Article Synopsis :
This report from EY highlights the ways financial services firms are exploiting opportunities presented by technology to counter competitive threats.
Companies are realigning their business portfolios to cut costs, better reflect their emerging strategies and free up resources for investment in new priorities, and divestment is a crucial part of this process, with sophisticated analytics giving decision-makers more and better tools to evaluate divestitures.
The report delivers four key insights in the financial services sector, as follows:
- 69% of financial services executives are looking at carve-outs of back- and middle-office assets and using a managed service provider instead, while 67% are considering a transfer of employees to a third party and contracting them back as needed. Focus on the fundamentals for cost savings and growth opportunities.
- 96% of financial services businesses now conduct portfolio reviews at least once a year, and 82% say recent structural reforms helped them improve the quality of those reviews. And yet, 66% of firms still struggle to make portfolio reviews a strategic imperative.
- 87% of financial services companies have divested competitively weak business units, and 33% plan to reinvest divestment proceeds in new technologies.
- 76% of financial services companies say the regulatory environment has adversely affected their ability to make divestments over the past 12 months, with cybersecurity a particular growing concern.
Though deal volumes have fallen, from $164b in 2016 to $149b in 2017, deal frequencies may tick up in 2018, with 87% of financial services firms expecting to initiate a divestment within the next two years; the majority planning to do so in the next 12 months.
Tax policy is a main driver of activity, with 87% expecting tax-law changes, especially in the US, to affect divestment plans (rising to 100% in insurance). Technological disruption — whether operational, driven by consumer demand or prompting new regulation — is also adding to the pressure. Such disruption prompts familiar divestment triggers: slowing growth, opportunistic approaches, geopolitical uncertainty and macroeconomic volatility.
Many businesses are bringing in automation and shedding noncore middle- and back-office operations. In other cases, competition from tech-driven challengers is pushing them to invest in their own systems or outsource to keep up. Divestment offers financial services companies a route to growth, including ways to acquire new capabilities rapidly and counter the threat from new entrants (e.g., FinTech).
New tools and techniques, particularly in the field of analytics, are crucial enablers of more strategic divestment approaches, helping businesses identify, maximize and unlock value within their asset portfolios.
- Insurers in many markets are struggling with poor returns and unsustainably high operating costs on existing products, combined with the need to reposition their capital towards innovative growth opportunities
- Technological innovation offers insurance companies opportunities to achieve growth and obtain significant operating efficiencies
- Insurance executives are already pursuing new routes to value via increased use of technologies such as telematics, robotics and data-driven risk analysis
- More than half (61%) expect the number of technology-driven divestments to increase over the next 12 months, ahead of peers in banking and wealth and asset management
- 29% of insurers say they lack clear understanding of how evolving technologies will affect their sector or their business over the next 12 months, higher than other sectors in financial services
New US cybersecurity regulation took effect in 2017, and the European Union will implement the General Data Protection Regulation (GDPR) in 2018, imposing new data-protection standards on organizations conducting business in the bloc. Divestment teams need to consider these factors — and any other pertinent regulatory issues —in portfolio decisions.
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Digital Insurer's CommentsAs it relates to divestment strategies, we agree with the report’s main conclusion that technology should be viewed as both means and end.
Specifically, new analytics technologies should be employed as a means of evaluating divestment strategies with the end-goal of bringing new technological capabilities—both operational and end-user—to the organization.
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