Nobody disputes that operational efficiency is something businesses should aim to achieve. But to secure competitive advantage, it’s only part of the equation.
Efficiency is doing things better. It’s about the bottom line, but unless a business understands the market dynamics that create the need for an efficiency programme, there’s a risk it focuses on the wrong issues. And that can be costly.
Even if the programme is successful, the main issue with addressing efficiency alone is that the focus becomes internal performance rather than delivering customer value.
There may be a short term competitive advantage if a business can do similar things better than competitors, but the law of diminishing returns will eventually kick in. Competitors will close the gap and grab market share.
The answer to sustainable advantage is to combine operational efficiency with unique ways to deliver customer value. In other words, being different and better than competitors.
So, understanding market dynamics doesn’t just give a framework to your efficiency programme; it gives insight into what’s shaping customer demand and helps your business develop the right strategy.
Market dynamics and consequences for platforms
In the retail investment market, the combined forces of technology and legislation have encouraged investor empowerment. And this places rapidly changing demands on a notoriously clunky sector. To remain competitive, platforms must respond efficiently in new ways to deliver a joined up user experience. Businesses that can deliver high speed-to-market responses to consumer and regulatory change at a low cost will have the edge.
Why is technology evolution so significant? It continues to be one of today’s mega trends and the UK in particular appears to have embraced technology. The average spend per person online is £2,000 a year – that’s a higher rate of online spending per capita than any other developed country.
But it’s not just about the scale of consumer adoption; a key issue for businesses is the sheer speed at which innovation is happening. For the platform sector this rate of change means that continuing to tinker incrementally with legacy process and technology just isn’t sustainable in the long term.
Legislation and investor empowerment
An equally significant trend in the retail investment sector has been the power shift from provider to investor. RDR provided the foundation when client fees replaced commission. Auto-enrolment has seen pension scheme membership in the private sector rise. And although it’s early days, indications post-pension freedoms are that we’ll see investor pressure on the industry for change. Awareness they can take their money out is high but the two biggest investor issues are access and understanding.
Shaping investor expectations
Easy access to information is exactly what investors experience when they do business with many other sectors. And it’s thanks to technology.
Some may label ‘Big Data’ and the ‘Internet of Things’ as jargon, but we’ve all had our experiences and expectations shaped by them. Investors know the art of the possible because they experience personalised, real time, flexible access to what they need when they need it from other sectors.
This expectation is at the heart of demand for multi-channel access.
If we look across to the banking sector, experience has shown the significant commercial advantage of enabling customers to enjoy multi-channel access. Engagement, loyalty and the number of purchases all increase when banking customers can connect both digitally and physically.
Platforms must play their part in delivering this experience at a competitive price to investors. If platforms don’t satisfy expectations, innovators from other industries will step in.
Margin pressure and changing business models
Different models are doing well in the platform market, from established players with scale to newer entrants. Some who have adopted a vertically integrated model offering platform custody and asset management have shown strong growth.
But of course, the continued downwards pressure on price and squeezed margins means there’s always a risk of a price war. Winners need to break out of traditional business models and innovate. And the underlying technology must be able to support it. Some key questions platform CEOs should ask are:
• Can the technology deliver a faster speed to market?
• Can it cope with diverse business models?
• Can it integrate with existing technology infrastructures?
• Can it support real time, digital investor access?
Combine efficiency and innovation for success
Every platform business will have unique challenges, but there are some generalisations that hold true for all.
No matter what the model, scalability and improved service are must haves for businesses with ambitions for growth.
In the UK, platforms have already undergone significant challenges in dealing with sudden, increased demand - pension freedoms are a recent example of this. Some have reported an increase in transactions well in excess of 40% over the last 12 months, and many expect demand to more than treble over the next five years.
The actual numbers aren’t the issue; the real point is that processing capability must be able to grow in line with investor numbers. Thankfully, straight through processing is business as usual for the majority of platforms. Of course, straight through processing isn’t just about speed - it’s also about data integrity, accuracy, quality and risk containment. Failures due to poorly conceived and designed processes can come at a high cost to all parties, regardless of the speed of those processes.
For platforms, the key efficiency challenge is how to achieve the agility required to respond quickly to external demands. It’s also about connectivity and mobile tools that allow investors to securely view, manage and engage with their investments and the intermediaries working on their behalf. All at a competitive price.
Twenty years ago, efficiency often equated to a stripped-back service and poor customer experience. But with today’s technology, the opposite is true. I alluded earlier to ‘Big Data’ and the ‘Internet of Things;’ these are not the preserve of emerging markets and start-ups. Platforms also have the opportunity to create personality through technology by harnessing digital knowledge of an individual investor’s experiences and preferences to serve relevant information at the right time.
Does operational efficiency secure competitive advantage?
Perhaps, in the short term. But to be sustainable a platform must combine efficiency with customer centred innovation. Due diligence for platforms choosing a technology provider involves many considerations, but key software capabilities should include:
• a global code base so all users benefit from updates and innovation;
• flexible configuration that minimises the need to cut new code to make changes;
• workflows integrated with the technology;
• a workflow engine built specifically around platform and investment market requirements.
Platforms may not yet find that their underlying technology is subject to direct scrutiny from clients. But whatever the platform business model, the spotlight will shine on difficult to update solutions that inhibit investor engagement and access to their savings when they need them.
Many who have adopted next generation technology have transformed their processing capabilities and propositions, but many still grapple with legacy systems. Success demands more than a healthy IT budget. A relentless attention to trends that are likely to influence investor demand and a laser focused client-centric strategy are also critical to long-term success.
By Nick Parsons, Chief Technology Officer at Bravura.