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Management Strategies

10:25 AM
Glen Fossella, CTS North America
Glen Fossella, CTS North America
Commentary
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Compressing the Technology Value Chain: Accommodating the Evolving Branch with an Adjusted Model

The need for better time-to-market and customized solutions is changing the way banks acquire and integrate technology in their branches.

As new technologies continue to impact banks’ operations and retail footprints, the layout of the “branch of the future” will be determined by bank-specific business needs. While bankers have differences of opinion regarding where new hardware technologies within the branch, there is a preceding debate around how those technologies are acquired. The traditional technology acquisition process is cumbersome. Naturally, bank managers prefer a faster time-to-market cycle and solutions that are custom-tailored for a specific strategy to maximize their benefits.

[See Related: Another Take on the Branch of the Future]

As a result, another evolution is occurring that is changing the way bankers acquire technology.

The Traditional Model

The traditional value chain of technology acquisition typically involved several entities, each one carrying specific responsibilities in the process, including:

• Original Equipment Manufacturing companies (OEM): historically, OEMs design and manufacture a product to meet the finished product manufacturer’s specifications;

• Finished product manufacturers: this group purchases components from OEMs, then integrates and adds their own value to complete a finished product to sell to the market;

• Systems integrators: the bank works with this group on business process redesign, sourcing, software integration and supporting the overall implementation;

• Business process consultants: this group is also focused on process redesign and vendor selection, but typically with less involvement in technology integration and implementation; and

• Fulfillment partners and field/depot service organizations: this group provides logistics behind delivery and rollouts, as well as ongoing service for hardware.

Beginning in the early 2000s, this value chain began to compress. Hardware OEMs, fueled by advances in design and engineering systems combined with greater software standardization began to bring products directly to banks. These companies, many of which were relatively unknown a decade ago, are gaining industry prominence by accessing end-users directly, bypassing well-known finished product manufacturers and systems integrators.

Another primary driver of change was the banking crisis. The subsequent regulations forced major institutions to restructure retail banking in an effort to eliminate costs and regain profitability. In response, larger banks with the necessary scale and resources to test new ideas began partnering with OEMs to prototype, pilot and produce successful concepts. Circumventing links in the value chain allowed these institutions to implement differentiated services on shorter cycle times and realize the benefits with greater frequency.

Shifting Responsibilities: Filling the Void

While scale and resources are advantageous, there is another component that is required to engage this compressed value chain: domain knowledge. Removing systems integrators from the mix means bankers must acquire and maintain a much deeper understanding of current and future technology trends. This enables them to work closely with OEMs’ designers and engineers and effectively map technology against business requirements.

Likewise, OEMs must become more comfortable working directly with the banks and increase their knowledge of an institution’s business. Just as the bank must invest in understanding the technology, the OEM must move beyond selling “speeds and feeds” and develop a comprehensive understanding of what the bank needs to continue being successful.

Success hinges on the bank and OEM being able to match business needs with the design, development and application of the technology. Over time, the relationship must evolve to become strategic, even symbiotic. As this evolution continues, banks and their OEM partners that adapt and exercise flexibility amidst the changing environment will achieve success faster and with more frequency.

This change shifts responsibilities for the other entities. As trusted advisors, business process consultants maintain their role of helping structure and facilitate strategy development and execution. In addition to these responsibilities, consultants must develop a more comprehensive understanding of bank operations as they supplant the systems integrators’ process redesign function. Fulfillment partners and field/depot service organizations – which operate on low-margin, capital-intensive business models – have highly defensible positions. These partners now work more closely with the OEM, further strengthening their positions with the bank.

The new dynamic also requires finished product manufacturers to adapt to a challenging environment by moving upstream and providing services such as business process consulting, software and integration. As a result, systems integrators that traditionally provided “solutioning” expertise are feeling the crunch. To compensate, some have expanded downstream -- developing and engineering their own solutions or sourcing components and finished products from other outside manufacturers.

In all cases, success accrues to providers who understand that speed and solution flexibility are the new paradigm in delivering banking technology.

Investing in New Competencies to Remain Competitive

Banks operating through the compressed value chain are quickly outpacing competitors using traditional approaches in terms of delivering greater value to their customers and shareholders. However, institutions with the necessary scale and resources, in addition to the ability to invest in required competencies, will be the only ones that can support the model directly.

So how should small and mid-sized institutions respond to this changing environment? Watch the moves of the top institutions closely. Delineate between “branch of the future” concept tests and true network-wide rollouts. Identify emerging OEM vendors and consider working with them. Recognize that while the big banks usually get first-mover advantage, the payback for OEMs is to take new technology downstream as quickly as possible before their competitors catch up. By being “fast followers,” smaller institutions can mitigate risk while leveraging the advantages of the compressed technology value chain.

Glen Fossella is the COO of CTS North America, a branch automation technology provider.

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