40,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Series
- Sprache: Englisch
Transform your financial organisation's formula for value creation with this insightful and strategic approach In Transforming Financial Institutions through Technology Innovation and Operational Change, visionary turnaround leader Joerg Ruetschi delivers a practical and globally relevant methodology and framework for value creation at financial institutions. The author demonstrates how financial organisations can combine finance strategy with asset-liability and technology management to differentiate their services and gain competitive advantage in a ferocious industry. In addition to exploring the four critical areas of strategic and competitive transformation -- financial analysis, valuation, modeling, and stress -- the book includes: * Explanations of how to apply the managerial fundamentals discussed in the book in the real world, with descriptions of the principles for reorganization, wind-down and overall value creation * An analysis of the four key emerging technologies in the financial industry: AI, blockchain, software, and infrastructure solutions, and their transformational impact * Real-world case studies and examples on how financial institutions can be repositioned and rebuilt on a path of profitability Perfect for managers and decision makers in the financial services industry, Transforming Financial Institutions through Technology Innovation and Operational Change is also required reading for regulators, tech firms, and private equity and venture capital funds.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 641
Veröffentlichungsjahr: 2022
Ähnliche
Table of Contents
Cover
Title Page
Copyright
Dedication
About the Author
BACKGROUND TO EES
Introduction
NOTES
PART One: Managerial Fundamentals
CHAPTER 1: Strategic Decision Making
1.1 STRATEGIC ANALYSIS
1.2 STRATEGIC PLANNING
1.3 OPERATIONAL EXCELLENCE
1.4 BUSINESS PERFORMANCE IMPROVEMENT
1.5 MERGER AND ACQUISITION
RESOURCES AND FURTHER READING
NOTE
CHAPTER 2: Financial Decision Making
2.1 FINANCIAL ANALYSIS
2.2 FINANCIAL VALUATION
2.3 FINANCIAL MODELLING
2.4 FINANCIAL STRESS
RESOURCES AND FURTHER READING
NOTES
CHAPTER 3: Asset‐liability Management
3.1 RISK TRANSFER
3.2 FINANCIAL ENGINEERING
3.3 RISK MANAGEMENT
3.4 CAPITAL MANAGEMENT
3.5 THE BASEL FRAMEWORK
RESOURCES AND FURTHER READING
NOTES
CHAPTER 4: Technology Management and Innovation
4.1 FINANCIAL TECHNOLOGY MANAGEMENT
4.2 EMERGING TECHNOLOGIES
4.3 THE TRANSFORMATIONAL IMPACT OF FINANCIAL TECHNOLOGY
RESOURCES AND FURTHER READING
NOTES
PART Two: Repositioning Financial Institutions
CHAPTER 5: Turnaround and Transformation
5.1 REORGANISATION AND WIND‐DOWN
5.2 TURNAROUND PROCESS
RESOURCES AND FURTHER READING
NOTES
CHAPTER 6: Value Creation and Growth
6.1 INTRINSIC VALUE
6.2 VALUE OPTIMISATION
6.3 VALUE REALISATION
RESOURCES AND FURTHER READING
NOTES
PART Three: Conclusion
CHAPTER 7: Rebuilding the Global Banking Industry
7.1 THE INDUSTRY'S CHANGE AND GROWTH AGENDA
7.2 THE TRANSFORMATIONAL IMPACT OF TECHNOLOGY
7.3 SPECIALISATION AND INCLUSIVE RISK TRANSFER
RESOURCES AND FURTHER READING
Afterword and Acknowledgment
Bibliography
Index
End User License Agreement
List of Illustrations
Introduction
Exhibit I Content modules of the book's business transformation and value cr...
Chapter 1
Exhibit 1.1 Hypothesis‐driven problem solving
Exhibit 1.2 System theory and its application for strategic analysis
Exhibit 1.3 Capability‐driven strategy (CDS)
Exhibit 1.4 Heat map with high, medium, and low impact
Exhibit 1.5 SWOT analysis
Exhibit 1.6 Gantt chart and performance tracking template
Exhibit 1.7 Front‐to‐back TOM of an international banking business
Exhibit 1.8 Baselining and cost mapping
Chapter 2
Exhibit 2.1 Illustrative financial institution's statement of PnL and OCI in...
Exhibit 2.2 Illustrative financial institution's balance sheet in accordance...
Exhibit 2.3 Financial institution's consolidated statement of changes in equ...
Exhibit 2.4 Illustrative financial institution's cash flow statement in acco...
Exhibit 2.5 Equity value under fair value considerations
Exhibit 2.6 Free cash flow computation
Exhibit 2.7 Net operating profit after taxes (NOPAT)
Exhibit 2.8 The derivation of NOPLAT and NOPAT
Exhibit 2.9 Valuation synthesis across methods
Exhibit 2.10 Liquidity mechanics and supply and demand
Chapter 3
Exhibit 3.1 Historical milestones of the Basel framework
Exhibit 3.2 Comparison of total loss absorbing capacity (TLAC) and minimum r...
Exhibit 3.3 Comparison of standardised approach (SA) and internal‐rating bas...
Chapter 4
Exhibit 4.1 Emerging technologies in finance
Exhibit 4.2 Open architecture banking model
Chapter 5
Exhibit 5.1 Reorganisation and wind‐down of financial institutions
Exhibit 5.2 Financial institutions' turnaround and transformation cycle
Chapter 6
Exhibit 6.1 Transaction life cycle
Exhibit 6.2 The value creation with drivers across categories
Exhibit 6.3 Value realisation across separation and integration consideratio...
Guide
Cover Page
Table of Contents
Title Page
Copyright
Dedication
About the Author
Begin Reading
Afterword and Acknowledgment
Bibliography
Index
End User License Agreement
Pages
ii
iii
iv
v
xi
xii
1
2
3
4
5
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
257
259
260
261
262
263
264
265
266
267
269
270
271
272
273
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.
The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e‐commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more.
For a list of available titles, visit our Web site at www.WileyFinance.com.
Transforming Financial Institutions
Value Creation through Technology Innovation and Operational Change
JOERG RUETSCHI
This edition first published 2022Copyright © 2022 by John Wiley & Sons, Ltd.
Registered office
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
For details of our global editorial offices, for customer services, and for information about how to apply for permission to reuse the copyright material in this book, please see our website at www.wiley.com.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks, or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought.
Library of Congress Cataloging-in-Publication Data
Names: Ruetschi, Joerg, author.
Title: Transforming financial institutions : value creation through technology innovation and operational change / Joerg Ruetschi.
Description: First edition. | Hoboken, NJ : Wiley, 2022. | Series: Wiley finance series | Includes bibliographical references and index.
Identifiers: LCCN 2021043867 (print) | LCCN 2021043868 (ebook) | ISBN 9781119858836 (paperback) | ISBN 9781119858843 (adobe pdf) | ISBN 9781119858850 (epub)
Subjects: LCSH: Decision making. | Strategic planning. | Problem solving. | Financial institutions—Management. | Information technology—Management.
Classification: LCC HD30.23 .R84 2022 (print) | LCC HD30.23 (ebook) | DDC 658.4/03—dc23
LC record available at https://lccn.loc.gov/2021043867
LC ebook record available at https://lccn.loc.gov/2021043868
Cover Design: Wiley
Cover Image: © oxygen/Getty Images
To Parissa and Leila, the true loves of my life.
About the Author
Dr Joerg Ruetschi specialises in turnaround and value creation at the intersection of finance and technology. He has been working with financial institutions, technology companies, and private equity as well as venture capital firms on special and entrepreneurial situations for almost 20 years. Joerg's core professional interests have been in building, growing, and transforming businesses through delivering comprehensive end‐to‐end solutions from strategy through execution.
Originally trained in investments and quantitative analysis, Joerg gained early experience in risk management and capital markets during his academic studies, which led to a PhD in Finance in 2005. He spent 10 years in investment banking at Goldman Sachs and alternative investments at StepStone Global with focus on asset‐liability management and asset restructuring. He joined Booz & Company (now Strategy& as part of the PwC network) in 2013 to lead the advisory proposition for bank restructuring and the broader transformation agenda of financial institutions. After the merger of Booz & Company with PwC, Joerg operated on its Deal Advisory platform with focus on operational restructuring and merger and acquisition (M&A) in financial services. He set up his own independent platform, Evolve Enterprise Solutions (EES), in 2019 to fully focus on emerging technologies and specialty finance, driving the broader change and growth agenda of financial institutions.
As an operating executive and advisor, Joerg worked across the life cycle in turnaround and transformational M&A. This included strategy development, operational execution, and technology solutions. In this capacity, he led the commercialisation, reorganisation, and integration of emerging financial technologies, assuming executive roles in artificial intelligence and enterprise software businesses. He led a series of engagements for the restructuring of the international wholesale businesses of global European banks; advised regional, systemic banks across Europe, the Middle East, and Africa on nonperforming assets, business performance improvement, and technology solutions; and assisted neo‐banks in the operational build‐up of their consumer and commercial finance businesses. He further brings extensive experience in alternative investments through which he also worked in the international specialty and reinsurance markets.
Joerg has a dedicated technical background in value creation, restructuring, and finance which includes in addition to his PhD, the Certified Turnaround Professional (CTP), Chartered Financial Analyst (CFA), and Financial Risk Manager (FRM) designations. His long‐term academic and research interests have been risk transfer and financial engineering, financial stress, and restructuring as well as entrepreneurship and technology innovation. During his professional career, he has been specialising in the combination of strategic and financial decision making as well as the transformational impact of technology. He developed a comprehensive transformation and value creation methodology to build and transform financial institutions that is further discussed in this book.
BACKGROUND TO EES
Evolve Enterprise Solutions is an independent platform for entrepreneurial and special situations. The firm drives the change and growth agenda in financial services with core focus on emerging technologies and specialty finance and their integration into the ecosystem of incumbent financial institutions.
EES Value Advisory offers executive and managerial services across the incubation, scale‐up, transformation, and turnaround of businesses as well as creating and defending value in principal investments (M&A). It further leads advisory mandates across strategy development, validation, and roadmaps (e.g. turnaround and value creation plans), investor and due diligence support with commercial and operational focus, and the planning and execution of business transformation initiatives, restructurings, divestments, greenfield build‐ups, and buy‐to‐build strategies.
Through EES Capital Advisory, the firm keeps a strong focus on building equity participation in the companies it works with.
Further information can be found at www.eesadvisory.com.
Introduction
This book is a reflection of my own journey in finance through my experience in financial technology, advisory, investment banking, and alternative investments over the last 20 years. After having the opportunity to be trained in investment management at an early stage, I developed during my studies a deep interest in risk transfer and financial innovation with a fascination for financial history and dynamic system theory. Impressed by the publications of Charles Kindleberger and Edward Chancellor, I lived through my first financial crises as a student with the downfall of the hedge fund Long‐term Capital Management in 1998.1 These interests fundamentally shaped my academic studies that eventually led to a PhD. Ten years followed as a derivatives specialist in investment banking and alternative investments before moving into advisory to focus on bank restructuring and the broader transformation agenda of financial institutions. Over the last years, I have dedicated my focus on emerging technologies, specialty finance, and their transformational impact on financial institutions. My core interests, as we are going to explore further in this book, remain on how financial institutions can be transformed with regard to value creation for shareholders but also with regard to system reliance as well as financial effectiveness and inclusion.
With the Global Financial Crisis (GFC) of 2007–2009, a boom of 30 years of deregulation and growth that started with the Big Bang in 1987 came to an abrupt end. With it, the fundamental beliefs in modern risk transfer mechanisms and financial engineering were shaken. In response, the G20 regulatory reform addressed several of the issues through new capital requirements, leverage constraints, and regulatory scrutiny. These incoming regulations have challenged the established commercial models with their profitability thresholds, leading to the immanent result that large complex financial institutions operate way below their cost of capital. At the same time, emerging technologies have fundamentally transformed operating platforms and the decision‐making frameworks. The incoming technology agenda has the potential to reinnovate the industry and put it back on a growth path. However, this requires substantial investments and the break‐up of the industry's existing organisational structures. Accordingly, this book introduces a business and management methodology that is shaped by the analysis of a number of core hypotheses:
– Hypothesis 1:
Post GFC and the G20 regulatory reform, size, and operational complexity have become core value drivers for financial institutions. Both impact and endanger the creation and delivery of shareholder value.
– Hypothesis 2:
Emerging technologies facilitate new business and target operating models (TOM). Technology‐enabled service components allow financial institutions to differentiate and gain a competitive market positioning. Efficient system and infrastructure platforms build the core of the delivery of targeted client services. The latter is play between technology providers and incumbent financial institutions. Inherent to these developments is an open question around the regulatory treatment of those components, that is, the client‐facing services and systems as well as infrastructure platforms are fully regulated whereas the backup infrastructure may operate outside of today's regulatory regimes.
– Hypothesis 3:
There is inherent value in specialised finance and risk transfer capabilities such as dedicated lending, trading, and related risk transfer mechanisms across specific client segments and product portfolios. Specialty finance businesses operate at a much lower cost‐income ratio and higher return‐on‐equity targets than large‐scale, aggregated financial businesses.
– Hypothesis 4:
Strategic coherence becomes a major driver in structuring financial institutions with profitability as core focus.
– Hypothesis 5:
Open architecture models allow incumbent financial institutions to specialise on their core competence and to integrate best‐in‐class services with the objective to provide customer a coherent experience through core platform offerings.
– Hypothesis 6:
Balance sheets of financial institution need to be managed under fair value considerations and marked‐to‐market on a consistent basis. Direct lending and investment facilities through stable pools of capital can further facilitate the structured loss of funding facilities under such a regime.
In validating these hypotheses, this book develops a methodology to transform financial institutions and create value through risk transfer businesses. Business transformation is usually applied to specific situations. It describes the outright turnaround and restructuring of a business following a crisis or change agenda with emphasis on operational efficiency, often under financial stress. Value creation, on the other hand, refers to an agenda of strategic growth initiatives. These initiatives are either driven by expansion through organic and acquisition‐based growth or operational efficiency through business improvement and capital optimisation. Value creation therefore often implies the acquisition of a business, followed by a series of initiatives to build and reposition it. The term is applied narrowly in an investor context with financial sponsors such as private equity and hedge funds taking an important role as financial or even strategic buyers through principal investments. This book uses value creation in the broader context of a management and entrepreneurial philosophy. Exhibit I illustrates this framework graphically.
Exhibit I Content modules of the book's business transformation and value creation framework
The introduced methodology follows a strategy through execution mindset, applying commercial evaluation through operational execution in repositioning banking and financial services business. In its core, it is about how to transform a financial services business front to back by combining commercial and operational change with disciplined balance‐sheet management and cutting edge technology. Before these fundamental drivers can be assessed in a comprehensive value creation framework, a common understanding of strategy, financial decision making, asset‐liability management and, most important, financial technology has to be established. The book is organised in two parts. Part One covers the managerial fundamentals and building blocks of the end‐to‐end business transformation and value creation framework that is discussed holistically in the second part. Exhibit I provides an overview of the content modules on which the management framework is built.
The book's focus is on presenting an experience‐based methodology for practitioners with no further aspiration for an academic contribution on the topic. I have borrowed heavily from existing concepts in professional and academic literature and refer back to these as “Resources and Further Reading” at the end of each chapter. Readers will further find in the chapter “Afterword and Acknowledgment” references to many of the individuals, that is, colleagues, mentors, and friends, who were part of this journey and experience. My professional and research interests across the different stages of my career has been centred on solving complex financial, commercial, and operational problems, and in particular how technology has impacted decision making and operational delivery. This experience provides a base to express a personal view on what works and what does not in accordance with my own professional development path. I wanted to be as illustrative as possible by adding tangible examples as well as reported and unreported stories to the book's narrative. I aimed to reference existing literature at a minimum under the dedicated section at the end of each chapter but sometimes also consulted public resources to validate my own understanding without further quoting them (in addition to the references in the already quoted literature). Last but not least, the entire book (in particular in Chapters 2 and 3) applies pragmatically a quantitative terminology and uses for instance discrete and continuous compounding alternatively in the introduction of different models. The target audience is decision makers and business leaders while appreciating that the industry's language remains a mathematical one.
The title of the book implies the coverage of a broad spectrum of financial institutions across banking, capital markets, insurance, asset management, technology, and infrastructure. My core focus over the years though has been on international commercial and wholesale businesses in banking and asset management with risk transfer as the key engine of the underlying business model. My own transformation and value creation experience has been in particular centred in the repositioning of capital market, corporate, and investment banking businesses of global European T1 banks; the restructuring of nonperforming assets of Southern European regional [systemic] T2,3 banks; and the build‐up of specialty finance2 platforms and financial technology businesses. This book is very much a reflection of these experiences and therefore focuses its coverage mainly on corporate and institutional as well as specialised, commercial lending businesses, often in an international setting. The term “financial institution” therefore always implies a banking perspective which includes deposit taking, payment, lending and borrowing, underwriting and placement of securities, brokerage, trading, clearing as well as institutional asset management. Furthermore, the book covers private placement and alternative risk transfer mechanisms with the objective to take risks from bank balance sheets and replace them with stable pools of capital which includes direct lending and investment facilities. The text further refers to those vehicles as asset‐management solutions.
NOTES
1
Further information can be found in Charles Kindleberger's “
Manias, Panics, and Crashes. A History of Financial Crisis
” from 1992; Edward Chancellor's “
Devil take the hind most. A history of financial speculation
” from 1988 and Roger Lowenstein's, “
When Genius Failed: The Rise and Fall of Long‐Term Capital Management
” from 2014.
2
A series of challenger banks have been built across Europe that focus on specific niche segments across consumer and commercial finance.
PART OneManagerial Fundamentals
The first part introduces the fundamentals concepts and managerial fundamentals that drive decision making and operational excellence in financial services. These building blocks cover strategic and financial decision making, asset‐liability management as well as technology management and innovation. The first two chapters frame the decision‐making methodology for financial institutions and the later chapters discuss with balance‐sheet strength and technology management two key capabilities of a successful financial‐institution model.
CHAPTER 1Strategic Decision Making
Strategy is a very broadly used term applied in military, political, and business situations. Lawrence Freedman illustrates in his book Strategy—A History the origin of strategy though mythical figures, politicians, and business leaders. They all have in common to take decisions under uncertainty and confusion of the human affair. Strategic decision making aims to clarify these moments of uncertainty with an applied set of problem‐solving principles. It is therefore a problem‐solving methodology that is applied to complex, unstructured, and multidimensional issues, driven by the uncertainty of human behaviour and decision making. Max McKeown specifies in The Strategy Book that strategy is about shaping the future by which people attain desirable ends with available means. Authors such as Igor Ansoff, Henry Mintzberg, and Michael Porter established during the last 50–60 years a corporate discipline that aims to combine a rigorous planning approach with adaptability to the circumstances given the uncertainty of the situation.
Corporate and business strategy follows a vision for a business in accordance with an executable mission of a specific commercial and operational plan. This involves determining and implementing long‐term goals and objectives, with the considerations of a financial institution's market positioning and available capabilities. These considerations include competitive analysis, macroeconomic and industry conditions, regulatory constraints, and other dimensions of the internal organisation and external environment. The following chapter introduces a series of core strategic principles and applies them to financial, commercial, and operational problem solving in financial institutions. It covers tools of strategic analysis such as hypothesis‐driven problem solving, system theory and coherence, as well as strategic planning such as roadmaps; heat maps; strengths, weaknesses, opportunities, and threats (SWOT); and scenario analysis. It further discusses the operational efficiency and the design of target operating models (TOM), performance improvement, and merger & acquisition (M&A) as fundamental tools of the strategic decision‐making process. The ability of an institution to convert strategy into a success business is directly related to the continuous testing of the logic and the assumptions when making structured decisions about how to win in a competitive marketplace.
1.1 STRATEGIC ANALYSIS
Strategic decision making develops a systematic approach and defines a methodology to analyse business situations and solve entrepreneurial issues that are by nature complex and unstructured. It solves the key question on how to get a competitive advantage over the opponent in resolving the issues. The complex nature and dynamic relationship of the underlying drivers require a systematic problem‐solving mindset. In business and finance, this problem‐solving mindset establishes a clear understanding of the dynamics of the market positioning of a business with its revenue stream and the effectiveness of the operating platform with its cost structure. System theory is used to further assess the dynamics within the assumptions and limitations of theoretical models. At the same time, every strategy has to be coherent with an organisation's market positioning, capability set, and product and services fit while following a best‐in‐class benchmark. The following section introduces those three tools of strategic analysis.
1.1.1 Hypothesis‐driven problem solving
Strategic analysis is by nature solution oriented and hypothesis driven while being fact‐based at the same time. The process of coming up with a good strategy has the same logical structure as the problem of coming up with a good scientific hypothesis, as strategy deals with the edge between the known and the unknown. It is an educated guess about what will work in a specific situation. As a decision process, it applies a structured framework to generate fact‐based hypotheses followed by data and information gathering with the objective to prove or disprove the hypotheses.
This decision and problem‐solving process is therefore often referred to as a hypothesis‐driven approach. The hypothesis‐driven approach is a cornerstone in strategic analysis. It starts with understanding the situation, framing the problem, analysing through gathering information as well as data, and finally concluding the analysis by guiding policies and coherent action plans. In its analytical approach, it simplifies the often overwhelming complexity and reality by identifying certain aspects of the situation as critical.
This hypothesis‐driven analysis is driven by three core principles that can be summarised as follows:
Simplify and reduce complexity by stating early an initial hypothesis which leads to a result‐driven analysis.
Specify and focus through identifying key drivers in a designated analytical framework that is mutually exclusive collectively exhaustive (MECE).
Quantify and validate through available information and related data.
As Exhibit 1.1. illustrates, every strategic issue, as any complex und unstructured problem‐solving challenge, starts with developing and testing a bunch of hypotheses that sets out the path how a situation can be resolved. This path knows five major steps.
The principles of the hypothesis‐driven approach provide a central decision platform, based on which efficient problem‐solving process can be applied. The process is defined through a structured framework that is centred on the initial hypothesis. It begins with framing the problem through understanding the situation and defining the boundaries of the analysis. It early comes up with an initial hypothesis and further breaks down the issue in its core components. By gathering information and data and through analysing them, it is continuously refined until a synthesis and conclusion can be reached. There are five steps that further define this methodology.
Exhibit 1.1 Hypothesis‐driven problem solving1
Baseline, structure, and hypotheses
Step 1: Understand the situation and assess the problem
The objective here is to fundamentally comprehend the situation of a business by looking into initially available information and data. The step is known as baselining as it organises available data in a format that then further drives the structure of the analytical framework and the solution path around it.
In a restructuring situation, the incoming management team assesses the situation with readily available information while starting to work on a more detailed baselining. The baselining provides a detailed description of the business model, outlines the target operating model with its value chain, and provides a functional breakdown of the operational cost base.
Step 2: Frame the problem through hypotheses and structure a framework
In a first diagnosis, a clearly defined framework allows the management team to come up with an initial hypothesis on how to resolve the problem directionally. It is shaped across the core elements of the situation and its related issues. The following key elements are to be considered:
– Set up the analytical framework through defining the issues in a structured approach with its key drivers and major factors: It is followed by an issue tree that sets out a logical order for each of the issues.
– State an initial hypothesis that speeds up the quest for a solution and sketches out a roadmap for the analysis: It will guide the work throughout the entire problem‐solving process. Forming an initial hypothesis will make the decision making more efficient and effective. It should be formed at the start of the process as it allows one to reach conclusions based on limited information. As different hypotheses are proven or rejected through gathering data and information, validate them accordingly. The initial hypothesis remains central in outlining the framework of the analytical process.
– Develop issue trees to bridge the gap between the analytical framework and hypotheses: An issue tree structures the issues that must be addressed to prove or disprove a hypothesis. Every issue generated by the framework can be further broken down to subissues. By creating an issue tree, the issues and subissues are laid out in visual progression. This allows determining what questions to ask in order to form the hypothesis and serves as a roadmap for the analysis. It also allows eliminating quickly dead ends of the analysis, since the answer to an issue immediately eliminates all the branches falsified by the answer. To reduce complexity, simplify by numbering the issues and state hypothesis in the MECE approach along an issue tree.
Mutually exclusive collectively exhaustive (MECE) refers to the concept of separating the problem into distinct, nonoverlapping issues while making sure that issues relevant to the situation and problem have not been overlooked. All possible options are to be considered or rejected in the problem‐solving process.
In our restructuring case, a global T1 bank experienced a capital shortfall and had to sell a series of asset portfolios and businesses in a fire sale. A new management was appointed to execute a broader turnaround of the global markets business where the issues were located. During the baselining, an initial hypothesis was established that post sale the operational capabilities and their cost base were outsized with regard to the remaining portfolio of assets and businesses. The management team developed a functional breakdown of the cost base and identified the major cost driver for each function. Based on this analysis, a group of hypotheses was built to take costs out rapidly and stabilise the operations as base to further reposition the business.
Analysis, refinement, and elimination
Step 3: Gather information and analyse data
After setting up the framework and defining the set of applicable hypotheses, the next step is to design the analyses that must be pursued to prove and/or reject the hypotheses. It is followed by gathering the data and information needed for the analysis. Those steps include:
– Gather information and data to identify and verify the different issues specified by each hypothesis.
– Analyse and diagnose through, continuously refining the hypotheses along the issue tree.
– Isolate the core issues by a process of segmentation and elimination.
In our case study, the management team gathered detailed financial data across the different initiatives and conducted interviews with respective stakeholders. Through the received data streams and information, it validated and eliminated several of the cost reduction hypotheses. The hypotheses that got confirmed were further refined until the management team was in a position to agree on the cost targets with the different business leaders. The aggregated quantum was then presented and approved by the board of directors and subsequently communicated to the market.
Conclusion and action plan
Step 4: Synthesise by coming up with guiding policies
In a first conclusion, the key findings are summarised and synthesised to an overall conclusion. Additional factors may further be considered when they impact the outcome. This leads to the evaluation of which strategic options might be applicable while keeping the big picture.
Step 5: Outline a comprehensive action plan
In the final step, the management's action plan is outlined. This often implies several strategic options with different choices. Tangible recommendations need to be articulated as a conclusion before the implementation process can be started. Action steps are to be coordinated with one another to work together in accomplishing the guiding policy. What is important to realise is that good strategy and good organisation lie in specialising on the right activities and imposing only the essential amount of coordination.
1.1.2 System theory
Systems theory is a multi‐ and interdisciplinary approach that integrates different theories with their individual premises and dynamic behaviours in a comprehensive setting. A problem‐solving methodology follows specific theoretical assumptions that define a system with its boundaries, surrounded and influenced by its environmental factors. A system is a group of things that are interconnected and demonstrate their own behaviour patterns over time. This may be a natural system that exists in reality. It may be replicated through a logical system and theoretical model as an approximation of its reality. The combination of several systems represents an overarching system. Changing one part of the system may affect other parts and with it the whole system with predictable and unpredictable behavioural patterns. Some systems are self‐adapting. Others need to adapt and their growth depends on how well they can adjust to the environment.
The goal of system theory is to discover dynamics, conditions, and constraints across systems that can be generalised to overarching principles. Whilst we aim to avoid the deep coverage of theoretical concepts such as dynamic system theory and cybernetics, it needs to be emphasised that interdisciplinary thinking is a crucial element of any strategy toolkit. The modern financial system is global in scale and intertwined. As a result, it has become immensely complex. Often several theories (i.e. systems) need to be applied as a fair proxy of reality. Different systems may model different dynamics and outcomes. The interdependence between the models is crucial and encourages us to use different disciplines to analyse a situation. Financial analysis, valuation, and modelling are by definition quantitative driven and highly dependent on specific premises as will be further covered in Chapter 2. This leads to a simplification of the real world dynamics, and as we will further learn similar behaviour patterns and decision making that consequently may destabilise the entire system.
System theory can crucially support strategic analysis by outlining the dynamics and impact factors on aggregated levels. It allows one to think through problems from different standpoints and interdependencies. Dynamic system theory in particular describes the long‐term qualitative behaviour of complex system dynamics by using mathematics in the area of differential equations. Its focus is not on finding precise solutions through formal equations but by describing the dynamics of a system depending on its initial conditions. The study of chaotic systems is attributed to dynamic system theory. It has found its application in advanced financial modelling.
Exhibit 1.2 illustrates a simplified decision model based on system theory. Similar to more advanced applications such as the St. Galler Management Model, it uses an institution's ecosystem as the overarching system at the highest level and then applies subsystems to describe the organisational‐level implications. Systems are interrelated and driven by feedback loops between output and input. Data, market intelligence, people, and resources are input factors. Products and services as well as processes and systems are output factors. The interdependencies drive the subsystem while organisational and ecosystem levels provide the constraints and requirements that need to be fulfilled.
Exhibit 1.2 System theory and its application for strategic analysis
When analysing broader trends in financial systems, macro‐history that looks at events in financial history and approximates long‐term trends with respective implications for decision making should be applied in combination with dynamic system theory. Chapter 2 will apply in its analysis of financial stress and banking crises a respective methodology that is based on the combination of quantitative analytics, dynamic system thinking, and macro‐history.
1.1.3 Coherence
The term “coherence” refers to the degree of alignment among an institution's strategy, its capabilities set as well as the options and portfolio choices it encounters. It is a reflection of its successful commercial positioning. In its analysis, this methodology covers a range of fundamental questions on the effectiveness of the market position, the strategic fit of its business as well as portfolio and services, and the gap between available and required capabilities. It further assesses how capabilities can be built successfully either organically or through acquisitions. On the other hand, it provides a framework on how incoherent capabilities are to be disposed or divested. Every roadmap needs to be assessed with regard to its strategic coherence. This is equally applicable to turnaround and transformation as well as value creation plans.
Following the methodology, originally developed by Booz & Company (now Strategy& as part of the PwC network), a strategy is coherent across three core elements: the market position of a business, its capabilities set, and its services and product fit. To have a successful execution of the strategy, those three elements are to be in full alignment. Every strategic decision needs to be targeted towards coherence and needs to be consistent with its strategic identity. Crises that lead to restructuring and turnaround, underperformance that requires business transformation, and/or an acquisition that demands a value creation are to be assessed against these three elements of coherence. If strategic coherence is not ensured, the strategy may fail, which applies in particular for complex and diverse businesses such as banking and financial services. Exhibit 1.3 describes the different factors of coherence that is also known as capability‐driven strategy (CDS).
Sustainable competitive advantage
A financial institution needs to have a sustainable advantage to competitive advantage which is the overarching objective of a coherent strategy. There are three main sources of competitive advantages. The first one is economic success factors such as absolute and relative cost advantage through higher operational efficiencies as well as differentiation advantages through risk‐based credit underwriting and technology‐enabled distribution channels. The second one is organisational factors which relate to specific institutional and management capabilities. The third and last one comes from political and legal factors through high market entry costs and market protection such as high regulation.
Market positioning
The market positioning defines the way a business creates and realises value for its stakeholders and differentiates itself from competitors. Although the positioning needs to be nimble and adaptable for growth opportunities, it needs to be ultimately focused and tangible for decision making. It is a distinctive feature that is core to the strategic identity. At the core is an institution's value proposition. Financial institutions usually have multiple and often diverse businesses. Diversification benefits with regard to managing the economic cycle and the different risk factors as well as complex client requirements, franchise relationships, and distribution opportunities are often quoted as rationale. In the late 1990s and early 2000s, universal financial conglomerates were created that consisted of banking, insurance, and investment management businesses. The management complexity was dramatic and most of them spectacularly failed when the technology, media, and telecommunication bubble burst. Goldman Sachs, on the other hand, is known for its unique market positioning, business profile, and talent culture. Until very recently, the firm had remained loyal to its core strategic identity as an investment bank with risk‐taking and advisory businesses at the core of its franchise. In looking for additional growth areas, Goldman Sachs has more recently ventured out to consumer finance although it had been struggling previously with its ultra‐high net worth wealth management business. Applying the coherence methodology to this strategy move, it remains an open question whether this strategic change will be a successful one.
Capabilities set
A capabilities set is a combination of several mutually reinforcing activities that, together, constitute the market position of a business. On an individual level, a capability is the ability to reliably and consistently deliver a distinctive outcome for the business. This is ensured through the right combination of processes, tools, knowledge, skills, and organisation. Each of the capabilities has to be distinctive on its own and represents an extraordinary if not unique competence that is differentiating. When deployed effectively as set, the combined capabilities lead to a competitive advantage. It is not about individual capabilities but the way they work together. For financial institutions, this can mean the ability to centralise data analytics to assess and manage risk, to develop and bundle products and services in a unique way, or to effectively manage relationships with specific client segments. The capabilities deliver value as a combined entity. In case of Goldman Sachs, the firm's ability to manage data across products and businesses, and steer its balance sheet to transparent daily mark‐to‐market valuation, gave it a massive competitive advantage in managing the risks of the accelerating subprime crisis before the collapse of Lehman Brothers in autumn 2008.
Exhibit 1.3 Capability‐driven strategy (CDS)
Every strategic decision needs to consider if the organisation has the ability to deliver and the required capabilities set to do so. If a financial institution does not have them now, can they be built organically or acquired externally? To do so, the gap between available and required capabilities has to be assessed and clearly described. Then specific actions can be implemented to close the gap. Every strategic roadmap, if it is a turnaround plan or a value creation blueprint, needs to reflect this and, most important, always link back to the market position.
Product and service fit
Finally, every product and service offering has to be supported by the capabilities set and fully aligned with the market position. Products and services deliver revenues and add the financial aspect to every strategic decision. If they are not in alignment, then the overall impact of the strategic move remains questionable. Furthermore, if the product and services fit is not ensured, the exit of the respective product portfolios is to be considered. Often during periods of growth, the product and service portfolios are extended to nonaligned and/or not supported capabilities. UBS, for instance, added late in the cycle, leading up to the Global Financial Crisis (GFC), a series of fixed‐income and credit businesses in a desperate attempt to catch up with the established American investment banks. When the credit cycle turned, UBS did not have the risk‐management capabilities to manage the position and client exposure effectively. The group with its differentiating and sustainable wealth management business experienced losses in the area of US$40–50 billion. It was at the edge of collapse and had to be rescued in a combined operation by the Swiss government and the Swiss national bank. Following the stabilisation of its balance sheet, UBS, as many other banks in similar situations, moved all its incoherent or nonstrategic assets and businesses to a noncore unit and wound them down in a disciplined manner. Financial institutions complete pricing analyses in relation to the addressable target market and customer segmentation.
Strategy identity with winning ambitions
The thorough understanding of the market positioning and the institution's capability set and product and services fit lead to the strategic identity. The strategic identity sets the winning ambitions and initiatives in the competitive playing field for success. The winning ambitions are shaped by an institution's vision and purpose that gets captured by the mission statement. It must be coherent across the firm's market positioning, capability set, and product and service fit. It eventually describes the way an institution intends to gain a competitive advantage through its value proposition and growth initiatives in the marketplace.
1.2 STRATEGIC PLANNING
Strategic planning follows a structured process that combines several layers of analysis to a roadmap. The roadmap evaluates a situation and concludes on a strategic direction. It starts with an impact assessment that outlines the available options and portfolio choices to be aligned with the requirements of the commercial and operating model. Finally, a coherent action plan is to be established.
1.2.1 Roadmap
A strategic roadmap summarises the cornerstones of a strategic plan. It is designed to help the management team to make its strategic choices. The roadmap starts with an evaluation of the situation, followed by impact assessment that leads to a response plan. The situational evaluation is shaped by the set of hypotheses that have been built in to understand the situation. The action plan outlines the strategic direction with its different options, defines the specific problem‐solving process for a situation, and comes up with an action plan that further moves the analysis towards implementation. A turnaround and value creation plans that we are going to introduce in Chapters 5 and 6 are to be understood as such strategic roadmaps. For the time being, it remains crucial to be familiar with the term and understand its role. Conceptually, the hypothesis‐driven approach as an efficient problem‐solving process leads and shapes the strategic roadmap. It moves the focus from identification and evaluation to action and implementation.
1.2.2 Impact assessment
Every new situation such as a crisis, a major transformative event (e.g. new capital requirements), or the circumstances of an underperforming business require the detailed evaluation and impact assessment. Strategy offers a series of tools that facilitate this initial analysis. The following paragraphs are focussing on heat maps, SWOT, and scenario analysis as proposed tools. In its approach, all those tools are usually expert driven and supported by quantitative analysis. It allows illustration of the situation with its core drivers while getting senior decision makers and stakeholders aligned to the problem‐solving process.
Heat map analysis
A heat map visualises and graphically illustrates an initial evaluation and impact assessment with its core issues against several dimensions. The individual outcomes are contained in a matrix, often as an expression of an institution's organisational structure and its operating model's functional structure. The important role of the target operating model will further be discussed in a subsequent section. As illustrated in Exhibit 1.4, the outcomes of a heat‐map analysis are represented in accordance with a colour scheme, for example, red for high impact, amber for medium impact, and green for low impact.
Exhibit 1.4 Heat map with high, medium, and low impact
Heat maps can be applied to a variety of situations such as specific events in case of a crisis or a strategic shift. The heat map allows quick assessment of the situation and provides initial guidance and direction for how the situation can be approached and the issues resolved. It is a powerful tool for internal coordination and alignment across decision makers.
SWOT analysis
The SWOT analysis further provides helpful information for matching resources to an institution's capabilities and market positioning. It is one of the most commonly used approaches in strategic planning. It covers strengths (S) and weaknesses (W) from an internal view, and opportunities (O) and threats (T) from an external perspective. The analysis outlines advantages and disadvantages and identifies the environment's favourable and unfavourable factors in achieving the objectives of a strategic decision. It naturally illustrates the competitive advantage or disadvantage of an institution in a specific situation which can impact the decision dramatically.
Prior to performing a SWOT analysis, it is important to first develop the proper context by working through the process of a market assessment and identify the competitive advantage an institution. The assessment must follow the framework and requirements of strategic coherence. It is always applied within the context of a defined market that sets the barriers to implement a particular strategy at the organisational or product level. Through the combination of different scenarios, the SWOT analysis helps in developing strategic options and priorities. The combination of strengths and opportunities indicates the right or a strong strategic fit. The combination of weaknesses and opportunities allows to overcome gaps. The combination of strengths and threats leads to the reduction of organisational vulnerabilities. Finally, the combination of weaknesses and threats preempt threats that may attack vulnerable areas. Exhibit 1.5 illustrates the core components of a SWOT analysis with its applications.
Scenario analysis
A scenario analysis further evolves the initial assessment by analysing possible future outcomes by stressing specific factors for the evaluation. It assumes specific scenarios for the factors and assesses the possible outcomes under these developments. Each scenario normally combines optimistic (best case), standard (base case), and pessimistic or less probable (worst case) developments. The scenarios are built with the objective to assess the implications for decision making. The four combinations outlined under the SWOT analysis can be the starting point for an extended scenario analysis framework.
Exhibit 1.5 SWOT analysis
The scenarios can be qualitative or quantitative. Qualitative scenario analysis applies graphic factors to illustrate the dynamics and interdependencies by using instruments from system theory. Quantitative scenario analysis often uses a binominal or trinomial tree by applying specific probability distributions. As we are going to discuss further in Chapter 2, a probability distribution is a mathematical description of the probabilities of events of a sample space. The sample space describes the set of all possible outcomes of a random phenomenon being observed. There are discrete and continuous probability distribution with different specifications such as normal or t‐shaped distributions. Monte Carlo simulation uses stochastic processes in forecasting the different outcomes. It develops a better view regarding the risk and uncertainty of an outcome and is often applied in financial analysis and valuation. Chapter 2 covers in detail the fundamentals of a scenario‐based approach in the context of a financial decision‐making process.
Game theory allows the simulation of the strategic interaction among rational decision makers. It can apply to a variety of situations in strategic decision making. In its simplest form, it applies zero‐sum games, in which each participant's gains or losses are exactly balanced by those of the other participants. More advanced forms change assumptions and introduce behavioural relations to simulate the outcomes of the interactions. As we explore further, in financial decision making the behavioural element is usually approximated by utility functions that can be described by mathematical models. Through the application of deep‐learning machine learning models, game theory can use today large amounts of data and apply advanced simulation for complex decision making. Chapter 4 will cover these developments further under the section on artificial intelligence and augmented decision making.
1.2.3 Strategic options and portfolio choices
The establishment of strategic options follows the impact assessment. This allows the structured evaluation of the relative merits and feasibility of different ways forward expressed by the available options. A strategic option is nothing else than an available choice. There naturally is always a chance of an inherent challenge or disadvantage to choice made. Options are therefore often aggregated and become portfolio choices in accordance with the strategic direction of an institution. Probability theory offers several quantitative techniques to quantify the options and their aggregation. Contingent claim models that are introduced in Chapter 2 apply binominal trees in a discrete setting and closed‐end formulas in a continuous setting. However, the selection of a strategic options often remains subjective and is likely to be influenced by the specific political interests or cultural values of the decision makers.
It remains most important that any choice is coherent with the firm's strategy, market positioning, capability set, and product and services portfolio. The introduced methodology of strategic coherence articulates a paradigm against which all choices and decisions are evaluated. In turnaround and transformational situations, the rationalisation of business portfolios is often required in accordance with the strategic direction chosen. Up to the GFC, many global European banks had pursued lofty ambitions, trying to build themselves into global powerhouses in some cases by expanding into businesses where they had little expertise such as investment banking. They suffered accordingly in the period following the crisis, incurring losses and, in some cases, had to accept government bailouts. However, a group of them radically restructured their business portfolio and significantly scaled back on major business lines and geographies. UBS, for instance, scaled back their investment bank to provide services to their core wealth management business. Royal Bank of Scotland (RBS) reduced their corporate and institutional bank substantially (now known under the Nat West Markets brand) to the requirements of their UK‐domestic corporate and institutional client base. Other banks made none or only incremental changes to their strategy and had to go through an accelerated restructuring at a much later stage in the cycle. In value creation situations such as buy‐to‐build or buy‐to‐fix acquisitions, the same principle applies. Each value creation initiative must be coherent to the build‐up and/or repositioning strategy, the market opportunities, and the capability set. As part of the broader transformation cycle of the industry, a group of specialty finance providers popped up after the GFC. They challenged the existing market structure by either focussing on underserved client and product segments or providing technology‐enhanced services in a very effective manner. The profitability of these challenger banks has been much higher with a return on equity (ROE) of more than 30% and cost‐income ratios below 40%. Targets that could have never been fulfilled as part of a large and complex organisation.
1.2.4 Action and response plan
An action and response plan is the part of the strategic roadmap that describes the set of actions to get the solutions to the respective situation implemented. It is often used for illustration and approvals in discussions with senior management with regard to next steps. It provides a detailed documentation that consists of an executive summary, a section on the evaluation and impact assessment, consisting of a combination of a heat map, scenario, and SWOT analysis, as well as a Gantt chart. The Gantt chart proposes a response schedule with its timeline, activities, and key milestones. This plan usually outlines the going‐forward direction though a comprehensive business plan which then further describes the overall commercial considerations. It includes financial information, operational requirements, and specific implementation initiatives for the execution. Good examples of such action and response plans are separation and integration plans that are further covered in Chapter 6 under value creation and growth.
A Gantt chart is a bar chart, named after its inventor Henry Gantt, that uses a bar for each activity in accordance with its timeline while showing the dependency between activities and response status. Each activity is represented by a bar. The position and length of the bar reflect the start date, duration, and end date of the activity. Tasks and specific subtasks are created, and interdependencies and overlaps are visualised. Each activity is a response to mitigate or influence the outcome described by the evaluation and impact assessment. It illustrates the response schedule graphically and often describes milestones with specific marks to complete it. Exhibit 1.6 illustrates a Gantt chart with its visible features. There are several software solutions available that allow a flexible integration in an institution's programme management.
Exhibit 1.6 Gantt chart and performance tracking template
A quantitative performance tracker accompanies the plan with the aim to track progress and associated costs. The tracker applies a selected set of key performance indicators (KPIs) that allows the management team to measure progress towards plan and highlights areas that need attention. The right set of indicators needs to be selected as a representation of the respective situation and desired outcomes. Important is to identify and select the critical few management metrics. KPIs can be grouped in a financial, commercial, and operational perspective. Its role will further be discussed in Chapter 6 when the different components of a value creation plan are going to be established.
1.3 OPERATIONAL EXCELLENCE
With strategic coherence, a methodology and group of core principles were introduced. A business must establish itself with a clear identity in the marketplace and create a set of differentiating capabilities to which all product and services have to fit. The operating model brings this all together with focus on operational excellence and efficiency. It outlines the governance structure of a business across locations and the different operational functions such as front office, operations, technology, and support functions, that is, finance, risk, human resources, and legal. It defines processes and systems as well as the services provided by each function across the value chain. It sets the people agenda by articulating skills and motivations of its people across each function and defines performance management and incentivisation as well as organisational development.
1.3.1 Operating model
The operating model facilitates the realisation of an organisation's strategic ambitions as an expression of its strategic identity in coherence and alignment with its market position, capability set, and product and services fit. It links back to vision, culture, and specific management processes and is organised in accordance with the paradigm of operational efficiency in transparent alignment with its KPIs. It most importantly clarifies if resources and costs are correctly allocated and its cost base and drivers in line with benchmarking peers and best practice. The information flow must be guaranteed and controlled back‐to‐front.
The operating model can be distinguished in an as‐is and target operating model (TOM). The as‐is operating model is a description of today's processes, systems, and services. It delivers a functional front‐to‐back view of today's cost base which is the starting point for the performance analysis. The TOM on the other hand implies a target state that is to be attained on a going‐forward basis. For any turnaround and value creation plan, the TOM is fundamental to any business performance improvement initiative such as cost reduction, restructuring, or commercial as well as operational transformation. They all start with the design of the targeted state of the operation and its functions that are defined by the TOM. There are several design principles that have to be incorporated.
The TOM outlines where operations and people are going to be located. It defines the organisational structure with its major business units, sets roles and responsibilities, and allocates resources respectively. Tasks are defined and divided, and authorities are distributed to ensure efficient delivery. It is an expression of an institution's day‐to‐day activities, organised front to back across functions, representing the value chain of a business. It starts with the front office which includes all revenue‐based activities such as product and sales‐related ones. It defines the market position and how the organisation faces off to customers and competitors. It is followed by operations and technology and outlines the services that are provided. It can be divided in middle office which includes product control and compliance functions as well as client services support. There also is a classic back‐office which settles products and issues documentation and drives standardised operational services. The shared or support functions support the different business units, operations, and technology across the organisation. These are finance, risk, human resources, legal, and compliance. Technology can also be organised as a shared function, delivering services across business units. Given the specific requirements of individual business units, they usually remain close to operations or a hybrid model of group and business unit technology services is established. Within the risk function sits the second line of defence while the first line remains a responsibility of the front office, and auditing as the third line is part of the finance function.
