The collapse of Silicon Valley Bank (SVB
Marking to market means adjusting the recognized value of an asset to reflect the most current market price. In the case of SVB, the bank had amassed a large portfolio of long-dated treasury bonds. The value of those bonds dropped dramatically when interest rates rose. However, because the bank was not required to mark the value of those long-term assets to market, investors were in the dark about the losses. Had the bank been marking those assets to market all along, it would have been forced to acknowledge the losses much earlier and presumably set aside additional reserve assets or take some other preventative action before disaster struck.
A mark-to-market process can play a similar role in forcing financial service firms to objectively assess the value and effectiveness of technology assets. Technology infrastructure takes shape over time. Its evolution and architecture are determined by a host of factors unique to the organization, including the composition of legacy platforms, changing business needs, strategies and budgets and mergers and acquisitions that bring in new systems. As firms race to keep up with this constant change, it can be difficult for leadership to determine how their capabilities compare with those of competitors.
That’s where mark to market comes in. Senior technology professionals should be constantly scanning the landscape, and analyzing the technology currently being employed by competitors or offered by vendors. Technology teams should be comparing their own capabilities and external results to alternatives available in the marketplace, and regularly sharing those results with senior leadership for planning and budgeting purposes.
Avoiding the risk of excessive optimism
A regular mark-to-market exercise helps financial services firms measure progress in digital transformation. Virtually every financial services firm in the world is working to digitize business. To do so, they have either developed or acquired the basic infrastructure required to support digital processes in both back-office and customer-facing functions.
Although firms are using much of the same technology, results vary widely. For example, many firms that have “digitized” client communications have simply converted statements and other materials that were once printed and mailed to static PDF files that are emailed to clients. Internally, that transition might be judged a success, given the cost reductions achieved. However, if these firms take the time to mark to market, they might find their new digital capabilities are less valuable than they might seem.
Competitors have used technology to transform client communications into interactive digital experiences that dramatically improve the client experience, while lowering the firm’s service costs. Without benchmarking against the marketplace, firms might continue overestimating the value of their own digital platforms, leaving them exposed to the threat of customer attrition.
Objectively measuring results from innovative technology
The risk of misjudging the value or effectiveness of internal capabilities is highest when it comes to new or next-generation technology. Many firms have adopted technologies like cloud computing, artificial intelligence (AI) and blockchain. Although organizations measure outcomes against internal ROI targets, it’s impossible to assess how well or how poorly the firm is exploiting these new capabilities without a detailed comparison of internal progress against external innovation.
For example, a company’s migration to the cloud might have met every internal target for cost savings, but the firm might not be taking advantage of its new access to software-as-a-service solutions that have the potential for even more dramatic business enhancements. In much the same way, a firm might be getting great results implementing machine learning tools to automate operational processes while missing out on other transformative AI solutions, such as predictive analytics, customer service personalization platforms and automated insights.
The best way to guard against overly optimistic assessments of an organization’s technology capabilities is to establish a formal process for evaluating technology performance across the market. That process should include technology deployed by peer competitors, technology available from vendors and “best-in-class” use cases that demonstrate the maximum potential of innovative technologies. Some of that analysis can be obtained from regular industry surveys, like Broadridge’s annual Digital Transformation Survey, which provides detailed information about the practices and capabilities of technology leaders across financial services.
Benchmarking the organization’s own technology assets and capabilities against this market review will provide valuable insights for technology leaders and senior management in setting firm strategy and prioritizing budgets. Conducting this mark-to-market exercise regularly will ensure the firm is not falling behind competitors and help avoid any nasty surprises like the one that took down Silicon Valley Bank.
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