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Up to the task: An effective finance operating model for banks
www.pwc.com/financialservices
Gearing up your finance function operating model to deal with tough new business and regulatory demands
January 2012
2 PwC Up to the task: An effective finance operating model for banks
Contents
03 Introduction
04 Meeting regulatory and business demand
06 Strengthening operational efficiency
08 Faster close
09 Managing change
10 Helping you to create a more effective operating model
10 Contacts
PwC Up to the task: An effective finance operating model for banks 3
Finance teams are also at the forefrontof dealing with new capital demands andtheir impact on the strategy, financialmanagement and operational make-upof the business.
In turn, business demands are increasingas finance teams are expected to delivera faster close, more granular informationand the telling business insights neededto make sense of a complex and uncertainmarket environment, and help inform therestructuring and strategic re-orientationbeing conducted by many banks.
These tough new demands have requireda thorough review and possible overhaulof the finance function target operatingmodel. CFOs and their teams are strivingto make sure that systems, processes,governance and organisational design areup to the task. With budgets constrained,the underlying requirement is the need todo more at less cost.
This paper provides an overview of thechanging demands on finance teams,target operating model considerationsthat will be required to meet them andhow to make the successful transition toa more efficient and higher performingfinance function.
IntroductionPressure to deliver
Finance teams are facing unprecedented pressure as the fallout from thefinancial crisis leads boards, regulators and other key stakeholders todemand more information, more quickly than ever before, with greaterinsights into what the information means and with zero tolerance forerrors and delays.
CFOs and their teams are striving to make sure that systems,processes, governance and organisational design are up to the task.With budgets constrained, the underlying requirement is the needto do more at less cost.
4 PwC Up to the task: An effective finance operating model for banks
New capital and liquidity requirementsare further adding to the pressure onfinance function operational capabilitiesand the infrastructure that underpinsthis. Management needs to know howthese demands will affect funding costsand business line and productprofitability. Many banks are looking todivest non-core and capital intensiveassets as they seek to concentrate limitedresources where they can earn the bestreturn. In turn, many banks have soughtto reduce their risk-weighted assets andscale back their balance sheets.
The quality of finance data, systems andanalysis is going to be crucial in managingrisk, capital, leverage and liquidity,effectively, and providing the sharpinsights needed to judge the rightstrategic course. Key demands includegreater granularity and closercollaboration with risk management
teams, along with a thorough review ofanalytical assumptions to make sure theycontinue to be valid and consistent. Thegeneration of much of this informationdepends on models, which need to becontrolled and assessed for their accuracyagainst actual results.
Further challenges centre on thedynamic nature of capital and liquidityrequirements. Frontline teams want toknow how the cost and capital profileof current transactions are going to beaffected as the regulations move fromBasel II to the transitional Basel 2.5 andeventual Basel III. A typical instancewould be the treatment and profile ofa five year swap written today, which isgoing to keep shifting. Some trades thatmake good use of capital under currentarrangements may cease to be so as therules change.
Meeting regulatory andbusiness demand
There seems to be no let-up in the increasing demands for informationfrom regulators. The reporting requirements on capital and liquidityhave soared. The new ‘routine’ also encompasses further demands incomplex and multifaceted areas such as recovery and resolutionplanning. Yet, it is the surge in short notice ad hoc requests in areas suchas exposure to market stresses which is proving most demanding andpotentially disruptive, adding to the pressure on already stretched staff,systems and controls, and making it difficult to plan the allocation ofresources. The fast moving pace of recent events means that requests forinformation are often broad, ill-defined and expected within days, yetthe tolerance for errors and delays is effectively zero.
The quality of finance data,systems and analysis is going tobe crucial in managing risk,capital, leverage and liquidityeffectively and providing thesharp insights needed to judgethe right strategic course.
PwC Up to the task: An effective finance operating model for banks 5
At present, much of the evaluation isfairly fragmented in scope. A key priorityis therefore bringing all the analysistogether and communicating it acrossthe business to inform the necessarydebate about what business will and willnot be viable under the new regime.
Many finance functions are findingthat their current operating model canno longer cope with these heightenedbusiness and regulatory demands.A patchwork of workarounds may beable to deliver in the short-term.Some banks may have been reluctant tooverhaul their operating model becauseof the investment this is likely to entail.Now, we appear to have reached a tippingpoint where many banks have come toview the business critical nature of theinformation and risk of inaccuracies,or failure to deliver outweigh the costsof putting it right.
Each bank faces different demands,depending on its products andgeographical reach. Yet, there are anumber of key considerations andprinciples that are likely to be commonto all institutions as they look at how tomake sure their operating model is fitfor purpose:
• The need for flexibility.
• The need for timely and reliable datafrom around the organisation.
• The need for greater automation andstreamlining of reporting to reduce thetime lags and weaknesses in control,created by the proliferation ofspreadsheets.
• The need to cut through the web ofcomplexity created by fragmentedprocesses, multiple legacy systems andlack of clear data governance andownership.
• The need for clear identification ofcommunalities on the one side anddifferences in compliance demandson the other. This is needed to balancethe economies of scale created by acentralised shared service approachwith the different expectations in eachterritory (e.g. the different scope ofloan delinquency thresholds or ageingcategories, as well as acceptablecapital).
Case study:Geared up for the new regimeA multinational bank was required to file over 100,000 regulatory reports annually. The impact of the financial crisis and newregulation has increased the number of reports, while squeezing the timelines in many jurisdictions.
The bank recognised that its finance function’s operational infrastructure was being overstretched by these new demands.Technology support was inadequate, adding to the need for manual processes, while also increasing the risk of error. Systemsand processes were highly fragmented and CFOs did not have a clear line of sight where the most critical production risks lay.Mistakes were becoming more common, which was heightening the risk of regulatory sanction. In turn, the heighteneddemands on staff were leading to long hours and high turnover of personnel.
To speed up turnaround times and improve control, the bank is looking to minimise manual intervention through processautomation. It is also planning to create a common data repository, capable of aggregating data across business lines andproducts, recognising that need to improve data governance and data definition standards to create consistency.Improvements in oversight and control are underpinned by clearer mapping of processes and associated risks, and thecreation of a better co-ordinated and more sustainable centralised governance model. Greater efficiency has reduced theroutine demands on staff and allowed them to devote more time to business insight. This is supported by closer attention totraining and employee development.
6 PwC Up to the task: An effective finance operating model for banks
Certain activities will clearly need to beretained within the headquarter’s financeoperation, or be embedded within thebusiness. This is likely to include insightcapabilities and regulated activities. A keyelement of strengthening operationalefficiency and developing the targetoperating model is therefore determiningwhat activities should be kept withinoperating units and what can becentralised within an SSC to createscalability, along with how to maintaineffective governance, control andreporting under the new structure.
With the demands on finance constantlychanging, it will also be important tobuild in sufficient flexibility and effectivedata capture. Typical considerationsmight include whether the informationcontained in the general ledger and all ofthe various source systems is available ina consistent and flexible enough formatto allow the SSC to use it without majorcleansing for reporting across differentjurisdictions. Proper data governance
(data definition and data stewardship)can accelerate finance’s ability to respondmore quickly and with a higher level ofcomfort over the accuracy.
In the next stage of development, sharedservices for finance and accounting arebeing integrated more closely with othersupport functions such as IT, HR andcustomer services. This combined serviceapproach allows banks to rationalisefragmented processes and improve theefficiency of their operations. Many ofthe new generation of SSCs are alsodeveloping into centres of excellence,focusing on both core processes andhigh-value adding activities.
Strengtheningoperational efficiency
The first wave of operational efficiency saw the introduction ofenterprise resource planning (ERP) systems. Having adopted these ERPsolutions, financial institutions then embarked on delivery modelanalysis. The development of shared service centres (SSCs) for financehas further reduced costs and provided an opportunity to streamlineand standardise processes. Today’s finance function is faced with thechallenge of providing deeper insights and leveraging these advances intechnology and delivery capabilities.
With the demands on financeconstantly changing, it will alsobe important to build in sufficientflexibility and effective datacapture.
PwC Up to the task: An effective finance operating model for banks 7
Case study:Cutting costs and turnaround timesThe finance function of a large international bank was looking to deliver sustainable savings and faster reporting through thedevelopment of a new finance operating model.
The first stage was the selection of the target operating model and evaluation of what processes and activities could becentralised within a newly created SSC, and what should be retained within the business. Areas under consideration includedfinancial accounting, management accounting and purchase-to-pay processes. The next stage focused on the standardisationof processes and elimination of duplication.
The creation of a standard set of internal reports for all legal entities cut the number of reports by nearly half. The removalof duplication allowed the bank to cut the number of processes by some 40%. Overall, the bank reduced finance FTEs by20% from 250 to 200, while still being able to halve management reporting time. Further benefits of centralisation andstandardisation included a reduction in the number of IT systems and related maintenance costs.
Effective process and data governanceis critical to ensure timeliness and datareliability, the fundations of faster close.This includes assigning data owners fromwithin the business for each key set ofinformation and ensuring consistencyacross the organisation, whatever thegeography or business unit. Regulatorsare not interested in where theinformation exists in the organisation aslong as they get answers to their querieson a consistent basis. The underlyingrequirement is the recognition that gooddata and the decisions that flow from itare the responsibility of everyone withinthe business, rather than just being amatter for finance.
Faster close
The speed of closure is a key indicator of the efficiency of the reporting process. Key priorities include theimplementation of standard charts of accounts within every business unit. It will also be important to buildthe finance architecture around an efficient enterprise-wide data model, and move towards greaterintegration of financial and management reporting data processes.
Case study:Closer to the customer
The finance function of theinvestment banking division ofa large international bank waslooking to develop a ‘lean’transformation process, whichwould allow it to focus moreclosely on meeting changinguser (‘customer’) needs andfinding ways to continuouslyimprove the value providedby finance.
The foundation has beengreater clarity over who the
customers are and engaging with them to find out what they requireand how finance could improve delivery. The finance team can thenlook along the critical path to identify and eliminate hold-ups andwaste in areas such as the use of spreadsheets (subsequently cut byhalf). This is underpinned by greater or ‘right first time’ processes andreadiness to challenge and improve existing practices.
As a result, turnaround times for flash reporting have been cut from5 working days to 1 and monthly reporting from 16 to 13 workingdays. At the same time, the finance team has been able to enhancedisclosure, deliver more market-driven commentary and improvethe quality of balance sheet substantiation, while still being able toreduce headcount by 17%. A notable feature of these improvementsin performance is that they have been achieved without investmentin IT.
8 PwC Up to the task: An effective finance operating model for banks
As Figure 1 highlights, the first step is aclear and compelling vision about whatyour organisation expects from its financefunction, both now and in the future.A clear vision can make it much easier totarget resources and assign roles andresponsibilities. It will also help to makethe business case for investment in newpeople, tools and technology. Keyconsiderations include: What level andnature of decision support does the
business require? Does the financefunction have the talent and systems todeliver this? How can processes be mademore efficient and hence free up moretime to provide insight and analysis?
It is then possible to design a targetoperating model that works for yourbusiness and devise a roadmap forchange. The operating model will definebusiness expectations, the key areas of
focus for the function and set out theaspirations for best practice. The targetoperating model will also govern whichprocesses go where (i.e. SSC, or retainedwithin business, or head office units).The roadmap will set out the initiativesrequired to realise the model and itsbenefits, along with a clear view of thephases and dependencies during thetransition. As part of this action plan,it will be important to determine thepriorities that can deliver quickestreturns and help sustain the momentumof the change.
Our experience underlines a numberof risks that can derail the transition andundermine the benefits. These includelack of senior management support,insufficient ownership and accountabilityand the absence of a consensus on sharedservice development. There is also thedanger of allowing the model and changeprogramme to be built around systemsdevelopment rather than a cleararticulation of business needs. These risksunderline the importance of strongleadership from the board, theidentification and management ofstakeholder needs and clear assignmentof responsibilities as part of strong andconsistent programme management.
Once the target operating model beginsto be realised, it can deliver considerablebenefits across the organisation,including more streamlined processes,reduced errors and improved regulatoryrelations. It can also increase moraleand create a better performing financeteam capable of delivering greater valueto the organisation.
PwC Up to the task: An effective finance operating model for banks 9
Managing change
Creating an operating model capable of meeting these more exacting business and regulatory demands isclearly a huge challenge, which will be heightened by multiplicity of stakeholders, pressure on resources andthe need to sustain core reporting responsibilities.
Busin
ess structu
reIn
teractio
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Enablin
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mponen
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Guiding principlesClients - Data - Sourcing People -Systems - Quality - Process -
Locations - Control
Business service model
Process levels 2 & 3 Operating design
Technical architecture & data models Location model
Governance and compliance model
Performance management framework
Functional service model Interaction model
Vision and strategy
10 PwC Up to the task: An effective finance operating model for banks
Helping you to create a moreeffective operating model
Fabiano Quadrelli(PwC Italy)+02 6672 [email protected]
Andrea Laurenti(PwC Italy)+02 6672 [email protected]
Celine Roy-Larentry(PwC France)+33 1 5657 [email protected]
Dale A Simonson(PwC US)+312 298 [email protected]
Jeffrey JB Boyle(PwC Hong Kong)+852 2289 [email protected]
Marinella Marzo(PwC Italy) +02 6672 [email protected]
Ralf Jaspert(PwC Germany)+49 40 6378 [email protected]
Saskia Bosch van Rosenthal(PwC Netherlands)+31 (0) 88792 [email protected]
Shane Knowler(PwC Hong Kong)+852 2289 2703 [email protected]
Vaughan C Sutherland(PwC UK)+44 (0) 20 7804 [email protected]
PwC provides advisory and auditing services to leading banking groups worldwide. Strengthening financefunction effectiveness is a key part of our support. Drawing on our wide-ranging banking industry expertiseand tried and tested tools and methodologies, we can help you evaluate, design and develop a target operatingmodel that best fits your business needs and evolving regulatory requirements. Our work with banking clientsis backed by close liaison with regulators, analysts and other key stakeholders to help our clients develop abetter understanding of stakeholder expectations and how best to meet them.
ContactsIf you would like to discuss any of the issues raised in this report in more detail pleasecontact one of the following below or your usual PwC contact.
PwC Up to the task: An effective finance operating model for banks 11
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms acrossthe PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability,responsibility, or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or forany decision based on it.
For additional copies please contact Maya Bhatti, Global Financial Services Marketing, PwC (UK) on +44 207 213 2302 or [email protected]
www.pwc.com/financialservices© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. ‘PwC’ refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of itsmember firms nor can it control the exercise of their professional judgement or bind them in any way. No member firm is responsible or liable for the acts or omissionsof any other member firm, nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.
