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Managing Director of Accenture Financial Services, Korea
The financial services sector staggered out of 2007 with a significant net income decrease, amounting to more than 25 percent on average for many of the biggest global banks. Some analysts expect write-downs from the subprime crisis to total $1 trillion-$1.2 trillion.
 managing director of Accenture Financial Services Korea |
Yet the challenges that bankers are facing are not slowing their pursuit of growth and cross-border efficiencies through geographic expansion. In a recent study by Accenture and Subi Rangan, professor of strategy and management at INSEAD Business School, 31 senior executives of the world's largest banks (17 in Europe, 10 in Asia-Pacific, three in North America and one in Latin America) made it clear that geographic expansion is a strategic priority.
Still, these leading bankers admitted that the hurdles are high. Not only is competition strong in the most desirable markets, but most banks are less than confident that their human resources, organizational infrastructure and IT capabilities can meet and overcome the challenges and maximize the benefits of geographic expansion.
Much of that lack of confidence stems from not having the right international management teams and operating models to execute cross-border expansion successfully. During the period from 2001 to 2008, banks focused on operational excellence with industrialization programs addressing productivity and risk management, as well as merger integration.
However, Accenture expects the ensuing period from 2008 to 2015 to see that emphasis shift to business model innovation and competitive repositioning.
To some extent, geographic expansion represents the triumph of hope over experience. Bankers say they are generally disappointed by their performance so far in several non-domestic markets (Russia, China, Japan and Africa in particular).
In part, this may be because success factors vary from region to region. For instance, brand and marketing matter greatly in developed markets, but the key success factor in emerging markets is branch experience.
Cross-border mergers and acquisitions initiated by developing-market banks are on the rise, but the geographical ambitions of these institutions don't exactly mirror those of mature-market banks. Although both developed and developing markets bankers have their eyes on China, Russia is a particular field of dreams for developed-market banks. By contrast, developing-market bankers are looking more to Southeast Asia.
Shifting Balance of Banking Power
Capital flows in the banking industry used to run one way-from the developed to the emerging markets. But that has changed as emerging-market institutions have taken their place in the ranks of global industry leaders.
In 2003, no banks from emerging markets were in the top 30 banks in terms of market capitalization; in 2008, there are six. Accenture estimates that Chinese banks alone have $70 billion-$80 billion in excess capital they could invest in expansion and acquisitions.
Cross-border mergers and acquisitions are an increasingly large proportion of total M&A deals. In 2004, cross-border transactions constituted only 22 percent of banking industry M&As.
In 2007, more than a third (34 percent) of all bank M&A transactions consisted of cross-border deals, and many of those deals were initiated by emerging-market banks. In fact, crossborder acquisitions initiated from emerging markets rose from $1.3 billion in 2004 to $13.8 billion in 2007.
By contrast, acquisitions from developed markets grew by less than five percent annually over the same period and actually dropped 28 percent to $48 billion in 2007 from the previous year.
Major Challenges to Expansion
Senior executives of the world's largest banks are frank about major challenges that could stymie their strategies for global expansion. New entrants with new business models will continue to compete in the financial services market. They include such entities as Volkswagen Bank, GE Money, PayPal, Tesco and others.
But evolving competition isn't the only worry. Asked to assess their non-domestic performance by market share and profitability, survey respondents gave themselves below average ratings in their efforts in Russia, China, Japan and Africa.
They rated their international management teams the lowest among four human resources capabilities that included understanding of different cultures, exporting their corporate cultures and hiring/developing talent in non-domestic markets.
Moreover, when ranking on a scale of one to five their overall IT infrastructure and applications capabilities to support geographic expansion, executives reported an average score of three or less.
Three Business Models
Globally, banks are moving away from a mere "presence" strategy toward a penetration strategy that aims for significant market share. Typically, banks implement one of three business models when expanding geographically: multi-local, synergy seeker or global localization
Multi-Local
The goal of the multi-local is local business development. It emphasizes decentralized local entrepreneurship. Characteristics of multi-local institutions include: 1) Headquarters managing a portfolio of businesses; 2) Organization by country, with a focus on local business; 3) Operating model optimized within each country; and 4) Locally independent IT systems.
All banks starting their geographic expansion journey apply this model. Raiffeisen is considered among best practices.
Synergy Seeker
The synergy seeker also emphasizes local business development, but with selected scale and scope economies, such as centers of excellence and shared services, to improve group efficiency. For example, characteristics of a synergy seeker include: 1) Focus on horizontal relationships to achieve cross-border synergies; 2) Operating model based on regional or country blocs to address peculiar local conditions and requirements; and 3) One multi-language IT system with specific localizations
Global Localizer
The global localizer seeks not only local business development but also functional excellence and maximization of scale and scope economies. Characteristics of this networked model include: 1) Entrepreneurial local-market management; 2) Deep understanding of local cultures and client needs; 3) Standardized processes; 4) Global shared services, such as human resources and finance and accounting; 5) Specialized regional product factories, for example, in consumer finance and other businesses; and 6) Flexible IT enabling differentiated propositions
Many banks are working in this direction, including Danske, Nordea, Santander, BBVA and Unicredit.
Banks typically expand in phases. In the initial phase, the goal is local profit maximization and the business model is apt to be multi-local. A consolidation phase follows in which the goal becomes economy of scale and scope, and the business model begins to gravitate toward the synergy seeker.
Finally, with the synergy seeker or global localization model well established, another expansion phase will follow in pursuit of continual growth. Industrialization and centralization of operations are particularly important in the synergy seeker and global localization models.
What Must Korean Banks Do to Succeed?
Korean banks need to assess their capabilities first and then ask themselves several key questions: 1) What are the value creation opportunities in working on business mix and selecting next-target geographies?; 2) What capabilities do we need in order to sustain growth?; 3) How do we combine capabilities and shape the operating model to suit our portfolio of different bank businesses?; and 4) Where do we deploy the operating model to maximize synergies?
To achieve high performance in cross-border expansion, successful transition from one business model to another model demands that banks develop new capabilities.
For each capability, it is necessary to define the appropriate level of industrialization and regionalization. Global shared services and specialized product factories can be important success factors.
Geographic expansion is the banking industry's new El Dorado. Bruised but not broken by the subprime mortgage crisis, banks in the developed world are moving toward emerging markets in search of growth opportunities. Meanwhile, Korean banks have been also looking for opportunities beyond borders.
Of course, there is no small challenge. A recent study developed by Accenture finds that senior banking executives of some of the world's largest banks admit to significant shortcomings.
For example, asked to assess their non-domestic performance by market share and profitability, respondents rated their international management teams the lowest among four human resources capabilities that included understanding of different cultures, exporting their corporate cultures and hiring/developing talent in non-domestic markets.
To make geographic expansion successful and to join the leading group of multi national banks, Korean banks also must define and implement the right operating model to fit their chosen strategy and the focus should be on industrialization and centralization of operations therein.
For banks to fully realize the value-creation opportunities in geographic expansion, the right operating model is paramount in developing a high-performance "acquisition engine" to industrialize the process and maximize the benefits of cross-border deals.
Suggestion 1 To make geographic expansion successful and to join the leading group of multi national banks, Korean banks must define and implement the right operating model to fit their chosen strategy ― and the focus should be on industrialization and centralization of operations therein. Suggestion 2 For banks to fully realize the value-creation opportunities in geographic expansion, the right operating model is paramount in developing a high-performance ``acquisition engine'' to industrialize the process and maximize the benefits of cross-border deals. |
Steven Lee is the lead partner in charge of Financial Services Accenture Korea. Since his expatriation from Sydney office 11 years ago, Steven has been specializing in large change programs involving Basel II, CRM strategies, core systems implementations and others covering call center, sales force automation and campaign management for major Korean banks, securities and Insurance companies. Lee is also responsible for Asia Pacific regional CRM service line for the financial service market unit. Prior to his posting in Korea, Steven has been involved in large-scale technology led change programs in banking and insurance companies in Australia, U.S. and Europe. |
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