The High Cost of Speeding on Wall Street

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Then in 1999, the Gramm-Leach-Bliley Act opened the door to financial firms offering services well beyond their traditional fields, from insurance to consumer banking. With the whole world seemingly opened up, glory came to those who could craft new ways of securitizing and repackaging everything from municipal debt to first-time homebuyer mortgages.

And since any good idea is quickly imitated on the Street, the new priority became getting the idea out on the market before everyone else did. Those who so much as tapped the brakes risked seeing others grab their profits—or worse, having their talent walk out the door, launch the idea for a competitor, and make a mint.

Managing Innovation

The solution is, of course, not to curtail innovation. Vibrant capital markets are powerful growth engines for the global economy. We need product innovation, we need cheap access to capital, and we need mature hedging instruments.

But Wall Street also needs to do a better job of managing innovation. That ability comes from a more "industrialized" approach to new product introductions—akin to proven practices in other industries—combined with a focus on comprehensive risk management systems, financial accounting systems, and matching and settlement platforms. Building and managing products—both established and new ones—on common platforms gives managers a clearer sense of how a company's positions affect its risk exposure and capital commitments in real time. These platforms also slash IT costs, compliance expenses, and development costs. Ultimately, that makes bringing new products to market quicker, easier, and safer.

Yet we consistently see companies building new product platforms from scratch, often to feed the egos of division heads or provide bragging rights to salespeople. One international bank built a currency-trading platform from scratch for its hedge fund division when it already had one on its established trading desk. When completed, the two systems couldn't even talk to each other. Now the bank has to manage two disparate systems for the foreseeable future, adding more time, overhead, and risk to its operations. And with all of that effort, getting a picture of the firm's overall currency risk still isn't easy.

What's worse, that situation isn't unusual. There has been no shortage of instances where firms first launched a new financial instrument, and then months later built the reporting systems, only to find that their economic models were wrong and they were losing money.

Defending the Kingdom, Not the Fiefdoms

It is an unpleasant job to wrest control from the fiefdoms that have formed in the personality-driven, short-term thinking atmosphere of Wall Street. But as a matter of survival, management needs to face its responsibility to the company and shareholders and press for answers about the potential risk of new products beyond the short-term cash flow it may generate. Specifically, firms must have industrial-strength management and reporting systems in place before they launch these products and adopt the global, cross-asset class discipline to manage them.

The investment-bank-led Counterparty Risk Management Policy Group III said as much in its report to the Federal Reserve in August. In the name of the common interest, firms need to invest in human and technological capital and change the business processes that have undermined the financial industry. The short-term costs of these initiatives are insignificant, the group asserted, compared to the long-term costs of doing nothing.

Common IT platforms in the back office are a big step in the right direction and a critical advantage that Wall Street has done little to adopt. The auto industry, another highflier facing painful times, is a good model to think of. With SUV sales dropping, the companies that looked ahead and built flexible systems are now able to "flip a switch" to make hybrids on the same factory line. Those carmakers can produce a wide variety of products from a single platform at manageable costs, quality, performance, and risks, while their competitors are stuck looking to retool their whole operations. The same concepts can be applied to finance.

Ultimately, common platforms streamline the back end and improve Wall Street's speed to market. But they also allow better control and understanding of risk, which are essential factors to consider with the prospect of new speed limits coming into effect.

Bob Gach is the global managing director of Accenture's capital markets practice and a 28-year veteran on Wall Street.