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The Survival Compass for Post-Crisis Financial Services: Managing ComplexityAccording to global management consultancy Oliver Wyman, banks and insurers must focus on managing complexity better to restore sustainable profitability and transform their business to survive in a dynamic, post-crisis industry environment. Average returns of large financial firms have fallen from over 20% in the early 2000s to 7% in 2013, the level of utilities companies. Returns of the 8 American and 16 European banks designated GSIBs (global systemically important banks) have declined by 70% since 2006. Although absolute profits grew during the nearly two decade bull run in financial services from the 1988 peak in interest rates until 2006, the productivity of financial sector firms has not improved since 2001. The 18th annual State of the Financial Services Industry report examines the complexity drivers of greatest concern for financial institutions: regulation, multi-channel customer interaction, fragmented systems, product proliferation and geographic expansion. In addition to driving up operational costs, the study notes these complexity sources cause opacity which undermines decision-making and dilutes the influence that managers can exert over the various parts of their firms. Additional key findings on the cost of complexity include:
"Eliminating complexity completely is not an option and simplification cannot provide the whole answer," said Michael Wagner, report co-author and Oliver Wyman partner. "A large bank or insurer will always be a complex business, with many customers, products, channels and staff. Economies of scale, risk diversification and continuing globalization require it." Financial services companies are not alone in dealing with the expansive complexity challenge. Highlighted within the report are brief case studies on how airlines, energy firms and online insurers find ways of reducing the costs that arise from complexity while retaining the benefits of it. For financial services firms, the Oliver Wyman study recommends five measures to reduce the costs of complexity while retaining its benefits:
"A successful and effective complexity management program requires commitment and endurance from all levels of an organization, especially the very top. Investors realize that only a significant overhaul can change the fortunes of financial institutions," said Rebecca Emerson, report co-author and Oliver Wyman partner. The Oliver Wyman State of the Financial Services Industry 2015 report is available here. About Oliver Wyman Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm's 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE:MMC). For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter (News - Alert) @OliverWyman.
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