Feb 11, 2016

Understanding the Digital Transformation with Paul Rowady

In this video blog Paul Rowady, Director of Research for Alphacution sits down with CMO of Numerix, Jim Jockle to discuss his latest research examining the digital transformation occurring within financial services industry. They discuss what’s driving this shift and how it’s impacting process oriented workflows, optimization of human capital and business output. They observe the dramatic changes happening in this field including new approaches to IaaS, the challenges and adoption of Cloud technology, and how institutions are responding to new demands for technology innovation – including information design and enterprise approaches to data management.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Jim Jockle (Host): Hi, welcome to Numerix video blog, I'm your host Jim Jockle. Joining me today is Director of Research, Paul Rowady of Alphacution Research. Welcome, Paul.

Paul Rowady (Guest): Good to be here, Jim.

Jockle: So, want to sit down and talk about a recent report on Digital Transformation: Clues to Shifting Financial services Technology, Part I. So, I think first thing we have to do is, give us your definition of what is digital transformation of financial services?

Rowady: Yeah, I think we get caught up in the FinTech Part of the transformation is really exciting because we get to talk about a lot of new, sexy, buzzwords like Blockchain, Cloud, and Internet of things, and many, many, others; mobile payments. There’s just a whole ecosystem of new buzzwords. But what I’ve been focusing on in this research is larger enterprises, big buyers of solutions and technologies in the financial services ecosystem that have a lot of bodies, have a lot of businesses and their transformation is a lot more process oriented and that’s a different kind of transformation in terms of how do you reengineer workflows so that you have the optimal amount of bodies, the optimal mix of skills that are operating on that workflow and that’s the less sexy aspect of the innovation but I think it’s the bigger impact of the innovation that’s going on.

Jockle: You know that reminds me a couple years ago you were running a conference panel discussion and it was with the former CTO of UBS and one of the points that really stood out for me in that conversation was 90% of my time is managing legacy systems but if the remaining 5% is if I could look at business process and give all of my users 10 minutes back per day then I’m doing a good job.

Rowady: Exactly. Exactly. It’s those kinds of metrics that I think bring into focus the magnitude of the value when you start the journey of optimizing or improving a process that involves so many bodies, so much time, which is I mean the biggest piece of the spend here is the human capital piece. So how do you being to optimize, maximize the output of your team and that’s where a lot of the foundational technology certainly infrastructure as a service is one of those developments and I mean cloud and public cloud, private cloud and all the hybridization that falls under this umbrella of infrastructure as a service which has dramatic impacts not only on the technology teams to deploy that kind of capability but also the end users in the time it takes to get what you need.

Jockle:  So are you now saying as you go into 2016 the cloud argument and anti-cloud sentiment in financial services is dead?

Rowady: I think it’s pretty much dead. I mean I think that the argument, that, well you know if we look a year ago and prior when the cloud discussion first came about security issues was the major impediment to adopting some of the big horizontal, you know the AWS’s of the world, right. And, the argument that is coming out of that is that we specialize in this stuff. Our security if going to be at least as good as your security because this is not what you do and so it seems that the adoption, certainly the adoption by new entrants, that are threatening to disintermediate some of the pieces of this financial services spectrum is one reason why the incumbents have to get on that train. The other thing is the cost and the ratio of more for less and I think just the level of adoption has gotten to a tipping point, not only from the incumbents from the success of the new entrants, that, that argument is pretty much dead for what seems to be a majority of the compute, a majority of the workflows. Nobody is saying that all the work flows are going into the public cloud. I think though it’ll be a portion that are just so ultra-sensitive that you just want to keep it and any more private scenario, even if it’s not in your own data set. But I think your hypothesis it’s dead or just about dead is pretty accurate. And that’s going to fuel new trajectory, if you will, in adoption going into 2016.

Jockle: So let’s talk about the trajectory. Where do you start? KYC? Basel III? SIMM? MIFID? The startup invasion challenging core banking systems on the retail side or loans or where does an institution start?   

Rowady: I think that the prioritization has to be in responding to the regulatory needs. It’s not to say that it isn’t important to be paying attention to new entrants and where they might be disintermediating some of the business, but the reality is the bark is bigger than the bite, right? It’s important to pay attention to what they’re actually doing but the economic threat of that in the short term is much different than the economic threat of not complying with a whole spectrum of rules. Ideally, responding to these rules if you are paying close enough attention to how you organize data, how you collect data, how you save and store data, then you’re really answering many of these different alphabet soup of regulations simultaneously, as opposed to just going to do this report by collecting this list of metadata items and then I’m going to do this rule and collect that list of metadata items. If you have a more enterprise sensible, more enterprise centric data management strategy, then the metadata items that are necessary to satisfy this rule, and that rule essentially all being organized simultaneously. Now, of course that’s easier said than done and these are very, very dispersed, and diverse, and decentralized, and siloed still organizations. So, you know the reality and the objective are still certainly not in the same place.

Jockle: So, is it a fair assumption to 2016 and beyond that a financial institution needs to be an IT company as much as it is a provider of services?  

Rowady: Yeah, I don’t know if I would go quite that far. I mean certainly there are leaders in our space that are claiming that they’re an IT company and I think that there is some logic to that. Certainly if you have a culture and you have a history of developing quite a bit of your own proprietary footprint, then you have somewhat of the luxury of staying on that track so to speak. But, if you don’t have that culture of proprietary development where the pieces fit together more easily, then I think that it’s difficult to just become that, right? If you are a large financial institution that has a culture where you are bolting pieces together, you kind of have to stay on that road. So, some of the players will be able to claim the technology mantra and wear that banner, and others will have to have a different messaging. Where maybe they are managed services certainly is a big piece of this. Maybe there are pieces of the staff that are sufficiently democratized or commoditized that can be outsourced or partnered and then what I think happens is that the special sauce rises higher in the proverbial stack. In other words, where the technology and where the creativity needs to occur is in the so-called information design that we were talking about a minute ago, where they really have to design how their clients interact with their services and internally how their workflows are managed with this much more sophisticated, we called it in the past, exploration layers, in addition to a presentation layer.

Jockle: Well it might be an interesting piece of research if you were to categorize some of these institutions, right? Because I think we’ve seen such a shift of you know the custodians are going to kind of move into this business and then some retracement, changes in some of the investment banks moving out of investment banking or scaling down trading operations and focus on wealth management. So, it might be interesting to see what hat puzzle is going to look like in and kind of project in the next few years.

Rowady: So some of the early work that we’re doing is trying to create some new lenses to solve that puzzle or to see those pieces and I think already, just in the first phase of modeling that we’ve done on the largest buyers of technology in the space, which are the largest global banks that their spending patterns, the banks that have more volatility in their spending pattern, using a couple of metrics that one being revenue per employee and another being technology spending per employee, the volatility of those metrics suggest a level of capability. There are firms who are leaders, who have very low volatility of spending, which is quite miraculous when you consider the volatility of the underlying landscape over the last 10 years. Whereas other organizations have extreme volatility in their spending patterns which suggests that they don’t have the continuity, they may not have the culture, they may not have the management continuity that allows them to develop in the way that the new digital era requires them. So I don’t think that everybody can be a leader, I think that there are leaders who will perpetuate their leadership. Some new ones will enter those ranks and others will continue to follow to the best of their ability.

Jockle: And what about, we’re also seeing a trend now of a lot of institutions are setting up innovation labs in terms of funding some of I think the number out there was a 380 startups globally, now kind of spread out between Silicon Valley, London, as well as Singapore, just in the last year that have received VC funding and a percentage of that is from some of the banks themselves, like a Deutsche Bank, or folks like that. What is the anticipation of that technology that the banks themselves are investing in for financial services gets incorporated into the overall institutions ecosystem.

Rowady: Well I would go back to the beginning of why its setup that way. I think that, and this is you know, something that I’m trying to do with our new business model, is a lot of times and this is born out in prior research from a year or two ago, where when you look at the biggest impediments to transformation digital or otherwise, pedestrian transformation, or just typical change, that it’s not the adoption of the new tech or the new software, or the new data. It’s the political inertia that gets in the way, roughly speaking. So one of the strategies, and this is where Silicon Valley I think has played a role in where the venture teams, whether they be inside a traditional financial services company, a bank, or they’ve been purely a venture firm, is that sometimes you need to set up a blank slate, clean petri dish, where something can germinate and grow to the point where its mature enough to be replanted inside a politically toxic organization as opposed to trying to do it inside the organization as it exists now. And I think if you look at overtime that this is a common strategy that things tend to fail inside organizations that have other objectives. There are teams in place inside a larger organization that don’t want that innovation to succeed because it threatens their job, threatens their promotion, or threatens their budget. So the fact that you see many of the large incumbents setting up innovation labs that are technically outside is really a way to protect those innovations from this so-called “political toxicity”, cultural dysfunction. Just normal stuff even. Now, do we have too many, maybe. Everybody’s jumping on that bandwagon, everything’s not going to succeed, but the strategy to protect innovation I think is what is notable and what you’ve observed.

Jockle: Well Paul, I want to thank you so much for joining us today. The report Digital Transformation Clues to Shifting Financial Service Technology for Alphacution Research. Paul, thank you so much for joining us. And of course the website is Alphacution.com and you can follow Paul on LinkedIn as well as Numerix and of course we want to talk about the things that you want to talk about, please follow us on Twitter @nxanalytics, are you on Twitter?

Rowady: Yeah. @alphacution.

Jockle: @alphacution. Thank you so much Paul, we’ll see you next time.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section. - See more at: http://www.numerix.com/part-ii-priips-update#sthash.zhrgRsmC.dpuf
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Reflecting on SIFMA: Risk and the Explosion of Market Complexity

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