A Perspective for Corporate Functions

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By Manoj Reddy, Head of BFSI Risk & Treasury Practice, TATA Consultancy Services (TCS)

Transformation is more of a journey than a destination, with strategic growth objectives, product innovations, ever-evolving regulatory landscapes and technological advancements typically driving the need for transformation. Banks of all sizes across the globe are closely monitoring economic and geopolitical scenarios in addition to the overall safety and soundness of financial systems locally and globally. Transformation programs are not only essential for business growth and addressing regulatory obligations but are also, at times, critical for retaining business relevance and continuing to deliver expected business value to customers and stakeholders.

Often, a tendency, even a compelling urge, to embark on the transformation bandwagon is driven by industry benchmarking, mandated regulatory actions, digital advancements or exciting innovative technologies with the potential or promise to be massively disruptive. Corporate functions in banks, such as risk, finance and treasury, consistently feature among the top transformation priorities of enterprises year-on-year due to regulatory mandates and their pivotal roles as horizontal functions supporting the smooth and efficient operations of business lines. It is this horizontal nature that increases the intricacies of designing and implementing effective transformations.

Key principles for enabling a business-centric transformation

Although theoretically, all transformations have business contexts and broad purposes, not all of them have clear and quantified articulations of the business necessity or growth value to be derived from such a transformation. The following are five key principles to ensure adequate business centricity when designing a transformation.

• Business necessities against solution possibilities. New technologies, such as generative artificial intelligence (GenAI), have enormous potential to augment human intelligence in making business processes more efficient and insightful, thus rightfully being compelling propositions for accelerated adoption. Although one can think of a multitude of use cases for their adoptions, there must be a balance between the “art of possibility” and the “art of necessity”. Beyond the number of use cases, the compelling proposition should revolve around the core and chronic business problems a specific technology could solve, prioritizing those for adoption. Most next-generation technologies can bring enormous business value, provided they are assessed comprehensively and objectively for their relevance and applicability, as well as the quantified business outcomes they can generate.

• Alignment of a function-specific transformation strategy with that of the enterprise. Corporate functions and sub-functions can sometimes have siloed transformation visions, with unintended consequences that require remediation later from an enterprise point of view. For instance, if the transformation vision for a treasury team is to build a dedicated treasury datastore for its investment-management function, then such a dedicated datastore communicating with upstream source systems individually might cater to the transformation needs and objectives of the treasury function but, in parallel, unintentionally dilute the overall story around an integrated and single authorized datastore from a regulatory standpoint or the strategic objectives of risk and finance alignment through a golden-data source.

• Going beyond addressing current needs by factoring in anticipated needs. It is extremely important to not simply cater to the current business needs and future-proof the transformation from a technology perspective; rather, it is important to future-proof for anticipated business changes. This becomes even more critical for a heavily regulated industry such as banking, in which banks are exposed constantly to not only newer regulations but also revisions to existing ones. Hence, it is important to factor anticipated business changes into the core-requirements transformation to drive solution choices and roadmaps. For instance, it may be extremely important to factor in the anticipated regulatory needs of interest rate risk management in the banking book (IRRBB) when a bank seeks to transform its overall asset and liability management (ALM) framework and choose the third-party system most apt to future-proof the solution to a large extent.

• Contextual business relevance for transformation against peer benchmarking. The portfolio and idiosyncratic business profiles should largely drive the transformation vision and agenda, as opposed to solely benchmarking against peers or broader industry adoption. Solution choices should additionally be supported by a contextual understanding of enterprise-specific business and technology strategies, and the overall maturity of technology adoption should be a key principle in designing the transformation. For instance, a bank with limited trading-book footprints and limited aspirations to scale them further could review if it really needs Monte Carlo simulations or advanced PFE (potential future exposure) calculations as part of its solution components in its intended transformation owing to peer benchmarking.

• Taking a holistic view of transformation needs to uncover potential synergies at an aggregated level. It is critical to take a holistic view of function-level transformation views and augment business-need statements to realize the benefits of shared transformation components across multiple business objectives. Here, too, a core understanding of business needs and purposes will be critical to ensuring the identification of common solution levers for different business problems across separate functions. For instance, the transformation vision for treasury modernization and its solution choices could be viewed holistically with the needs of the finance and risk teams relating to the Basel III Endgame (B3E)—given the shift towards the standardized rule-based approach. There is a good possibility that a third-party product, which could be central to the treasury’s transformation needs in terms of trade-lifecycle management and cash and liquidity, could offer out-of-the-box modules for market and counterparty credit-risk computations as defined under the Basel III Endgame.

Recommended approaches

• Business architecture as a foundational step. Business architecture is often an underappreciated business artifact but carries enormous value throughout the multiple phases of the transformation. Even when there is plenty of vertical expertise within a business sub-function, horizontal knowledge of functional interdependencies is a rare and precious commodity. Business architecture is a manifestation of that horizontal business knowledge, which is not only critical in determining the solution architecture but also in defining the roadmap in terms of sequencing prerequisites for an efficient and effective transformation. For instance, a business architecture would call out any dependencies in the netting and collect collateral data prior to carrying out any exposures through default computations or, for that matter, bring in deposit cash-flow information from an asset/liability management system before computing liquidity metrics.

• Assignment of specific ownership of business and IT (information technology) teams across transformation components. Although transformations in most cases involve the development or enhancement of a system or technical solution, ownership should be equally assigned to the business owners along with any technology counterparts. It is important to not only have broader program-level ownership but also understand and analyze each component of the transformation to assign specific primary and secondary ownerships between the business and technology teams. For instance, if a transformation requires developing a new data platform for risk and finance, then the transformation activity on defining data consumption must be specific to each downstream business function, and overlaps should primarily lie with the business—with developing the data model and architecture left to the technology team to take the lead on.

• Detailed due diligence on product and solution options. Applications are central to most transformations, and the decision regarding whether an application should be procured through a third-party vendor or built inhouse should be made through a detailed due-diligence process across key business dimensions—such as the complexities of business requirements, probabilities of changes to business logic or derivations of business outputs through pre-defined business rules as opposed to statistical modeling. Of course, aspects such as alignment with broader enterprise-level technologies, data strategies and standards are important, but due weight needs to be given to the business context.

• Piloting with the right candidate portfolio or process. In a holistic, function-level transformation with a multitude of sub-functions, it is critical to pick the right pilot process or portfolio for the transformation that is able to unearth and expose all potential challenges and shortcomings in the strategy as well as the best approach to reach the overall solution. Choosing a random function as the pilot for the transformation may mire it too deeply, limiting its potential for holistic assessments and compromising its agility to incorporate course corrections without burning additional time and effort. For instance, if a bank is planning a risk and finance integration as a transformation program, then an RWA (risk-weighted asset) computation can be a good candidate process to consider piloting, given the need for data across all asset classes and multi-dimensional relational data in terms of customers, collaterals, guarantees and ratings.

• Reviewing business outcomes for their relevance against original intents. Since the business environment is dynamic and businesses must reimagine themselves constantly and embrace innovation to stay relevant or move ahead of the competition, it is imperative to reassess the core business outcomes of a transformation on a regular basis. What may have been a good-to-have business utility a few years ago might become the bare minimum in the future. For instance, a bank might have embarked on intraday liquidity as part of its original transformation, but with the modernization of payments and institutionalization of fast payments, its transformation may need to be recalibrated to achieve real-time or near-real-time liquidity monitoring.

Conclusion

The current business environment is exposed to multiple dynamic shifts in factors impacting business stability and growth, with change being the only constant. Banks must ensure that their business contexts and purposes are central to driving their strategies and the designs and executions of their transformation programs. In addition to ensuring that a holistic view of multiple transformation programs is taken to uncover dependencies and synergies, assigning the right ownership and being purposeful are critical for achieving desired outcomes and building business resilience. A transformation consumes a significant amount of an organization’s focus and resources; hence, it is important to ensure it is designed and executed with the utmost business centricity.