Austin Rudman, Head of Financial Services, KPMG Lower Gulf, writes how CFOs can shape a future-proof strategy.
Developing strategy doesn’t get any easier. Although the immediate ordeals of the financial crisis may have been overcome, new and even more disruptive challenges are looming. Over the next five years, financial institutions are likely to experience an extremely rapid period of profound change in their external environments. Government responses globally to the financial crisis have been focused on increased regulation, changes to corporate structures and business models, and across the Middle East, the strengthening of the regulatory framework has been front of mind. These have placed heavy burdens on everyone – but especially on those in senior executive positions. The problem, though, is that developing effective responses may have crowded out the capacity to step back and to reflect deeply on how best to meet the future demands of customers over the coming period of change.
There’s no doubt that strategic thinking is increasingly vital. Technology is evolving more quickly than ever. Reliance on social media is becoming ubiquitous, not only for casual conversation but also for corporate communication and business processes. Consumers are increasingly demanding constant, online access to every service. In turn, the explosive growth of information technology and communication is generating vast quantities of data about customers, markets, products and preferences – which will be invaluable to those companies that learn to exploit it. These trends are accelerating. The very real challenge of getting fit for the ‘new normal’ has to run hand-in-hand with preparing both for short-term disruptors and for the impact of long-term megatrends. In the first category, we have seen companies such as Apple, PayPal and others make significant inroads into the traditional financial services industry. In the slightly longer term, the industry will see major impact from demographic and social change, and from the increasing consumer tendency to value ease of operations over enduring relationships and brand loyalty and we see nothing to suggest this will be different in this region.
The foresight challenge
It is, of course, easy to argue for greater foresight, strategic thinking and preparedness. But it is far from clear actually how to begin engaging with the ‘unknown unknowns’. In recent conversations with senior executives, a number have said to KPMG that they find today’s environment intellectually very challenging. The five years after the crisis were tough, but the objectives remained clear. Now, however, fundamental decisions need to be taken about global and regional business models: which businesses to remain in, withdraw from or try to enter; whether the present low-interest, low-yield environment will ease soon or persist to drive more fundamental changes in strategy. Yet the foundation on which to base these decisions remains obscure. While many key decision makers agree that regional and global business landscapes will look very different in five years’ time, there is little certainty about how they will look. And there is no doubt that even the most far-sighted will both underestimate and overestimate the pace and extent of change. Foresight and decisiveness will be critical; so too will flexibility and agility.
The FinTech contribution and new forms of partnership
In clarifying the picture, the rapidly-growing FinTech sector could have a major role to play. Rapid innovation in financial technology – the use of software and information technology to deliver better financial services – in this new environment will mean more fundamental forms of partnership are required. Engagement with the burgeoning FinTech environment has the potential to give much-needed direction to the formulation of new strategy in an increasingly uncertain world. Multiple stakeholders will come together to kick-start new initiatives, often in new physical contexts such as dedicated facilities and innovation labs. These provide an environment in which to incubate, encourage and nurture new ventures until they can be scaled up and commercialised.
Participants in these initiatives will include venture capitalists, technology start-ups, national authorities and the local governments of major cities like Dubai, London and Sydney. A key area of focus is the potential of combining exploitation of ‘Big Data’ with new technology to streamline existing processes and transactions, or to develop much more personalised products and services. But scalability is a crucial issue. The challenge is not only to find ways of creating promising ideas but of identifying those which are capable of being scaled up into the mainstream business models of major financial institutions. KPMG’s own capital business (KPMG Capital) is investing in creating smarter data and analytics capabilities and has recently taken an equity stake in
Bottlenose, a leader in real-time enterprise trend analysis.
The benefits of these various alliances and partnerships flow to all participants. By joining with other stakeholders, established institutions can reduce risk, stimulate innovation and develop products and services to increase customer satisfaction and engagement. Start-ups gain injections of funding, but also, more importantly, access to business expertise and an understanding of how services are developed, marketed and delivered in the real world. New talent and skills can be developed in an atmosphere which preserves entrepreneurial attitudes and behaviour.
New thinking, new investment, new approaches
If FinTech can offer a way out of the foresight challenge and signpost some clear directions of travel, the question for CFOs in the region remains acute: how to embrace the current explosion of new thinking and nascent solutions, products and innovations, and sift through the rapidly changing environment, to identify those opportunities which will make a real contribution to the responses required. The guiding principle has to remain the need to focus on delivering what customers want in the way that they want it, even as these change profoundly.
Even in a period of consistently high oil prices, the last five years have seen many businesses across the Middle East concentrating first on survival and then on rebuilding their balance sheets. In the next five years – with continuing uncertainty over the demand for oil in the short, medium and long-term and subsequent market liquidity – we shall see a re-intensified battle for the customer. Those companies which can create lasting competitive advantage will be those which are most relentlessly focused on satisfying emerging customer needs and demands. The potential value of any technology development or other disruptor has to be assessed against this standard.
For the foreseeable future, CFOs – even those outside of the manufacturing sector – need to adopt the attitudes of lean manufacturers, finding ways of doing business cheaper, faster and better in a low-margin environment. This is likely to be the best – or even only – way of surviving the coming wave of change. And if this frame of mind is sustained over a longer period, there will be corresponding longer-term benefits, for the region’s business, its owners and its customers – and of course its CFOs.