The financial services strategists at Cap Gemini Ernst & Young put it succinctly in a recent report: "Isolation is risky." Banks worldwide appear to be getting the message, and they need look no further than the technology companies that serve them to see non-isolation in action.
Alliances among financial IT "solutions providers" may once have been characterized by simple co-marketing agreements-and not much else, save the fanfare surrounding their announcement. Today, though, they're running deeper than that, finally living up to the adjective so often associated with them: strategic.
Nina Castro Owens, a senior manager in CGE&Y's financial services institutions practice, believes the proliferation of "truly strategic" alliances involving banks and bank technology firms can be traced to a couple of New Economy realities. The first, she says, is an almost desperate quest for scale, among both smaller application software firms and a number of financial insti- tutions; and secondly, bankers have come to recognize that "they, too, have a need for speed." For the companies that sell them hardware and software, banks' no-nonsense demand for implementation with all deliberate speed, in addition to more timely and predictable returns on their IT investments, creates competitive pressures that mirror banks' own. For the solutions providers, too, scale and speed have become crucial.
Underlying both of these drivers, Owens says, is a fundamental truth about the 21st century marketplace: "Technology is now at the core of a successful financial services strategy."
It is technology, after all, that enables banks to "enhance their connectivity-with customers, employees, suppliers," she says, and doing so is nothing short of a strategic imperative today.
Given the onslaught of Web-enabled competitors coming out of the woodwork, bankers also recognize that they must "leverage technology to retain customers." Owens believes IT is, in effect, the centerpiece of any potentially successful financial services business model going forward. And because technology doesn't come cheap, "the stakes are getting higher" for small and midsize institutions, the analyst says.
"The global companies are outspending the rest. The firms that aren't at that scale are finding it more and more difficult to keep up, and they're looking to alliances to help them fill needs that institutions like Citigroup and Bank of America can handle internally," says Owens. (But make no mistake, she adds quickly, managers at Citigroup and Bank of America have been astute in tapping the advantages inherent in well-crafted alliances.)
The second major trend driving the proliferation of alliances is relatively simple, Owens says. "Technology is key in banks' customer development projects, but the return on investment for these efforts is extremely long-typically 24 to 30 months. If you go with an alliance partner," she says, "the ROI is usually much shorter."
Roy Lowrance, a vice president of Boston Consulting Group who oversees the global firm's IT practice in North America, also attributes the deepening of strategic alliances to a "multifaceted phenomenon" but one straight out of Economics 101-or, perhaps, New Economics 101.
Lowrance says banks' "old friend," disintermediation, is a trend that has been found out, and the news is not good. Except, that is, for bank customers; for financial services consumers, the news is very good indeed.
"Disintermediation is there, but it's a more general form of disintermediation, and bankers have learned that it's really a deconstruction. This is particularly true in financial services." Lowrance explains that, to the extent any service is based on information, as banking certainly is, the business environment "deconstructs" due to the Internet-enabled "separation of the navigation function (the channel through which a consumer finds the product or service) from the product itself, as well as a separation of the provisioning function.
"Deconstruction is good for the buyer," the BCG executive says. "Buyers can become bolder, if you will, because they now have more choices."
In a "deconstructed world," Lowrance says, scale becomes especially important to a product producer-in this case, a provider of bank technology (or, for that matter, a bank).
"If you're a product provider in a deconstructed industry environment, you may choose not to brand your product at all, but, rather, to let the navigator brand it." In that scenario, which fits the world in which banks operate today, "it actually doesn't make any difference who makes it, and companies are freed up to go with the most attractive outsourcing arrangements."
Navigators, too, are pressured to scale up in such an environment, says Lowrance, and will seek alliances in trying to do so.
"When scale starts to play an important role in an industry," the consultant says, "it's unusual to have more than, say, three to five ... no more than six or seven successful players."
Owens, for her part, goes at the issue somewhat differently, but her analysis also suggests a deconstruction of sorts, or at least the potential separation of financial services that once fit snuggly into a single institution.
Technology, she says, has made it possible to buy "a bank in a box." If you're an insurance company intent upon offering banking services, "you could have that up and running in six months or so." Incidentally, the same holds true in reverse-the bank that wants to expand its insurance offerings can do so very quickly by "forming an alliance with one of these fi-tech providers," Owens says.
She cautions that alliances involving banks are by no means limited to "outsourcing" initiatives, although the trend toward more outsourcing of technology functions has contributed significantly to the ever-swelling number of strategic alliances taking shape in the banking market worldwide.
"The activities banks are outsourcing are those they consider to be non-core activities," Owens says. "If you look at something like CRM, which is definitely a core activity, you'll see banks playing a much bigger role in that space. If it has to do with the customer, the bank is going to keep itself very much in the loop." Thus, if a bank enters a technology alliance to implement CRM, the arrangement is likely to resemble a true, working partnership, not a simple outsourcing deal.
In short, says Owens, a bank that sees its role principally as a manager of financial relationships is much more likely to embrace partnerships than an institution that views itself mainly as a processor.
But, back to scale: The big guys, by definition, are major players, on both the bank and technology-provider side. It's the giants, of course, that lend scale to alliances.
In the financial services industry, companies such as IBM and Sun Microsystems have partnering down to a science and practice it vigorously around the world.
"At IBM," says Robert Timpson, general manager of developer relations, "what differentiates what we're doing from what I call 'press-release alliances' is the value we bring to this, and the commitment all sides bring. The depth of commitment by IBM and its alliance partners-and these are among the leading application software companies-is very significant."
Not surprisingly, notes Timpson, who oversees IBM alliances in all industries, the financial services sector accounts for the largest number of partnering agreements. (Bank Technology News looked at the corporation's global alliance with Siebel in an April story about customer relationship management.) IBM has more than 1,000 employees dedicated to the Siebel alliance, "and I mean on site with them," Timpson adds. IBM also committed to providing special training to 5,000 of its 25,000-strong marketing army to sell the IBM- Siebel CRM solution.
"Siebel is well-known to bankers," says Timpson, "but I think they want IBM to come in and say, 'Here's a dedicated contingent of our people who have done it before, and here's a proposal to get it done on time and on budget.'"
Peter Staley, vice president of business partner programs for IBM's global financial services sector, recalls that while the formation of alliances has played a role in the corporation's business for many years, "it's a more important element of the way we do business than ever before."
"Today," Staley declares, "IBM's strategy is built around alliances."
While alliances such as the IBM-Siebel partnership serve a number of industries, Staley says, many of the company's 60 current alliances are industry-specific. The company's partnership with Financial Fusion is an example of the latter. Typically, the agreements involve integrated marketing efforts as well as "technology relationships." The technical end of the deal includes IBM assistance in helping its partners "port their applications to the IBM platform, if they're not already there," Staley says, "and we work together as well on the business case. This is very much a strategic play for us."
Under Financial Fusion's alliance with IBM, announced in April, Big Blue will provide integration and consulting services for Financial Fusion products for institutional trading in capital markets, in addition to collaboration on solutions for online retail banking. The agreement was sealed after Financial Fusion completed an ongoing effort to enable the company's applications to run on IBM servers, storage and middleware.
Chris Infurchia, senior vice president of marketing with Financial Fusion, says the company's alliance with IBM "is more content than just story." While marketing aspects of the agreement are a key benefit for Financial Fusion, "we are working closely with their engineers on the technical side ... to completely fine-tune Financial Fusion applications and online server for Net banking with IBM's offerings."
Infurchia stresses that while strategic alliances between IT companies are "good for us," they are also good for the banks that buy from them. "The financial institution enjoys the benefit of one-stop shopping, of course, but they also get the best product, carefully integrated and fine tuned."
Financial Fusion is also among the numerous bank IT providers that has a formal alliance with Sun Microsystems, a company that has made open systems-and consequently, ongoing partnerships with developers, a key part of its strategy since day one.
David Littlewood, who heads Sun's work in the financial services industry worldwide, believes the company's long history of partnering "is one of the reasons more applications run on our platform than any other." He notes, too, that Sun Microsystems' commitment to open standards, as seen in the Java programming language, has allowed application developers to work closely with Sun "without seeing us as competitors instead of partners."
"Sun Microsystems is in something of an enviable position, in that many developers write their applications to run on our platform and we don't even know until they've introduced it," Littlewood says. If the application shows enough promise to catch Sun's eye, "we will take what they've done and test it at our benchmarking centers, do some fine-tuning, then hopefully give the designers some feedback," he says. Occasionally, the company may take a small equity stake in a software company "to enable the market to 'happen' more quickly, so to speak."
Littlewood says Sun Microsystems is viewed by application providers as one of the best large companies to work with because of its practice of providing plentiful support without coming in and taking over. "I really don't know of anybody who does this better than Sun," he says.
Will small and midsize banks begin participating more directly in such alliances-that is, over and above their indirect participation as customers of financial IT providers' partnerships?
Financial Fusion's Infurchia says bankers may begin looking more closely at the advantages in such partnerships, but he's doubtful that the alliance trend will take hold within the banking business as it has among bank IT companies.
"I'm not a banker, but I think that if they're reluctant to consider these types of alliances, it has to do with their ownership of that customer data-or, really, ownership of the customer relationship." The necessity of holding on tightly to the bank's existing customers while searching for new ones probably discourages financial institutions from exploring alliances among themselves, Infurchia mused.
"But, for a company like ours," he says, "this kind of thing, done correctly, works very, very well."