Profiting from knowledge? KM in the financial sector

Feature

posted 1 Sep 2000 in Volume 4 Issue 1

Profiting from knowledge?
KM in the financial sector

In a sector in which business is fundamentally founded on knowledge-based intangible assets and competencies, a more strategic approach to KM could reap significant rewards. Robert Taylor reflects on knowledge management priorities in the financial sector.

Has the financial sector got the knowledge message?

Cranfield’s recent survey The Business Value of Knowledge Exploitation found that the financial sector appears to be leading the way in knowledge management in terms of knowledge infrastructure and working practices. The report proposes that the reason for this might be that “differentiation of their products and services...almost exclusively hinges on the continuous rejuvenation of the underlying knowledge base”.

We would not disagree with Cranfield’s proposition about the critical importance of knowledge in financial businesses. Our practical experience in Unisys Consulting, however – where our knowledge management practice is entirely focused on the banking and insurance sectors – is quite different to the Cranfield findings, a valuable contribution though they are. In our experience:

Few financial institutions have launched serious KM programmes. While most major financial institutions have some very creditable knowledge management initiatives in place or in progress, there is little evidence across the sector of the adoption of major, strategic knowledge management programmes of the kind seen in, say, the major firms in the management consulting sector. The initiatives that do exist tend to be departmental rather than corporate.

Of those who have, most are in the early stages only... Notwithstanding that they have some initiatives in place, most major financial institutions are still very much at the evaluation and planning stage, working out what knowledge management means for them and what their approach should be. Largely missing from the delegate lists of knowledge management conferences in the first few years, financial institutions are now more often represented at such events. We find that organisations of all kinds share the same issues at this stage: Business case, management support, staff motivation and behaviours, and so on.

...and their focus tends to be infrastructural rather than strategic. The initiatives that are being worked on tend to be infrastructural rather than directed at supporting specific business strategies. To be fair, this is a flavour of knowledge management practice in general, and is not limited to the financial sector. What this means is that most organisations are seeking to address rather generic issues such as promoting knowledge sharing and supporting knowledge communities, and so on. We propose that there is an alternative approach in which knowledge management initiatives are directed at specific business issues and objectives. When this alternative approach is taken knowledge management becomes more relevant to the specific organisation’s own situation (which helps greatly with the business case, management support and staff motivation/behaviour problems too).

In short, financial businesses are not, broadly speaking, acting in a way that suggests that they really believe they are knowledge-based businesses and that the practices of knowledge management are a vital part of achieving their missions. In truth, this observation holds for many types of business across all sectors. The reason is simple: Knowledge is invisible and intangible, and, in any case, it’s free. Or, at least, these are the unspoken beliefs that have been the norm up until the current ‘knowledge awakening’.

So what are the issues facing financial businesses that KM should be responding to?

Business drivers for KM in the financial sector

Our main proposition is that knowledge management should be an integral part of how a business seeks to meet its objectives, achieve its strategies and fulfil its mission. This is fundamentally a matter of responding to business drivers; changes in the market place, opportunities and threats. So what are the main business drivers in the financial sector at the moment? Financial businesses are beset with challenges on every front:

Industry consolidation – mergers and acquisitions. Hardly a week seems to go by without some announcement or other. A great deal of what are being merged or acquired are, of course, knowledge-based, intangible assets, yet only a minority of KM programmes are asking the question: “How should we support a merger/acquisition strategy?”

Customer focus – segmentation and ‘farming’ of the customer base, customer knowledge, customer service. Probably the number one theme in business today is customer service and the management of the customer base for long-term profit. A great deal of real knowledge management is, in fact, being conducted outside of formal KM programmes and within various CRM (customer relationship management) projects. Interestingly, however, the major focus is still on the development of databases of customer information rather than repositories of customer knowledge.

One financial institution has developed models that reflect what customers’ financial issues are likely to be at different stages of their life or when faced with various prototypical life events. This leverages, shares and applies the collective real-life knowledge and original research of the institution to both improve its sales and provide better customer service through more accurate positioning and targeting of product and service offers.

Unisys has been working with various financial sector clients in different aspects of customer knowledge. The most interesting of these are approaches to modelling customer behaviour, which can then be used to segment the customer base, anticipate customer actions, or as a basis to making flexible decisions about customers (for example, lending decisions that more accurately reflect what the institution knows about a customer, taking into account both the business development and risk factors in a balanced manner). One example application is the development of models of suspicious transaction patterns that, we have proved, can be used with a high degree of accuracy to point out potential fraud early on in the processing cycle, and so reduce losses.

New channels – Internet, WAP, interactive digital TV. New technologies present new knowledge needs in themselves. Many institutions are concerned not only about the new technical competencies required to make use of these channels, but also about other issues such as the legal dimensions of the Internet and the complexities of communication across different media (what will do for the Net probably won’t work on WAP so well). The other side of this coin is the content question: The way in which these new media lend themselves to a wider bandwidth of communication and so therefore demand content – which may mean sharing knowledge and information with customers to a degree and in ways that have not been seen before.

New products – stakeholder pensions, ISAs, online share dealing. Many new products and services are more knowledge rich (‘smarter’ as some would say) than their forebears. They may require a higher advisory and tailoring element, and may be more flexible than before. Conversely, some products and services (and stakeholder pensions are a prime example of this) are as simplified as possible for quick, cheap processing. This point supports the observation that financial businesses have an ambivalence towards the knowledge economy; they partially lean towards it, partially away and in favour of the old disciplines of ‘pile ‘em high, sell ‘em cheap’.

New competition – foreign banks, Internet banks, insurance companies entering banking, supermarket banks. Businesses are always looking for differential, competitive advantage. The knowledge and experience that an organisation has (and its people have) are quite singular potential sources of such an advantage since only that organisation and those people have the experiences that are unique to them. New entrants trade on a different platform to incumbents; perhaps it is leveraging their existing customer base and store networks (for instance, in the case of the supermarket banks). However, incumbents have the potential to leverage their deeper knowledge and experience of the particular market, geography, services and customers that the new entrant is addressing and so force greater cost efficiencies and produce even better service. The fact that this, broadly speaking, is not happening is an indicator that the potential knowledge advantage is not being leveraged.

Changes in the regulatory and economic environment – for example, the Euro. Keeping staff, systems and processes up to date with regulatory requirements is a major challenge in the financial sector. Other changes in the operating environment also pose significant challenges. An interesting one is the Euro, the arrival of which some institutions are preparing for while others see it as more of a longer-term issue. One of the apparent challenges of the Euro is that it is, on the face of it, a unique challenge; a single, one-off major change in the currency that will have impacts on staff, customers, systems and processes. It may appear to be an issue that knowledge management cannot help with on the grounds that there is little or no experience of it to go by (except maybe, to some extent, in other countries). However, there have been many similar challenges over the years including decimalisation and the ‘Millennium Bug’. The knowledge and experience of the people who tackled such issues could be valuable in ensuring a smooth(-er) transition to the Euro. Some organisations have invested in capturing corporate histories of such pivotal moments of change. These are valuable knowledge artefacts that preserve knowledge for future use.

One financial institution has captured the story of its demutualisation as just such a knowledge artefact.

Unisys has been assisting another financial institution in the development of a ‘knowledge centre’ on Euro issues (for example, systems conversion) that could be available to all parts of that institution as and when they make that transition.

IT – mastering new technologies, managing legacy systems, gaining the business benefits. Changes in technology present similar challenges to changes in the business environment (as above) – for instance, the challenge of needing to refresh the organisation’s knowledge base and skills so as to keep ahead (or keep up) with new technology. In truth, however, the sector has always been a heavy user of computerised automation and relies on it for fast, low-cost, reliable processing. Indeed, the tuning of systems and processes with the objectives of cost reduction and speed/quality improvements is a major activity, especially at the ‘retail’ end of the market. Here, however, much knowledge remains local and ‘in heads’. In most large institutions there is a major opportunity for improvement in systems management through knowledge management techniques and approaches.

Unisys has recently been advising various financial institutions in different aspects of this, including problem/event management where, for large global banks, there is significant potential for a better quality of service from the IT department through the global pooling and sharing of information on potential and actual system problems, and their solutions.

Cost pressures – automation vs. staffing, ‘e’ channels vs. branches etc. The KM answer to cost management/reduction is to find the ‘knowledge sensitive areas’ in those processes in which knowledge and information handling and usage can be streamlined to reduce work and errors, simplify tasks and so save cost. Many KM programmes are concerned with cost issues but few are working closely with specific processes and functions in order to ascertain where the actual cost reduction potential lies – instead, many of these KM programmes are working at a generic level where it is proposed that the initiatives to be put in place will provide a generally cheaper infrastructure (in most cases for the less structured aspects of work – for example, communication and collaboration between different people, locations and departments).

So what should a financial business be doing in respect of managing its knowledge assets?

Real KM objectives for financial businesses

Financial businesses need to set KM objectives that are directly relevant to the business issues, drivers and strategies specific to them. This means asking a different question than ‘what is KM about?’ – it means asking: ‘What can KM contribute to supporting our real business issues, drivers and strategies?’

But what is a relevant KM objective for a financial business? Consider the following – just three examples of potential KM objectives under the heading of ‘customer focus’ for a financial business:

Becoming expert in customers’ financial concerns

Transforming customer-facing staff from ‘processors’ into ‘advisors’

Becoming experts in corporate customers’ businesses.

These sorts of (proposed) objectives (which are only examples, and only from one small part of one particular business issue) are markedly different from the kinds of objectives commonly being set in nascent KM programmes today, which are often more infrastructural, addressing such generic issues as:

Fostering knowledge sharing, and

Supporting knowledge communities.

Taking a more focused approach to KM as proposed here may not mean that radically different solutions will have to be investigated. Tools such as expertise directories, intranets, document management systems, knowledge centres, corporate histories, and so on will still be the relevant solutions. What will be different is the manner in which they will be used and implemented. For example, an expertise directory project may not be about cataloguing many and various sorts of people and their interests and skills. Rather, there may be a more deliberate focus on capturing information about the specific subjects, skills and people relevant to a particular business strategy – for instance, the Euro expertise directory. Community development initiatives, rather than supporting natural communities (or just those who are interested in taking part) may have to invest more effort in getting together the people the company needs to have work together – perhaps the suppliers and consumers of expertise on the Euro, in this case.

Just think – would you say that the financial institutions that you deal with (on a personal basis) are trusted advisors, knowledgeable in the financial issues that concern you? Couldn’t the tools and techniques of a broad practice like KM help them be ever more like that? And wouldn’t the business advantages be worth it?

The ‘new KM’

Many organisations – not only those in the financial sector – are still at the evaluation stage of the knowledge journey and asking themselves how all the generic things they have read, heard and seen in the hype of KM relate to their businesses and to their situations. These same organisations are wrestling with the issues of how to work out the business case for KM, how to get senior management support for KM and how to get staff buy-in to KM programmes.

This is a case of ‘the clue is in the question’. The answers to these issues and problems are tied up in the question itself – the question of ‘what does KM mean to us, to me?’.

If KM initiatives are planned so as to directly address the real issues and support the real strategies of the business then the business case will be clearer and they will be more readily supported. Many of the same types of solutions will be implemented; many of the same approaches will be taken as are currently being trialed today. What will be different will be the focus put on those solutions – they will be less infrastructural and more purposeful and specific.

The financial sector, beset with so many issues and challenges, is ripe for this ‘new KM’ approach.

© Unisys, 2000. The opinions expressed in this article are not necessarily those of Unisys.

Robert Taylor is a knowledge management specialist with Unisys Consulting. He can be contacted at: robert.m.taylor@gb.unisys.com