HSBC, Bank of America, JPMorgan, +44 20 7844 0155
Citi, BNP Paribas, ING, Goldman Sachs, UBS, Socit +44 79 4671 2749
Gnrale, Deutsche Bank, Barclays, Credit Suisse, Credit
Agricole, Morgan Stanley, Merrill Lynch, RBS, Standard
Chartered, RBC, Bank of Montreal, Bank of Nova Scotia,
CIBC, BBVA, Unicredit; Top 5 Banks = Goldman Sachs,
UBS, Morgan Stanley, BNP Paribas, Merrill Lynch). Note:
Merrill Lynch figures are to 31 December 2008 and are
incorporated into Bank of America figures thereafter.
vSource: Deutsche Bank, company filings and
presentations, Accenture analysis; sum of revenues at
risk at BAC, JPMC, GS, MS, Citi assuming range of 2-10%
2009 core trading revenues derived from proprietary
trading.
Top 10 Challenges
6 Taking Sustainability
Seriously
Although investment banks direct
environmental footprint may be
minimal, their ability to influence the
economywide footprint is unparalleled.
Aside from the direct reputational
benefits; advances in technology,
increasing environmental regulation
and, most importantly, customer
demand, all mean that there is now
a risk-adjusted, profitable business case
for taking sustainability seriously.
Challenge 6: Taking Sustainability Seriously
The business case for J.P.Morgan to

address sustainability is that doing so will
lead to both improved profitability and
responsible corporate citizenship.
If there were no climate change issue, no
sustainability concerns and no natural
resource constraints, it would still make
perfect sense to use resources most
efficiently. Jim Fuschetti, Managing Director of J.P.Morgans Office of Environmental Affairs
Background
Investment banks have an unprecedented
opportunity to finance, and thereby influence,
sustainable behaviours by businesses
and consumers
Properly addressed, sustainability plays a vital role in building
and protecting long-term business value
For an investment bank, sustainability There is an enormous opportunity for

means the ability to combine social, doing so. Estimates vary of the capital
environmental and economic results to required to fund the roll-out of low
make a positive impact both on the carbon technology, however the Green
organisations own future and on Investment Bank Commission estimates
that of the world in a way that builds an amount of 550 billion could be
shareholder value and trust in required for investment in supply chains
the organisation. and infrastructure in order to meet UK
climate change and renewable energy
targets between now and 2020i.
Globally, The Stern Report valued the
level of investment to address climate
change at 1% of global GDP. Recent
analysis finds investments equivalent to
approximately 2% of GDPii,iii. At US$44
billion in Europe, this is significantly
short of the US$329 billion level of
investments implied from the 2% GDP
investment targetiv. Investment banks
have a significant opportunity to bridge
this widening investment
carbon chasm.
Sustainability must focus on strategic

imperatives: growing new business,
optimising and protecting assets,
strengthening the licence to operate It is very important not to
and driving operational efficiency. confuse the idea of being in
Ultimately it is about building trust.
The trust of customers and the trust of business, with the ideal of
government. Provided this focus is being an environmentalist
maintained, investment banks will see
their efforts translate into the creation
and protection of long-term business
value. This is supported almost
unanimously with the findings of the
United Nations Global Compact (UNGC)
and Accenture joint survey which
canvassed the views on sustainability of
Despite financial services being one of over1,000 CEOs globally. 97 percent of
the worlds least carbon-intensive bank CEO respondents consider
industries, banks manage over US$16 sustainability to be very important to
trillionv of investable assets globally. the future success of their business.
That gives them a unique opportunity to Indeed, 80 percent of bank CEOs believe
provide new financial products and that the economic downturn has
meet the demand of businesses and actually raised the importance
consumers from the transition to the of sustainability as an issue for
low carbon economy. top managementvi.
Because banking is such a diverse Sustainability is not a new concept for

sector, any strategic approach to investment banks. Stewardship was the
sustainability will vary according to founding principle on which the
individual banks. But definitions aside, Quakers helped build Friends Provident
sustainability for investment banks is over a century ago. This manifested
fundamentally about delivering the itself in their stewardship funds
right products and services to the right perhaps one of the origins of the
customers, in the right way and at the socially responsible investment
right time. It is very important not to movement. The social investment forum
confuse the idea of being in estimates socially responsible investing
business, with the ideal of being an (SRI) in the US now
environmentalist. Banks are encompasses an estimated US$2.71
intermediaries and within this trillion out of US$25.1 trillion
role, have the opportunity to craft investmentvii, with similar proportions
solutions that meet client needs. Those throughout the UK and Europe.
that do this stand to reap substantial
business and reputational benefits. Fast-forward to todays volatile post-
crisis environment, and sustainability
has a crucial role to play providing
investment banks with a lens through
which they can shape their strategy and
operations to regain public trust and
achieve tangible business outcomes.
These outcomes can be summarised

as follows:
Strengthening the licence
to operate
Rebuilding trust sustainability,
properly embedded, can provide the
foundation for regaining and building
the trust of key stakeholders
(investors, consumers, governments
and regulators).
Increasing and protecting revenues
Unlocking new business opportunities
identifying products and
services that support the transition to
Sustainability is not a separate department and it the low carbon economy, with the
ability to deliver revenues at the same
must not be perceived as such or lower risk than alternatives.
Optimising and protecting assets
Managing environmental and social
risk exposure translating
environmental and social risk
exposure into credit and market risk
Key challenges to guide business/investment
Embedding sustainability to achieve tangible outcomes decisions.
Driving operational efficiency
Streamlining operations identifying
At a high level, one of the principal Although there is no one-size-fits-all how best to streamline the banks
challenges for investment banks is to approach, the best way of ensuring operations, from stripping out
find ways of addressing, and organisation-wide buy-in (and an end redundant processes through to
overcoming, continuing deep-rooted to cynicism) will be to identify which ensuring energy efficiency across
institutional cynicism around this issue. sustainability drivers will impact the the organisation.
business and, more specifically, what
Our experience shows that the best way actions can be taken to create tangible
to approach this is by appointing a and quantifiable outcomes.
senior-level owner of sustainability for
the organisation. But that is only the
first step. Too frequently, where this has Figure 1: Investment Bank sustainability drivers and tangible outcomes
been done, we find that the front Sustainability
office remains largely unaware of any
such initiatives.
Strengthening the licence to operate
The next challenge therefore is to Rebuilding Trust
ensure that awareness of this Research of Dutch investors showed that trust within an listed company can increase the probability of investors buying a
companies stock by 50 percent and raises the share of wealth invested in stocks by 3.4 percentage points vii
commitment is consistently
communicated throughout the business.
Sustainability is not a separate
Increasing & protecting Optimising & Protecting Driving environmental
department and it must not be revenues assets efficiency
perceived as such. Unlocking Business Managing environmental and Streamlining Operations
Opportunities social risk exposure
Financing required transition to low The equity market is beginning to Accenture estimates combined
carbon economy from 2011 2020 for react with studies showing carbon initiatives in Smart Buildings, Smart
UK: is estimated at 550 billion viii efficiency has a meaningful Logistics and Green IT can remove
relationship to asset multiples across between 1 - 2 percent from the cost
companies in carbon intensive bases of most investment banks x
industries ix
This is supported by wider market

statistics. Investments in rolling out low
carbon technologies (including
renewables and energy efficient
infrastructure) have witnessed steady
growth in the past five years, reaching
US$40.2 billion globally for 2009, and
were resilient through the economic
Most importantly, downturn, down only 5 percent on the
record in 2008 of US$42 billionviii.
sustainability is a key lever
in building trust with These findings underline the fact that
customers and government far from being a marketing exercise,
sustainability has an increasing business
impact either through demonstrable
increases in revenue, proven cost
reductions and/or quantifiable societal
benefits. Most importantly,
sustainability is a key lever in building
trust with customers and government.
By understanding and quantifying the
scale of these impacts (for their own
Our perspective organisations and/or for their
The imperative to act on sustainability customers) banks will come closer to
embedding this mindset within the
has shifted from a moral obligation to a organisation and realising the
risk-adjusted business opportunities
robust business case that it creates.
(i) Strengthening the licence

The United Nations Global Compact to operate
(UNGC) Accenture CEO study of nearly The 2010 Edelman Trust Barometer saw
1,000 respondents globally canvassed trust in banks plummet globally. In
C-suite views on sustainability, as the US, banking moved from the 3rd
previously highlighted. CEOs were most trusted to the 3rd least trusted
questioned why there was ongoing industry (of 14)ix. This has recovered
support for sustainability despite the significantly from 2009, as banks have
difficult economic conditions. One taken action like removing under-
reason given for the growing support is performing management, restricting pay
that during such a time of hardship, and repaying bailout loans. These are,
businesses have been forced to examine however, somewhat automatic reactions
closely how their sustainability to the financial crisis. The industry now
activity delivers core business value needs to have a clear direction for how
measured in terms such as cost to build and retain trust now and in
reduction and revenue growth. the future.
A second reason for the growing
commitment to sustainability is cited as
an increasing demand for sustainable
products and services.
(ii) Increasing and protecting

revenues
A recently completed Accenture study
The UNGC Accenture CEO study found forecasts the levels of finance required
that 72% of CEOs cite brand, trust in the EU25 alone that will be required
and reputation as one of the top three from 2011 to 2020 to finance the
factors driving them to take action on transition to a low carbon economyxii,
sustainability issues.x expected to be an order of magnitude These assets have traditionally been
greater than the than that of the funded from the public purse; however
Looking ahead, further regulation will internet and telecom revolutions of the with governments under significant
create a vicious circle, where 1990s. Similarly, the Green Investment pressure to reduce sovereign debt, the
responsibility and innovation will not be Bank Commission estimates an amount funding burden will be transferred to
supported, and bankers will spend of 550 billion could be required for the private sector. As these technologies
more time finding loopholes which investment in supply chains and mature and stable government policy is
will necessitate further regulation. In infrastructure in order to meet UK implemented, all these investments
this environment, although no climate change and renewable energy will be in businesses and infrastructure
guarantee of success, a strong targets between now and 2020xiv. that are secured by assets, with cash
reputation will provide banks with a A significant amount of this capital flows that will provide an expected
fundamental licence to operate. This invested will be funded through the return that can be risk adjusted (similar
provides strong incentives for ethical banking system. The opportunity for to the alternative investments made by
behaviour across the industry, with a investment banks is enormous when investment banks today). There is no
view to embedding responsibility and thought of at a global scale. As an such thing as green investment, there is
self-regulation. example of the instruments required only investment.
HSBC provides an example of what this for the purchase of low carbon assets (iii) Optimising and protecting assets
can mean in practice. Outgoing banks could provide bond issuance, Some investment banks have already
executive chairman, Stephen Green, integrated project finance, launched significant programmes
vigorously re-enforced the banks public asset-secured debt and loans, unsecured focused on valuation correlation for
commitment to be a leading brand in loans and/or asset leases. carbon intensive sectors. Goldman
sustainability and this objective remains Sachs GS Sustain initiative is one such
core to its strategic aims. HSBCs This level of investment is expected to initiative. Providing an objective,
success in rebuilding public trust saw it enable CO2e emission savings that will quantifiable framework linking the
surge up Fortunes Global 500 bring the EUs 2020 emissions on track impacts of structural trends in the
Accountability Rating reaching third to meet its targeted 20 percent carbon global economy, society and
place in 2008, up from 43rd place emissions reduction by 2020. environment on global industries to
in 2006. investment conclusions on a sector-by-
Additionally, cost savings from the sector basisxvi, this recognises the shift
reduction in energy consumption and in environmental and social pressures,
emissions are forecast. Outside the low as well as the expectations of investors
carbon technology sector, Deutsche on companies to address these issues
Bank estimates that water infrastructure and report on their performance.
globally will require up to US$22 trillion
of investment up to 2030xv.
More broadly, banks face substantial

social and environmental risks in the
management of their loan and
investment portfolios. And while the
tools needed to help manage and
quantify this risk are not there yet, they
are definitely on the way. Guidelines
such as the Equator Principles and UN
Principles for Responsible Investment (iv) Driving environmental efficiency
have now secured mainstream Finally (and perhaps most relevant in
acceptance. And while much work the current economic climate),
remains to define how these are applied, sustainability can provide valuable
both frameworks provide a set of enterprise-wide focus for rapid and
protocols for incorporating sustained cost management.
sustainability issues into funding From working with clients in parallel
decisions. industries, and taking into account
investment bank cost bases, Accenture
Investors are also focusing on material estimates that combined initiatives in
issues of sustainability, in particular Smart Buildings, Smart Logistics and
climate change especially since some Green IT can remove between 1-2
estimates suggest that as much as percent from the cost bases of most
40 percent of some companies EBITDA investment banksxix. It is of course
could be at risk from emerging essential that banks do not jeopardise
carbon constraintsxvii. Investors worth their ability to operate and respond to
US$65 trillion in assets under clients through reduction in operating
management have demanded greater capacity. This is about removing low
disclosure of carbon emissions level inefficiencies in the business.
performance through the Carbon Getting this right will support
Disclosure Project (CDP)xviii, who collect, building trust and maintaining the
distribute and motivate companies to licence to operate.
take action to prevent dangerous
climate change. To sum up, far from being a marketing
exercise, sustainability has an
increasing and demonstrable business
impact. Indeed, it stands out as a vital
component in building and protecting
long-term trust and business value. As
such, instead of treating sustainability
initiatives as nice to haves,
disconnected from their core business,
investment banks are starting to view
them as tangible, risk-adjusted business
opportunities.
Accenture conducted a study that

highlights the capital required to
support the transition to the low carbon
economy. A robust model was built that
identifies the technologies that will be
implemented and their corresponding
financing requirements. This is further
supplemented by the financing
instruments required to channel
funding to both the developers and
purchasers of low carbon technology.
In addition the study quantified the
emissions reductions and amount of
cost savings that result from the
roll-out of the low carbon economy.
Benefits to the client and Accenture

This seminal report demonstrates
leadership in facilitating the transition
to the low carbon economy. Key
stakeholders can be quickly and easily
engaged to understand the level of
In practice financing required and the emission
Accenture report with a global financial reduction potential from the roll-out
of the low carbon technologies
institution quantifying the role of banking in identified. Additionally there is a deep
understanding of the barriers in the
the transition to a low carbon economy provision of funding for the roll-out
of this low carbon technology, and
more importantly, an understanding
Figure 2: Financing initiatives that are expected to be employed to channel of how these financing barriers can
funding to enable the roll out of low carbon technology. be overcome. Figure 2 highlights some
of the outputs on the model and
highlights the financing initiatives that
Carbon reduction are expected to channel the funding
potential L
required to accelerate roll out of low
carbon technology as part of the
Strong commercial potential transition to the low carbon economy.
(market demand & banking capabilities alignment)
110%
High
9 List of considered financing initiatives

8
Public Markets
7 1
8 Green bonds - Low carbon labelled bonds available to
wide range of investors and eligible for tax benefits
Applicable market potential for C&I bank
14 10 LCT ETF & Index - Financial exposure products to Low

3 Carbon Technology debt / equity
Direct capital provision
73%
Medium
10
7 Energy Efficiency Lease - Energy cost-savings used to
calculate repayment of LCT lease and loans
13 3 Tax-equity/debt schemes - for direct investments in
4 15 2
large scale renewables infrastructure
9 VentureCapital Investment arm - LCT tailored venture
11 capital funds (owned by banks) supported by
12
matched & capped government funding
5 Advisory services
6 2 LCT Sector Research - Dedicated & customized
Investment banking and research services for
Low
35%
Low Medium High
LCT sector
70% 120%
20% 15 LCT IPO Services - Dedicated M&A and IPO servicers
for companies in the low carbon technology sector
Asset & Wealth Management
1 Tax-credit LCT investments - Low carbon technology
dedicated debt / equity investments qualifying for
capital gain tax credits
Accenture experts
i Green Investment Bank Commission report, available at this paper please contact:
http://www.climatechangecapital.com/news-and-
events/press-releases/green-investment-bank-
commission-report-ccc-e3g-joint-announcement.aspx Peter Lacy
ii Accenture analysis, based on capital requirements
presented in GIBC
iii "Cost of tackling global climate change has doubled, peter.lacy@accenture.com
warns Stern", The Guardian, June 2008
iv Bloomberg New Energy Finance
+44 20 7844 3427
v New York Times, June 2010 +44 75 0010 2928
vi United Nations Global Compact (UNGC) Accenture CEO
Survey, July 2010
vii Social Investment Forum, available at Shaun Richardson
http://www.socialinvest.org/resources/sriguide/srifacts.cfm London
viii Bloomberg New Energy Finance
ix 2010 Edelman Trust Barometer, available at
shaun.a.richardson@accenture.com
http://www.edelman.com/trust/2010/ +44 20 7844 4982
x United Nations Global Compact (UNGC) Accenture CEO
+44 79 1033 0933
Survey, July 2010
xi Fortune Global 500 Accountability Rating
xii Accenture analysis Justin Keeble
xiii Accenture analysis
xiv Green Investment Bank Commission report, available London
at http://www.climatechangecapital.com/news-and- justin.keeble@accenture.com
events/press-releases/green-investment-bank- +44 20 3335 0682
commission-report-ccc-e3g-joint-announcement.aspx
xv WBCSD Vision 2050 report available at +44 78 1800 1688
http://www.wbcsd.org/Plugins/DocSearch/details.asp?Doc
TypeId=33&ObjectId=Mzc0MDE
xvi GS Sustain: Goldman Sachs Change is coming:
A framework for climate change a defining issue of
the 21st century May 2009
xvii GS Sustain: Goldman Sachs Change is coming:
A framework for climate change a defining issue of
the 21st century May 2009
xviii CDP 2010 Global 500 Report available at
https://www.cdproject.net/CDPResults/CDP-2010-
SP500.pdf
xix Accenture experience and analysis
Top 10 Challenges
7 Delivering Valuable
Transformation
In the wake of the financial crisis,
investment banks are undertaking
large-scale programmes to deliver
transformational benefits and build
market share. Additional impetus for
these initiatives comes from ongoing
regulatory reform, with further impacts
looming in both the EU and US.
However, the results to date are mixed,
with much duplication of effort,
conflicts between initiatives and
wasted resources.
Challenge 7: Delivering Valuable Transformation
You can have the best vision in the world,

but if you cant put it into effect, you are
wasting your time. Success in business is
25% strategy, but 75% execution. Accenture
Background
Most investment banks have mixed
track records where large-scale change
programmes are concerned
According to Accenture research, There have been and continue to be
leading investment banks each spent an multiple motivations for these
average of US$570 million on transformation programmes, including:
transformational change the bank
initiatives during 2010. The same Emerging market growth:
investment profile is predicted for 2011, Achieving business growth ambitions
indicating that changes promised in emerging markets
during the crisis have not been Post-merger integration:
delivered. Furthermore, some banks are Realising the benefits from bringing
still awaiting tangible benefits from the capabilities of multiple businesses
the investment they have committed together
to date. Cross-asset views and services:
Developing consolidated client level,
cross-asset records to support
portfolio optimisation and to focus
on client needs
Cross-asset distribution:
Enabling cross-asset distribution from
global markets divisions to banks
private, corporate or retail banking
customers
Enhance risk management:
Strengthening risk monitoring
infrastructures in response to broader
and more intricate regulatory
demands
With an increasing focus on their cost base as well as the

expectation to deliver on promises made in tougher times,
there are multiple challenges that banks must face and
overcome to accomplish their aims
Finance transformation: Improving

control and performance within
product control and general finance
One Bank initiatives:
Standardising products, services,
technology and processes across the
bank, on a global scale However, wherever the motivations for
Post-crisis regulatory change: change programmes originate within
Responding to the regulatory banks, current investment profiles
tsunami, highlighted by OTC suggest banks ambitions to realise their
Derivatives market reform and stated benefits within the required
Basel III timeframes exceed their ability to
deliver. With an increasing focus on
This broad sweep of factors may be their cost base as well as the
broadly framed across two dimensions; expectation to deliver on promises made
those incentivised by increasing in tougher times, there are multiple
revenues or decreasing operational challenges that banks must face and
costs, and those caused by regulatory overcome to accomplish
pressure. their aims.
Figure 1: Transformational programme drivers
Post -merger
Emerging market
integration
growth
Cross - asset views

Revenue
and services
Benefit Delivery
Cross -asset Enhanced risk

distribution management
Finance
transf ormation
Cost
One Bank Post-crisis

initiatives regulatory change
Low High
Regulatory Pressure
Few bank transformation programmes have achieved

acceptable returns on investment.
Few bank transformation programmes

have achieved acceptable returns on
investment. Objectives for these efforts
are typically overly complex, with
benefits poorly defined and difficult to
measure. To improve the performance
of future programmes, banks will need
Key challenges
to address some or all of the following
Satisfying the regulators while continuing to challenges:
satisfy shareholder expectations Leadership and Governance

Programme sponsors are clear though
lower level responsibilities for
The investment banking industry is in project delivery and task completion
flux, with ongoing change a fact of life are not uniformly appreciated
for all participants. In this environment, Ownership of project activities,
the overriding challenge for banks is to including functional contacts, IT leads
stay abreast of developments and and business SMEs are not
implement co-ordinated change consistently understood
programmes that comply with There is often a lack of ongoing
regulation and, wherever possible, boost prioritisation of project activities or
performance. change requests by the business
Change managers fail to engage with
broader programme objectives
A lack of drive to meet timescales in
some areas, with delivery dates
missed
Benefits Realisation
An absence of clarity around how
projects deliver business impact
beyond being broadly valuable
Uncertainty as to whether long term
business requirements are being
comprehensively met
Unclear linkage of architecture
workshop activities to business
projects and how requirements are Misalignment around objectives
feeding into IT, who are often already between project stakeholders can
working on their future state drive a perception of slow delivery,
architecture which may not reflect actual
progress
Delivery Focus Project lists defined in the initial
A reliance on a small number of strategy phase not being tested on an
individuals for SME input who do not ongoing basis, preventing uniform
have sufficient capacity to complete agreement on the programmes
all requested tasks and may not priorities
even be the person closest to the Uncertainty around which individuals Methodology
issues at hand should be consulted for Programmes not having the flexibility
Unclear product scope that hampers requirements input and SME insight to accommodate developments in
high level objective setting and a rapidly changing business and / or
development of the ultimate solution Departmental and Regional Silos regulatory environment
Business functions and regions are Project individuals are not sure what
involved in projects to varying artefacts are required and by when
degrees and inconsistently Different projects employ different
Change initiatives are often launched communication tools
at departmental level with no Not all projects have documented,
overarching framework for formalised, signed off and
coordinated delivery communicated objectives, approach
Some projects are not making and scope
sufficient progress due to a lack of
engagement with key SMEs and
business functions
For change programmes to

realise their objectives and
deliver business benefits,
business-led, empowered Continuous and intensive
communication ensures that the
leadership is essential stakeholders proceed to the next
commitment level and ultimately
maintain full commitment to the
programme. Poorly executed
communications remain the number
one cause of transformation failure.
Before a specific audience group is
convinced by a change, it will go
through different stages, as shown in
Figure 2. For each commitment stage,
Our perspective
there are different outcomes possible,
Strong business-led project management is i.e., progression to the next stage
or regression to a negative
essential to effective change programmes commitment level.
For change programmes to realise their Subsequently, portfolio-based

objectives and deliver business management ensures stringent
benefits, business-led, empowered oversight on the value for money
leadership is essential. Programmes delivered by the project and provides
unable to secure this run a high risk the ability to take aggressive corrective
of failure - even where there is full action when problems occur.
commitment and involvement from The checklist for a successful
middle management, authority to transformation programme should
drive through large scale change will comprise the following actions:
be lacking. COMMITMENT
Acceptance and personal
Portfolio-based investment Figure 2: Stakeholder commitment ownership of the change
t i
mm
management of the project should

Co
deliver the best results. This requires a

portfolio manager to allocate funds out
to projects based on delivery of interim
e
milestones, rather than a more cat BUY IN Change
Edu
Level of Commitment
traditional approach of allocating entire Buy into the goals of Aborted

Inform the change journey
budgets at the start of the financial
UNDERSTANDING
year. This approach will lead to regular Understanding of the nature
draw down of funding during the year, AWARENESS
High-level awareness and intent of the change
predicated on demonstrating that of the content and content
tangible progress has been made. of ther channel journey Resistance
Negative Perception
Confusion
Time & Effort

Source: D. Conner Managing at the speed of change (1993)
Provided the change framework and supporting systems are

Senior and visible business in place, banks will be able to adapt these as necessary to
sponsorship; business sponsors must
remain engaged throughout the
ensure rapid responses and seize first-mover advantage
lifecycle of the project to maintain
effective business prioritisation
against other projects competing for
scarce resources
Development and circulation of a
business benefits roadmap (building
on the high level roadmap from the Initiating transformational change in
initial strategy phase), based on such a volatile environment is
detailed requirements to ensure challenging. For those leading these
transformation objectives and programmes, it is important to
benefits are measurable and easily emphasise that change should be
understood by all delivered incrementally, rather
Identification of quick wins and early than through a big bang approach.
benefits helps to gather and As well as helping to secure enterprise-
sustain momentum wide acceptance, phased
Clearly defined accountability for implementation allows for ongoing
delivery, including performance flexibility. Such flexibility is particularly
objectives aligned with bonuses and essential when the mid-term regulatory
pay that reflect successful outlook remains unpredictable. Provided
transformation outcomes the change framework and supporting
Staff retention schemes for key systems are in place, banks will be able
project members, as appropriate, as to adapt these as necessary to
the employment market recovers ensure rapid responses and seize first-
Embedded flexibility in the mover advantage.
transformation programme to
withstand a rapidly evolving Finally, banks should actively seek out
regulatory and business landscape ways in which direct business benefits
Cross-departmental steering can be derived from any changes that
committees and forums to ensure have to be made, whether for
senior management have visibility of regulatory reasons, or through
all initiatives and can therefore operational restructurings and
recognise potential duplications, reorganisations.
conflicts or synergies
Integration of all geographies and
business lines involved in the
planning and business case
generation to enhance buy-in and
commitment
An appreciation of local complexities
from legal, tax and compliance
standpoints. One size fits all will not
always deliver a valuable outcome.
Guided by the strategy and current state

understanding, the team developed the
Target Operating Model to deliver the
programmes objectives, and a robust
business case needed to secure funding
and measure benefits realisation during
transformation. At every stage,
representatives from the principal
global centres were invited to provide
In practice
input to ensure regional buy-in and full
Driving through a focused business visibility of local complexities.
case for change Governance structures, communications

plans and benefits tracking
frameworks were put in place and
A global investment bank needed a new a programme office set up to project
front-office operating model to help manage prioritised initiatives. An
it defend and grow market share incremental delivery approach was
through globalisation and business followed, providing flexibility and the
harmonisation. The intended opportunity to deliver quick wins.
transformation was designed to deliver This approach was designed to build
US$200 million of benefits over momentum by realising benefits
three years through revenue protection throughout the programme lifecycle
and reductions in cost and rather than in a big bang style at the
operational losses. end. Transformation objectives were
prioritised to form programme
The bank asked Accenture to help it to initiatives, which were assigned
define the strategic vision for this measurable benefits and owners
initiative and deliver a new Target accountable for their delivery.
Operating Model. With senior business The initiatives were designed to
sponsorship from the global front office conclude within 12 months to tie in
COO and CFO, the project team with the bonus cycle.
began by convening a series of
workshops with key stakeholders across Benefits delivered
the business to identify current On completion, the bank benefited from
constraints and develop an overall improved client service and sales
strategic vision, providing the effectiveness at a global level, as well as
foundation for the planned reductions in cost, operational risk
transformation. and complexity. Above all, the delivery
approach allowed the bank to achieve
its strategic objective within 12 months,
delivering a return on investment in
excess of the business case baseline.
Accenture experts
Laurie McGraw
laurie.a.mcgraw@accenture.com
+1 267 216 1313
+1 917 687 7237
Suresh Kanwar
suresh.kanwar@accenture.com
+44 20 7844 8177
+44 77 7551 7627
Rob Deakin
London
rob.m.deakin@accenture.com
+44 20 7844 1191
+44 79 8057 5954
Top 10 Challenges
8 Harnessing Innovative
Technologies
Although innovative technologies
create exciting opportunities for
accelerating speed, efficiency and
profits, the challenge for investment
bank CIOs is increasingly: How can we
leverage maximum value from our new
technology investments by harnessing
them for the benefit of the whole
business?
Challenge 8: Harnessing Innovative Technologies
Cloud computing... is building serious

momentum on Wall Street Wall Street & Technologyi
Background
Harnessing new technologies for the benefit
of the entire enterprise
Industry leaders are using new technologies to enable
interdependent business functions, from front-to-back trade
processing to enterprise risk management.
Investment banks rely on advanced By concurrently enabling

technologies in the front office to interdependent business functions, such
enable high-speed, high-frequency as risk management, settlement and
trading. Until now, the upfront benefits financial reporting, these technologies
from this activity have been so are transforming the way organisations
enormous that the complexity and think, react and operate.
inefficiency of post-trade processes and There are a number of reasons for
systems have often been overlooked. this trend:
That is changing fast. The highest Management is demanding

performing investment banks are now integrated, proactive technology
using their front-office technologies in infrastructures that can anticipate
bold, innovative ways as a source of the impact of new market and
competitive advantage for the whole regulatory developments
business. CIOs are under mounting pressure to
get a return on their massive
investments in technology by using
these assets to drive down costs, as
well as driving up revenues
(traditionally the principal focus for
front-office technologies)
This increasing emphasis on ROI
means CIOs need to develop flexible
IT assets that, by adapting to business
change, can appreciate in value
over time.
Advanced elastic path optical networking, deployed in

virtualized networks, is being used to settle trades across
borders, regions and global market centres
We see the industry leaders adopting a

portfolio approach to their technology
investments demanding the best
possible return from them, both as
standalone assets and as part of an
integrated capability.
These organisations are leveraging These new technologies, historically

pioneering technologies to powerful sewn into front-office applications, are
effect, creating a renewable source now being harnessed for the benefit of
of business benefit from new toolkits the middle and back office, and on a
comprised of flexible architectures, larger scale, to drive the global
virtual networks and genetic infrastructure in various innovative
programming. ways, including:
Thinking machine algorithms,

underpinned by morphic
architectures, are being used to bring
risk management into the front
office, enabling pre-trade analytical
decision-making
Advanced elastic path optical
networking, deployed in virtualized
networks, is being used to settle
trades across borders, regions and
global market centres
Cloud computing, combined with
multi-core graphics processing units,
is being used to reduce the surging
cost of adding new hardware to cope
with geometrical increases in
data volumes.
The CIO has a tough remit: boosting the profitability of the

application portfolio by melding revenue-driving technologies
with those that are designed to reduce costs.
While the trading systems architects

are wrestling with these intensity
challenges on a functional level, the
enterprise architects are combating
escalating data management
requirements across the bank,
attempting to drive scale efficiencies
from mature technology investments.
In other words, the CIO has a tough
remit: boosting the profitability of the
Key challenges application portfolio by melding
revenue-driving technologies with those
Doing more and doing it more profitably that are designed to reduce costs.
Or to put it another way, as well as

Investment bank CIOs are struggling to being expected to do more with less, the
cost-effectively build and maintain investment bank CIO must also start to
applications that can provide both demonstrate a return on existing and
compute and data intensive processing. new technology investments.
The difference between the two refers
to the timeframes within which data
is processed. The first type involves
using large amounts of computer
processing cycles to act on data at
different times during a trading day;
the second type involves processing
data continuously throughout the day;
for example:
compute-intensive processing is
applied to macro stress-test an entire
set of client portfolios in one day, and
data-intensive processing is applied
to analysing pre-trade data many
times per second with as little latency
as possible.
The crux lies in effectively integrating new front-office

technologies with systems across the rest of the organisation
to transform business efficiency, effectiveness and insight
while dramatically driving down the costs of complex
technology renewal.
In todays environment, investment

banks must continue to use emerging
technologies in a much more
Our perspective
convergent manner to drive
Successfully leveraging a portfolio improvements in pre-trade analytics,
enterprise risk management and
approach to technology investments aggregate trading profits.
The crux lies in effectively integrating

new front-office technologies with
systems across the rest of the
Figure 1: Emerging Technologies for Risk Management organisation to transform business
efficiency, effectiveness and insight,
Sources Data Management Storage Valuation Risk Assessment Analytics Reporting
while dramatically driving down the
costs of complex technology renewal.
This will provide vital functions (Risk
Federated / Multi Channel
Data Servicing Provisioning Processing Cubes
Dynamic Risk Portal
Management, for example) with the
CMS Clearing
processing power and flexibility they
EMS Finance Factory need to analyse vast quantities of
Risk Management
Reference Data
CEP Web enterprise-wide data and the agility
Trades
they need to adapt to business and/or
E - mail
regulatory change.
High Speed Messaging >>
Reporting
High Speed Messaging >>
Counterparty Data
Network
Position
Security Master Web
E - mail
Service Supply
Reporting
Chain Governor
Network
Source: Accenture
Once they start to use technologies

in a convergent manner, investment
banks will be able to generate a single
version of the truth, a vital resource for
enhanced internal efficiency and for
external competitive advantage.
Crucially, by following this approach,

bank CIOs will be able to analyse their
technology portfolios, before rapidly,
flexibly, and cost effectively making
whatever adjustments are needed to Provided the following building-blocks
drive maximum value. That way, they are used, we envision a future-state
will consistently demonstrate ROI from architecture that amplifies the
their technology investments, as well historically point benefits of these
as helping the organisation to work technologies to the span of the
harder, smarter and more efficiently. entire enterprise:
The foundation for these

applications must be rooted in
flexible, morphic computational
architectures
The methods used to develop,
deliver and maintain these assets
should respond well to a complex,
adaptive environment where
hardware, software and
networking are becoming more
fluid and interwoven
The assets must be continuously
monitored to assess their ongoing
contribution to business value.
The traditional Value-at-Risk (VaR)

calculations had used Monte Carlo
methods to determine probability
distribution and confidence intervals.
However, in order to calculate VaR on
the most exotic derivatives (e.g.
Himalayan options), the group needed
to execute Monte Carlo (for VaR) on
top of further Monte Carlo simulations
(for instrument pricing). The number
and complexity of calculations had
become computationally prohibitive,
even when the latest technologies
(including grid computing and in
memory data caching/fabrics) were
In practice
employed. See Figure 2.
Integrating the power of analytics in the
Accenture was asked to solve three
cloud with Monte Carlo simulations variables:
Create a working prototype of an
advanced valuation methodology that
A leading investment bank required an replaces nested Monte Carlos with
elegant solution to a very challenging a unique solution
(and commonplace) problem. How to Prove that the new method achieves
price and value increasingly complex VaR calculations with the same
portfolios rapidly, accurately and cost statistical confidence
effectively? Develop a Point of View on how
emerging technologies can be
employed to drive a quantum leap in
computational efficiency for
Activies risk analytics.
Model Changes to
reduce compute time
Figure 2: Model selection for optimal performance
Model selection for
optimal performance
Historical
Market, Liquidity/ Volatility
Counterparty Reports VaR
Sample Size
Stochastic Volatility
Reports
Parameter Tuning
Portfolio VaR
Monte Carlo
Heston
Risk Matrices
Implied Volatility Sample Size
Derman & Kani
Counterparty Credit
Market Data
Hardle
Sampling Rate Liquidity
Dupire
Reports
Pricing Models
Interpolation methods
Merton P&L
Bootstrapping 1-factor
2-factor
Calibration Parameters
3-factor
Focus Areas
Heath, Jarrow Morton
Benchmark Rates
Parameter Tuning
Interpolation Methods
Source: Accenture.
The Accenture team used a newly-

developed proprietary solution,
MonteCloudo, a software library that
integrates the effectively limitless power
of cloud computing with
Monte Carlo simulation. Handling all The benefits were clear-cut, spanning:
cloud-related technical aspects of the End-user productivity fast and
project (from provisioning and accurate decisions
management to result collection and Low entrance barrier to cloud no
visualisation) MonteCloudo enabled the need to know about cloud
client to focus on modelling and implementations
parameter setting, hugely accelerating High Performance dynamic
the speed and effectiveness of the resource allocation and load
simulation. See Figure 3 balancing.
As a result, the Accenture team

delivered a working prototype for
pricing complex derivatives over Figure 3: Option Pricing Case Study
multiple states and time horizons.
Because it harnesses the power of cloud Option Pricing Engine
computing, MonteCloudo enables the European option
The maths?? Symbols
bank to switch computing capacity GARCH model for stochastic volatility
on and off as needed. Instead of Two random variables: W t and Y t
demanding further investment in
expensive technology hardware, this Case study for correctness check
compute-intensive project used Option name: Marks & Spencer Name of option Marks & Spencer
analytics in the cloud to get Option type Call Option
Type: Call option
Strike Price () 130
the results it needed, quickly and Option price: $63.500 Start Date 15/11/00
cost effectively. Result of calculation: $63.389 Expriry Date 29/12/00
10,000 time intervals Interest rate 6
Run the simulation until the expected error is 0.133542407
lower than 0.5% of the estimated option price 0.43208172
(w/ 99% confidence) 2.271729357
Source: Accenture
Accenture experts
Lloyd Altman
lloyd.altman@accenture.com
+1 917 452 0004
+1 917 514 1655
Kristina Klapper
Senior Executive, Frankfurt
kristina.klapper@accenture.com
+49 61 73 94 67306
+49 17 55 76 7306
Scott Reed
iWall Street & Technology, 2 December 2009
New York
scott.reed@accenture.com
+1 917 452 0020
+1 516 655 4121
Top 10 Challenges
9 Engaging Effectively
in Emerging Markets
Many investment banks and their
clients - have identified emerging
markets as a key part of their strategy
to grow revenues in the future. To make
the most of these opportunities, banks
must identify targets that go further
than just those experiencing rapid
growth, to identify sustainable
opportunities for the long term,
including, but not limited to talent
availability, infrastructure investment,
regulatory environments and
competitor concentration.
Pinpointing the requirements needed
for successful, sustainable and
profitable entry, and then incorporating
these objectives into a truly global
operating model will determine
future success.
Challenge 9: Engaging Effectively in Emerging Markets
The future belongs to the

emerging markets. Euromoneyi
As emerging markets move out of

poverty, then double and double again
their GDP, they have the real potential
to drive growth and revenues for
investment banks. These opportunities
are in direct contrast to developed
markets, weighed down by economic
uncertainty and stifled by intense
competition; emerging markets are
identified as a key component of banks
future growth strategies.
Looking ahead to 2011, the

attractiveness of these markets can only
grow. Banks have aggressive growth
targets in place for boosting returns on
equity targets that simply cannot be
met solely through operations in mature
Background markets. At a higher level, global
economic growth will be concentrated
The quest for superior returns in emerging markets, where the middle
Seeking opportunities for revenue growth, many investment banks classes are now bigger than the
consumer base in developed markets.
have sought, or are actively seeking, to build offices and branches in a In India alone, the middle class
wide range of emerging markets. (already 180 million strong) is forecast
to grow by 10 percent each year. With
increasing amounts of income available
Prior to the financial crisis, investment to invest, these consumers will drive
banks typically achieved returns on higher demand for financial services,
equity of 20 percent or higher. Now, both as individuals and through the
they are struggling to generate returns demands they place on companies,
of 15 percent in the post-crisis which will be meeting their consumer
operating environment. In a world demands. The result is new business
where leverage is going to be held to opportunities for banks across multiple
more conservative levels and proprietary sectors.
trading more limited, banks are
naturally seeking growing economies The priority for banks now is to ensure
where their services will be in demand, that their global strategies fully
and that usually means targeting incorporate opportunities presented by
emerging markets. emerging markets, while providing the
flexibility needed for newly established
Figure 1: Emerging Market GDP per capita growth operations in these markets to
US$ per capita generate returns on investment.
25,000
GDP per capita 2007A
GDP per capita 2007A
20,000
15,000
10,000
5,000
0
ia
a
a
ile
a
sia
ico
ia
n
e
a
ka
ey
il
d
di
in
re
in
na
in
ss
az
ric
lys
an
Ch
an
rk
ne
In
Ch
ex
Ko
ra
nt
Ru
et
Br
Af
ail
ala
Tu
iL
Uk
do
M
ge
Vi
Th
h
Sr
M
In
Ar
ut
So
Source: IMF, World Economic Outlook Database (April 2009), Accenture analysis
1. Rigorous target market selection

Target markets must be subjected to
Key challenges rigorous competitive and cost benefit
Developing relevant, coordinated offerings analysis, with clear milestones in place
for progress review and close
management of ongoing business
Where their emerging market strategies development. Indeed, whilst GDP
are concerned, most investment growth is an important economic
banks have reached base camp. But very indicator, it rarely correlates with the
few have progressed much further attractiveness of a market for
and only a handful have deployed an investment banks and it should only
integrated emerging market strategy. be taken into consideration along
with the availability of talent, ongoing
As they seek to take advantage of these infrastructure investment, government
new opportunities, banks will face a policy regarding foreign investment and
number of strategic, operational and the ability to translate global strengths
cultural challenges: locally, in order to identify successful
targets which can and should lead to
focus on some unexpected countries.
Given the high (and growing) level of regulation surrounding

the banking industry, an invitation from the host government
is critical in order to mitigate and correctly ascertain cost and
resource issues.
2. Market-relevant products 3. Integrated operating models

Banks must invest in researching and Emerging market offices and branches
developing market-relevant products must be properly integrated into the
that mesh precisely with client business, not run with bespoke
demand both new local clients and operating models (which can lead to
current clients expanding greater risk, higher costs and reduced
internationally. These will inevitably oversight by senior management).
differ (often dramatically) from The infrastructure supporting the
developed world products. Service emerging markets business must be
levels may need to be much higher, continuously checked to limit non-
for example, with face-to-face standard systems and tools.
interaction often an essential
consideration. 4. Regulatory awareness
Careful strategic planning will be
needed as regulatory requirements in
particular markets vary hugely, and
may be subject to rapid change.
Given the high (and growing) level
of regulation surrounding the
banking industry, an invitation from
the host government is critical in
order to mitigate and correctly
ascertain cost and resource issues.
Companies often need to go to multiple markets to find what

they need, be it talent, capital or technology.
Create geographic options

High-performance banks proactively
and continually explore new geographic
sources of value. They constantly look
outward, sensing their business
environment (and that of their clients)
and making focused choices about
where to compete and whom to engage.
No two markets are the same.
Companies often need to go to multiple
Our perspective markets to find what they need, be it
Setting the stage for successful growth stories talent, capital or technology.
Lessons from high performers:

Evidence from our research Reach out to potential clients in
demonstrates that high performance overseas markets with new business
banks distinguish themselves with a models, channels and infrastructure
globalization strategy that is conceived investment that unlock otherwise
and executed in a new and consistently latent demand.
different way. They discover new Source talent wherever it may exist
fulcrums of growth, cost efficiency and geographically, as well as from
risk management, develop them and sectors of the population that may
work them into the fabric of their have been overlooked previously,
businesses. Across all dimensions, such as women and rural workforces.
high-performance banks are guided by Identify emerging centres of
three central maxims: excellence in different technologies,
products and processes around
the world.
Build resource input security via term
contracts, upstream acquisitions
and investment in diversified
geographical sources to minimize
cost fluctuations.
Improve access to capital and
diversify risk by updating knowledge,
relationships and financing models
to reflect the new map of global
investment flows.
Be authentically local
Although searching for value in
emerging markets is a cross border task,
unlocking that value is a local exercise.
As tastes, customs, regulationsand
political environmentsdiffer widely; Network the organization
high performers embed themselves with Acting on knowledge from around the
full commitment in their chosen local world and executing company strategy
and regional markets as they execute in multiple locations requires the ability
their strategies. to transfer people, resources, capital
and know-how to the right places at the
Lessons from high performers: right time. Creating organizations that
Identify critical local differences in are permeable, both internally and
client preferences and usage and, in externally, enables flows of people, ideas
response, tailor products and services and best practices.
to new client segments.
Develop and mould local talent for Lessons from high performers:
today and tomorrow by investing Create structured channels to allow
across the skills spectrum. rapid diffusion of ideas and
Embed innovation activities into local knowhow across geographic regions.
research and development and Build a global backbone of
consumer environment, working in standardized data, systems and
tandem with industry peers processes.
and policymakers. Ensure global leadership to cultivate
Optimize resources strategy under a global mindset from the top down.
differing economic, cultural and
regulatory constraints across markets
and harness incentive regimes,
such as carbon trading, for current
and new business. Figure 2: Three maxims for emerging-market growth
Be willing to draw on a broad suite of
investment models tailored to the New clients Talent Innovation Resource Capital
characteristics of different markets. Sustainability
Reach out to Source talent Identity emerging Build resource input Improve access to
potential clients wherever it may exist centera of excellence security via team capital and diversity
in overseas markets geographically, as in different contracts, upstream risk by updating
Create with new business well as from sectors technologies acquisition and knowledge
models, channels of the population products and investment in relationships and
geographic and infrastructure that may have been processes around diversified financing models to
options investment that overlooked the world geographical sources reflect the new map
unlock otherwise previously such as of global investment
latent demand women and rural flows
workforces
Identity critical local Develop and mold Embed innovation Optimize resources Be willing to draw
difference in local talent for today activities into the strategy under on a broad suite of
clients and tomorrow by local research and differing economic investment models
preferences and investing across the development and cultural and
Be regulatory
tailored to the
usage and in skills spectrum client characteristics of
authentically response, tailor environment, working constraints across different markets
local products and in tandem with materials and harness
services to new industry peers and incentive regimes,
client segments policymakers such as carbon
trading for current
and new business
Create structured channels to allow rapid diffusion of ideas and know across geographic regions
Network the
Build a global backbone of standardised data, systems and processes
organisation
Ensure multi-polar leadership to cultivate a global mindset from the top down
Source: Accenture Institute for High Performance

1. Realising business opportunities
It is critical to allocate sufficient
financing and resources to maximise the
new unit's chance of success. This
means securing enough investment to
tackle several challenges that affect all
satellite operations, but more especially
those in developing markets. In
particular, it is important to move
In practice
quickly and achieve high speed to
Creating a local operation: an exercise in market once the opportunity has been
identified, since the first mover will
managing complexity often corner the lion's share of the local
market. This means it may be better to
launch now with good-enough'
Our experience shows that it is all too offering, than to wait until the fully-
easy for investment banks to engineered service is ready.
underestimate the complexities involved
in setting up or expanding securities A further key challenge is optimising the
operations in an emerging market. product mix and scope for local
Crucially, they must not expect to apply market conditions. In some markets,
the same implementation approach as product definitions and regulatory
in the major developed markets where frameworks are different from what is
they already operate. Also, they should normal in major hubs a couple of
be aware that the higher complexity of examples from the Russian market
designing and delivering emerging illustrate this point:
markets operating models applies across
the key domains of the business,
operations and IT.
There are four main priorities that

investment banks should focus on to
get their local operation up and running
as efficiently and rapidly as possible,
and to seize the highest available
market share among their target clients
and product segments. These four
priorities are:
A further key challenge is optimising the product
mix and scope for local market conditions.
FX options are not illegal but are also
not legally enforceable in Russia.
Therefore, although some
international banks have built the
capability to trade FX options locally, 2. Delivery complexity
there is no market in FX options While most investment banks are
at present organised and managed globally on the
What is referred to as a Repo' in the basis of relatively segregated product
Russian market is in fact a silos, setting up emerging markets
sell/buy back' rather than the single operations is typically a cross-product
Repo transaction subject to a implementation. Therefore,
master agreement typical in major organisations that are normally highly
markets - hence different processes effective in delivery and execution
and operational requirements apply. within a product silo often face new
implementation challenges in emerging
In other locations, it is the market markets where far more cross-product
dynamics that are distinct. For example, collaboration is required.
rates trading in key Asian markets
(e.g. Hong Kong) remains predominantly Furthermore, the critical importance and
voice rather than electronic and so rapid growth of wealth management in
investing in building a fully automated emerging markets raise major questions
electronic bond-trading platform before about how and how closely to
market entry may simply result in a integrate wealth management services
bank missing the boat in terms of with investment banking. Investment
market share. These challenges banking and wealth management have
underline the importance of investing different origins and heritages in the
in local skills and knowledge to avoid global hubs which have led to largely
wasting time and money down separate operational infrastructures.
blind alleys. However, in setting up emerging
markets operations there are
opportunities to address the significant
operational redundancies and
duplications between investment
banking and wealth management
operations (e.g. in securities settlement)
that are common in global hubs.
This requires new ways of thinking

about the operating model to more
effectively share infrastructure between
the investment and private banking
arms of the business. Inevitably,
addressing these issues increases the
complexity of development, testing
and roll-out.
3. Regulatory, legal and market

practice framework
From day one of the project, it is crucial
to focus on developing a full
understanding of local regulatory
requirements, accepted modes of
market behaviour and the legal
environment, and to incorporate these
factors at the design phase rather than
trying to bolt them on later.
This applies especially to new locations
where the bank lacks an existing 4. Technology
presence or experience on the ground. Implementing the optimal IT
In these entirely new sites, compliance, infrastructure in a satellite operation
tax, legal, anti moneylaundering (AML) involves addressing a wide array of
and other regulatory functions should issues. At first sight it may appear that
be addressed as early as possible. It is the cheapest and easiest approach is
also important to remember that to plug the unit into the bank's global
products based on a similar concept and IT systems, but this may limit the new
designed to fulfil a similar objective in operation's flexibility and
two different markets may be based on responsiveness to customer needs.
fundamentally different legal For one thing, its systems will need to
definitions. Examples might include meet local demands such as Sunday
financing agreements made under trading in the Middle East or use of the
Shariah law as compared to Western Cyrillic alphabet in Russia that may
interest-bearing loans. not fit easily into the global IT template.
For another, a small satellite operation
may find its IT change requests to the
global hub receive much lower priority
than those submitted by an established
unit in a major developed market.
Such factors mean that traditional
developed market-centric thinking
about IT may not apply, and require
careful consideration of the balance
between using in-house systems
and third-party (possibly specialist
local) vendors.
Challenge
Challenge
1: Responding
9: Engaging
to the
Effectively
regulatory
in Emerging
maelstromMarkets
Accenture experts
Jos Villar
Senior Executive, Madrid
jose.m.villar@accenture.com
+34 91 546 9229
iSource: Euromoney +34 61 924 9936
Wei Min Chin

Senior Executive, Shanghai
wei.min.chin@accenture.com
+86 212 3053 832
+86 138 1781 0675
Dinesh Sharma
London
dinesh.k.sharma@accenture.com
+44 20 7844 8288
+44 79 0991 5895
Top 10 Challenges
10 Picking the right

battles
Having weathered the financial crisis,
investment banks are seeking to
capitalise on their current positions
and move up the rankings to establish
themselves as market leaders. Aiming
high makes sense strategically but,
by definition, not all banks can be
top-three players. Particularly now,
when resources are limited and time is
tight, the priority is to focus on winning
the right battles.
Challenge 10: Picking the right battles
We're focusing on the markets where we

have a right to win. Michael Geoghegan, Group CEO, HSBCi
Figure 2: Defining factors in investment

bank high performance
Global Breadth
Evenly distributed revenues across Europe, Americas &
APAC regions
Top 10 players in BRIC, Mexico & Korea
Significant presence in second tier emerging markets

(Eastern Europe, Latin America)
Client Centricity
Clear client strategy based on segmentation
Client aligned Operating Model
Provider of integrated investment bank/ wealth/
asset management clients solutions
Product Depth
Recognised consistent strength across
FICC
Equities
M&A
Prime Services
Background Sustainably profitable in all chosen markets
In a resource-constrained environment, and products

banks need to choose where they can Two years ago, the banking sector was
compete and win in turmoil. Now, with the dust settling
on the financial crisis, investment banks
Top-three banks outperform across three key metrics global breadth, are seeking to take advantage of
client centricity and product depth market dislocation to seize market share
and propel themselves up the league
tables. It is not wrong to aim high. In
Particularly in todays straitened fact, this is in itself an effective way of
operating environment, it is surprising defending current market positioning.
that so many banks are actively aspiring But the priority must be to focus on
to top bank status (see figure 1). winning the right battles across the
Of course, each of the three key metrics three metrics shown in figure 2. That
of high performance Global Breadth, way, financial strength targets can be
Client Centricity and Product Depth realistically identified and emphatically
are as relevant as ever, but banks need achieved. To compete across this
to be selective about where they can framework represents a valid ambition,
realistically compete and win. Competing but only a few (very few) players will be
across all three simultaneously can able to achieve it and banks will need to
only result in under-resourcing, choose where to compete.
overbudgeting and, perhaps most
damagingly, incomplete execution.
Figure 1: Number of times Top Bank Aspirations mentioned in global press

1,000,000
Global Press Articles
800,000
600,000
400,000
200,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e
Year
Source: Dow Jones Factiva/ Accenture Research
The principal challenge, in such a resource-constrained

environment, is to identify the correct growth strategy across
multiple axes, covering products, clients and geographies.
Depending on their starting point, each

bank will have a number of possible
routes for achieving its strategic goal.
In the example below, the bank is
targeting an ambitious endpoint
(4) of Geographic Client Segment
Expansion into three core regions
Latin America, Asia Pacific and the four
BRIC economies. The challenge is
how best to get there with the resources
Key challenges available?
This raises a number of broad-based
No shortage of options but where questions, each of which must be
answered well in advance of any
to focus? strategy development:
How do we know where to

Market dislocation creates exciting focus first?
opportunities for seizing market share. Which are the principal battles along
The principal challenge, in such a the way?
resource-constrained environment, is Can we focus on more than
to identify the correct growth strategy one target?
across multiple axes, covering products, Whats our optimum route from
clients and geographies. No less current state to target position?
demanding for investment banks, once Having addressed these broad strategic
the chosen growth strategy is underway, issues, management needs to intensify
will be effective management of the its focus on the key external and
organisation-wide transformation internal issues:
needed to secure results.
External: Ensure the right way to go
to the right markets, in the right order,
at the right time and with the
Figure 3: Strategic matrix right clients
LATAM / APAC / BRIC
4 5
Internal: (a) Determine the right people,
Geography
EU / UK / US
doing the right processes with the right
Segmented 2 3 technology and the right investment
and (b) take steps to ensure that the
banks culture is maintained throughout
Client Segments
the planned transformation.
1
Comprehensive
Narrow Broad
Products / Services
Our perspective
Being in the right place, at the right time
Weve shown how vital it is for banks to When one market matures, theyre ready
focus their efforts and resources on with the next big thing; when buying
getting results. But what does this mean trends send clients in a different
in practice? Based on Accenture direction, theyre waiting at the end of
research and experience, we know that the path; when they acquire new
high-performance businesses have businesses, they do so wisely and tend
remarkable clarity when it comes to to them well. Add it all up and it means
setting their strategic direction. Put that high performers excel when it
bluntly, they always seem to be in the comes to their market focus and
right place at the right time. position the where and how to
compete aspects of business strategy
and one of the three building blocks of
Figure 4: The building blocks of high performance
Source: Accenture Institute of High Performance
high performance (see figure 4).
Market Focus
and postition-
maximising
business results
by targeting the
right place at
the right time
Performance Distinctive
Anatomy-out Capabilities-
executing developing
through offerings that
consistent, create a unique
competitive business
mindsets
Source: Accenture Institute of High Performance

By adopting the economic principles of non-cooperative

game theory and applying it to scenario analysis, leading
firms are able to determine the correct actions to be taken.
By adopting the economic principles of

non-cooperative game theory and
applying it to scenario analysis, leading
firms are able to determine the correct
actions to be taken. This approach yields
several significant benefits over
more traditional approaches, where
taking a view based on a snapshot in
time can be misleading:
Realistic understanding and definition
of the context in which the company
operates and wishes to operate in
the future
Identification of all the companys
possible reactions to pursuable
strategies
Consideration of not only win-lose
solutions, but also win-win options
Ability to catch imitation advantages:
being unique is not a prerequisite
for success
Conversion of uncertain situations
into certain ones (or with reliable
So how do they do it? probability distributions) throughout
If you were to read management books, the introduction of rational
you would probably find a matrix hypothesis on players behaviour
telling you to balance a measure of Support of an optimal strategic
(risk adjusted) profit potential against a solution which maximizes the
measure of internal capability strength economic result for the company
and to proceed within that framework. An ability to re-visit initial decisions,
However, this ignores the many easily and quickly with minimal
complexities of the real world, where disruption when environmental
every decision must be taken in the factors inevitably alter.
context of the economic environment,
and where for each action there is a
reaction of competitors to be foreseen
and interpreted visible and invisible.
How do you decide between growing
share of wallet in your current market
and earning client loyalty against
expanding the client base in emerging
markets? Both have large profit
potential, but to focus on both could be
a costly mistake that few can ill afford
right now.
Each chosen strategic lever will have

different implications on the game
elements and being aware of these
impacts will help identify strategies that
bring about a change of the game to
the companys advantage. Figure 5 illustrates the theory of
Understanding the importance of scenario analysis, but often facts are
different players is crucial to focusing unclear or ill defined (e.g. OTC
on the right games, whilst a clear Derivatives regulation) and actions/
understanding of ones own business is reactions are made not only
the first step to identifying the correct simultaneously, but before the first
strategic change. move can be completed
often through public statements rather
Analysis of different scenarios which are than proven execution; making the
looming ahead leads to evaluation of reality of scenario analysis significantly
payoffs coming from each combination more complex than the theory.
of actions and reactions, pointing to the
best course of action, given interactions
with other players in a dynamic
environment.
Figure 5: Illustrative three-step game

Timeline Payoffs Scenarios
My Bank Bank X Government Acts My Bank: p1A

moves acts Same Bank X: p2A 1 Assignation of a probability
behaviour distribution to each option
Cut prices My Bank: p1B
Enter
Bank X: p2B 2
Enter My Bank: p1C
Payoff valuation for every
Bank X: p2C 3 Scenario derives from a
Bank X specific combination of
My Bank: p1D
Same
behaviour Bank X: p2D 4 action-reaction, through:
Enter Not Enter Cut prices
My Bank: p1E
Bank X: p2E 5 forecasting of future
Enter
My Bank: p1F
cash flows during the
Bank X: p2F 6 years if the analysis
My Bank My Bank: p1G discounting back to
Same
behaviour
Bank X: p2G 7 present the stream
Cut prices My Bank: p1H
Enter in 8 of future profits
Not Enter Bank X: p2H
Enter
My Bank: p1I NPV has to be assessed
Bank X Bank X: p2I 9 for the company and for
Same
Not Enter
behaviour My Bank: p1L
10 each of the other player
Bank X: p2L
takes part in the game
My Bank: p1M
Enter
Bank X: p2M 11
My Bank decides to Bank X reacts to MY Government reacts
enter or not enter Bank strategy, deciding to banks strategies
the market to enter or not the market deciding its behaviour
Source: Accenture Research

Additionally, the approach circumvents

a significant and often overlooked
aspect within strategic decision making
- political buy in within organisations -
by ensuring engagement across the
organisation, from Trading and Risk to
Legal and Settlement, incorporating all
asset classes and business lines.
Successful competitive war gaming will

produce five key results:
1 A comprehensive understanding of
the competitive landscape of a
specific franchise, market or
opportunity
In practice 2 Understanding of value drivers as
well as own position and
Competitive War Gaming competitiveness of portfolio of assets
3 Determination of successful strategic
plans and bold tactical moves in
War gaming is an interactive strategic a protected environment against
gaming approach to develop market scenarios to be tested, such as
leading strategies, that allows banks New product/ market launch or
to make the right choices in times of major lifecycle management
uncertainty or where hard choices measures
need to be made due to resource Competitors launch of new
constraints. It consists of structured, (superior) product or market,
interactive workshops, enabling access additional indications and
to the strategic mindset of competitors, incremental product innovation
whilst enabling a creative way of Planned merger, acquisition or
thinking about threats. It allows the collaborative deals
testing of plans, tactics and Commercial market changes, such
unconventional views of the market, as pricing decline or shift in
resulting in an emphasis on what market growth (or both)
decisions need to be made. 4 Training of participants in predicting
the behaviour of key competitors
during their daily operations
5 Refined plans and business cases
based on new/improved assumptions
Typical Team Composition

War game simulations are typically run

with five to nine different teams:
1 Home Team
Represents own company - intention
to test certain strategies or tactical
moves
Need to focus on early identification
and execution of dominant strategies
to succeed during war gaming
simulation (and then later in
the marketplace)
Results can sometimes be unpleasant
for home team (e.g. when it is
unveiled that strategy to be tested
has a low probability of being
successful/competitive)
1 Regulator/Government Teams
2-5 Competitor Teams
Represent and simulate the reaction
Represent and simulate real
of oversight bodies i.e. governments
competitors in the marketplace
and regulators
(i.e. peer group)
Team will determine political views on
Need to leverage competitors assets
strategic moves from Home and
and strategic intent
Competitor teams
As teams consist of executives from
Dependent on relationship strengths,
own company they typically know
the team will consist of direct
more than the market (i.e. strategy of
participation from oversight
home team to be tested is understood
organisations
in great detail)
1 Control Teams
1 Market Team
Consists of Accenture consultants
simulating outcome of strategic
of different customer groups or other
moves (e.g. market share, profitability,
stakeholders (e.g. hedge funds, asset
shareholder value) through a
managers, internal desks, acquisition
financial market model specifically
targets)
designed for each war
Team will determine how market
game individually
reacts on strategic moves from Home
and Competitor teams

of oversight bodies i.e. governments
and regulators
Team will determine political views on
strategic moves from Home and
Competitor teams
Success Factors
It is worth bearing in mind that carrying
out competitive war gaming in itself
will not produce sufficient results; there
are four key factors that banks must
pay attention to, to ensure success:
Build creative and engaged teams

with cross-functional participants
(e.g. including Trading, Sales,
Operations, Risk, Compliance, IT,
Legal, Financial Control, with
appropriate cross-asset class
representation)
Embed exercise into overall strategy
development process to create
a menu of tactics to refine strategic
planning and commercial targets
Invest sufficient time prior to the
workshop to conduct sufficient
competitive and market research to
on-board teams in a very
structured way 2-3 weeks before
the exercise
Ensure effective war-gaming post-
processing in order to come up
with clear implications and actions
Figure 6: Typical Competitive War Game Methodology

Competitive war-gaming workshops follow four major methodology steps:
Methodology Steps Description Success Factors
1 Market characteristics and Understanding of own

strategic intent of represented strategic priority and intention
Setting the landscape
and immerse into role company will drive goals Understanding of key
and tactics differentiating factors
2 Feasibility of solution is React as your company

required, i.e. do not ignore basic would enables everyone
Undersatnd scenario and
work out soluation causeeffect relationships about to draw correct conclusions
market access, cost and profit which work in real life
3 Complexity increases but lets Thorough understanding

you proactively pursue your of competitors products,
Observe how competitors
react, learn and adapt strategic goal instead of reacting strategies and presence in
your strategy based on what competitors do the market
4 Collect and discuss lessons learned Successful completion

Translate competitors behavior into of previous steps
Decide implications
and develop roadmap take-aways for own company Ability to apply war gaming
Apply insights to tactical product tactics to own product s
marketing/commercialization strategic plan
plan (i.e. refinement)
Accenture experts
Lupus Maltzahn
lupus.maltzahn@accenture.com
+44 20 7844 8544
+44 77 6887 1919
Ryan Westmacott
London
ryan.m.westmacott@accenture.com
+44 20 7844 5259
+44 78 1030 4031
Ronan OKelly
London
ronan.okelly@accenture.com
+44 20 7844 0155
+44 79 4671 2749
i Michael Geogahan,
Chief Executive, HSBC
(speaking to Cantos, 2nd August 2010)
The Top 10 Challenges series

To help investment banks plan and
execute with success, Accenture has
used its research, industry expertise and
client insight to create a series of
papers detailing the ten key challenges
confronting investment banks as they
enter 2011, of which this paper is one.
The Top 10 Challenges

1 Responding to the regulatory
tsunami
2 Dealing with OTC derivatives reform
3 Embedding effective risk
management
4 Refocusing on client needs
5 Maximising client profitability
6 Taking sustainability seriously
7 Delivering valuable transformation
8 Harnessing innovative technologies
9 Engaging effectively in emerging
markets
10 Picking the right battles

www.accenture.com
OUTER
2011
for Investment Banks
Top 10 Challenges
Top 10 Challenges
Top 10 Challenges

www.accenture.com.

Accenture Top10 Challenges 2011

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Copyright 2010 Accenture Accenture is a global management

Figure 1: Real GDP Growth (% growth

Focusing on the future:

Result indicates where to invest to achieve

Electronic Trading - Direct Market Access

2 Dealing with OTC

10 Picking the Right Battles

The recent financial crisis has resulted in

And there is little prospect of a more

Beyond question, fears in the financial

As the dust has settled on the financial

OTC Derivative Remuneration

Enhanced Capital Risk reporting

There has been a pronounced shift

However these are layered with other

At a high level, bank CEOs and CFOs will have

The writing is on the wall. With little

At a more granular level, the key

The scale of organisational challenges

2.5% 2.5% 2.5%

4.5% 4.5% 4.5%

Current Increase to Capital Countercyclical Proposed

Source: Basel Committeeii

The problem is the current wave of regulation is

History has shown us that

The objective is not just to make the

Additionally, the bank needed to

Using Accenture Target Operating Model

Achieve a common Target Operating

Accenture supported the bank by

2 Dealing with OTC

We will see derivatives moved through

The Wall Street reform bill will for the

What is clear, however, is that the

Figure 1: The regulatory outlook for OTC derivatives

Swaps Certain swaps trading operations to be US only

Margin Requirements Stringent initial margin requirements with Tightening spreads

Sources: Deutsche Bank, Shearman & Sterling LLP, Accenture analysis

In executing their chosen market

The scale of work involved in shaping

The main challenge for investment

Regardless of the strategic response

Figure 3: Summary of challenges facing investment banks

Function Challenge Impact

Legal Differing legal frameworks in Increased complexity in client

Default management Will banks be forced to cover Variation

Processing New internal front-to-back processes, New ways of working required

To capture this prize, banks will

Accenture is currently working with Winning outcomes will hinge on banks

Scalable Trade Capture and

Accenture worked with the client to

Articulating and quantifying the

The programme helped drive the client

1 Client value proposition: The bank

i Source: Financial Times, 11 August 2010

The best enterprise risk management

One inevitable consequence of the However, while most investment banks

According to a recent Economist

Accentures recent survey of financial

The reality is that most investment

Source: Accenture (US Financial Services Regulation Survey, June 2010).

While each of these is significant,

In other words, top-down impetus is