Tag: McKinsey

Automating the insurance industry

From McKinsey Quarterly.

The insurance industry—traditionally cautious, heavily regulated, and accustomed to incremental change—confronts a radical shift in the age of automation. With the rise of digitization and machine learning, insurance activities are becoming more automatable and the need to attract and retain employees with digital expertise is becoming more critical.

Our colleagues at the McKinsey Global Institute (MGI) have been exploring the implications of workplace automation across multiple industries. Although their preliminary report cautions that “activities” differ from “occupations” (the latter being an aggregate of the former), it presents some stark conclusions: for example, automation will probably change the vast majority of occupations, and up to 45 percent of all work activities in the United States, where MGI performed its analysis, can be automated right now with current technology.1 This figure does not reflect the precise automation potential for each of these specific occupations, because activities are scattered across them, and different activities will be automated at different rates. But significant changes are clearly approaching in many industries, including insurance, whose potential for automation resembles that of the economy as a whole.

We’ve been studying the impact of automation on insurers from another angle. Drawing on our proprietary insurance-cost and full-time-equivalent (FTE) benchmarking database, we focused on Western European insurers, forecast the outcomes for about 20 discrete corporate functions, and aggregated the results.2 Our work indicates that some roles will undoubtedly change markedly and that certain occupations are particularly prone to layoffs; positions in operations and administrative support are especially likely to be consolidated or replaced. The extent of the effect differs by market, product group, and capacity for automation.

Steeper declines will occur in more saturated markets, products with declining business volumes, and, of course, the more predictable and repeatable positions, including those in IT. Other roles, however, will experience a net gain in numbers, especially those concentrating on tasks with a higher value added. The broader corporate functions including these roles will lose jobs overall. But some positions will be engines of job creation—these include marketing and sales support for digital channels and newly created analytics teams tasked with detecting fraud, creating “next best” offers, and smart claims avoidance. To meet these challenges, insurers will need to source, develop, and retain workers with skills in areas such as advanced analytics and agile software development; experience in emerging and web-based technologies; and the ability to translate such capabilities into customer-minded and business-relevant conclusions and results.

The net effect of such position-by-position changes is harder to determine with certainty. Numerous variables affect each role’s outcome—whether job creation or contraction—which means that the sum of these potential outcomes could shift significantly. To analyze these outcomes, we have factored in variable growth rates across separate regions and product groups, as well as the possibility of increasing cost pressures (including those arising from a low-interest-rate environment). Our most probable outcome for insurers sees up to 25 percent of full-time positions consolidated or reduced as a net aggregate, occurring at different rates for different roles over a period of about a decade.

That’s neither a negligible amount of job loss nor an unimaginably distant time frame. On the contrary, given the magnitude of these changes and the looming future, it’s important that insurers begin to rethink their priorities right now. These should include retraining and redeploying the talent they currently have, identifying critical new skills to insource, and retuning value propositions in the war for new talent and capabilities. That competition will almost certainly increase as the digital transformation takes hold. The first waves are already hitting the beach.

How the payments industry is being disrupted

A good overview of the disruption underway in payments from McKinsey.

Global payments revenues have been growing at rates in excess of expectations. Once again, Asia—and China in particular—is the primary engine propelling the global numbers, but all regions, even those where revenues have recently been in decline, are contributing to the surge. Payments growth is currently a truly global phenomenon.

Looking ahead, however, we expect global payments revenues will begin to reflect the flip side of Asia’s prominence as a growth driver. The expected macroeconomic slowdown in Asia–Pacific, in other words, is dampening expectations for payments growth overall. However, the turnaround in other markets will make up for some of this decline. We forecast that this rebalancing between emerging and developed markets will lead to tempered but still healthy revenue growth of 6 percent annually through 2019.

Mck-PaymentsOur most recent research reveals several additional trends of note. In 2014, as in 2013, growth resulted primarily from volume rather than margin growth ($105 billion versus $30 billion). Liquidity-related revenues (those linked to outstanding transaction-account balances) were again the largest revenue-growth contributor (53 percent). But transaction-related revenues (those directly linked to payments transactions) climbed more strongly in Europe, the Middle East, and Africa (EMEA), as well as in North America, contributing more to revenues than they have in any year since 2008.

We expect the contribution of transaction-related revenues to continue rising through 2019, growing at a compound annual growth rate (CAGR) of 7 percent (compared with 5 percent for liquidity revenues) and contributing more to global payments-revenue growth for the period ($360 billion compared with $220 billion). Weakening macroeconomic fundamentals, primarily in Asia–Pacific, will mostly affect worldwide liquidity revenues; transaction-related revenues, more driven by payments-specific trends and the ongoing migration of paper to digital, will continue to grow at historical rates. Further, the digital revolution in customer behavior and the intensifying competition will likely revive the “war on cash,” giving further impetus to transaction-related revenues. Still, with CAGRs of 9 percent in EMEA and 7 percent in North America, liquidity revenues should continue to grow as interbank rates recover from historically low levels.

We also anticipate a rebalancing of revenue growth. During the past five years, payments revenues grew at a CAGR of 18 percent for Asia–Pacific and Latin America combined, comparing favorably with flat revenues in EMEA and North America. During the next five years, however, these growth rates will be 6.5 percent and 6 percent, respectively.

Setting aside changes in macroeconomic fundamentals that are difficult to predict, we foresee four potential disruptions that will alter the payments landscape in the coming years:

  • Nonbank digital entrants will transform the customer experience, reshaping the payments and broader financial-services landscape. The payments industry has recently seen the entry of diverse nonbank digital players, both technology giants and start-ups, that are presenting increased competition for banks. While start-ups have generally not been a major threat to the banking industry in the past, we believe things will be different this time due to the nature of the attackers, the prominence of smartphones as a channel, and rapidly evolving customer expectations. To maintain their customer relationships and stay relevant, banks will need to respond to these changes with new strategies, capabilities, and operating models.
  • Modernization of domestic payments infrastructures is under way. The industry is currently going through a wave of infrastructure modernization that is required to compete effectively with nonbank innovators and address evolving customer needs. More than 15 countries have modernized their payments infrastructures in the past few years, and many others are in the planning stage. Because infrastructure upgrades are costly at both the system and bank levels, banks need to find ways to build products and services on top of the infrastructure that provide value to end users and accelerate the war on cash, in order to recover these investments as quickly as possible.
  • Cross-border payments inefficiencies are opening doors for new players. The entry of nonbank players and new infrastructure demands are not limited to domestic payments: they will also affect cross-border payments. To date, banks have done little to improve the back-end systems and processes involved in cross-border payments. As a result, cross-border payments remain expensive for customers, who also face numerous pain points (for example, lack of transparency and tracking, as well as slow processing times). However, as nonbank players increasingly encroach on the traditional cross-border turf of banks—moving from consumer-to-consumer to business-to-business cross-border payments—they will force many banks to rethink their long-standing approaches to cross-border payments.
  • Digitization in retail banking has important implications for transaction bankers. The digital revolution will extend well beyond consumer payments and retail banking, causing significant changes in transaction banking. As customers grow accustomed to faster and more convenient payments on the retail side, they will soon demand similar conveniences and service levels in transaction banking. Having witnessed the impact of nonbanks in consumer banking, transaction bankers are becoming more aware of the nonbank threat in their own backyard and of the potentially major downside of failing to invest in digital infrastructures and services.
 Overall, we expect to see the payments industry continue to grow at a moderated yet healthy rate during the next five years. But amid that growth, there will be a rebalancing of revenue sources, and, more important, powerful disruptive forces will begin to reshape the global payments landscape.

Mapping the Digital Shopper’s DNA

Excellent article from McKinsey – “Cracking the digital-shopper genome“. Companies have more data at their fingertips than ever, so why do online shoppers remain such a mystery? The solution begins with bringing all the information together to form a meaningful picture of the consumer.

While every e-commerce company wants a comprehensive view of its customers, few put in place a disciplined system for collecting and organizing those insights. In the same way that cracking the human genome requires decoding the DNA packages it comprises, companies should aspire to create a complete picture of the customer across a complete set of shopper characteristics:

Customer decision journey captures customer behavioral pathways and attitudes at each stage of a purchase journey. A customer may initially look for inspiration (ideas on what to buy) and then information (product descriptions, reviews, informational blogging content) before seeking the best way to buy a given service or product. Interactions can be tailored to this process: for example, one technology manufacturer seeks to identify shoppers on its website who are early in their journey and ensures they don’t see pricing promotions, which are instead offered to visitors who are closer to actually buying.

Digital-channel preference highlights how a shopper prefers to interact with a brand. These insights come from understanding how customers interact through various digital channels—such as apps, e-mail, social media, and video—and the ultimate value of that interaction. The most sophisticated approaches then map these channel preferences to phases of the customer decision journey to create a clear picture of the customer’s cross-channel experience.

Product affinity details what products and product attributes customers prefer across brands and categories. These insights are based on where customers spend their time while visiting a website and on their product-purchase history, analyzed for “key preference indicators” that help to create useful product taxonomies, such as whether the customer shows a preference for a certain designer or style. In structuring a taxonomy based on this behavior, retailer The Children’s Place, for example, uses Demandware’s CQuotient to analyze language in customer reviews and selects the most relevant words to inform a product’s metadata.

Response to offers details how customers respond to various offers and what incrementally results from those interactions. These responses track how coupon offers, discounts, and loyalty rewards, for instance, affect customer-shopping behavior at a level of detail that allows an e-commerce company to understand which offers yield the most cost-effective payoff by customer segment and, eventually, by individual customer.

Life moments and context looks at episodes in a customer’s life (such as having a child, getting a new job, or moving house) and behavior during seasonal events (such as at Christmas or on vacation). This analysis provides a better understanding of the consumer based on how much time typically elapses between purchases and whether the customer is buying consumables or durables (such as furnishing a new home or office).

Demographics, preferences, and needs provide insights about shoppers based on information beyond interactions with a specific e-commerce company. In recent years, there’s been impressive growth in the quantity and quality of data aggregated about customers at the “abstracted ID” level (that is, information that is not personally identifiable). Sophisticated data aggregators such as Acxiom and Nielsen’s eXelate are able to append not only demographic data such as age, gender, or zip code–based income level but also preferences and intent deciphered from browsing behavior across networks of hundreds of websites. For this to work over time, e-commerce companies need to adhere to strict standards about keeping data abstracted and respecting consumer privacy.

Raising your Digital Quotient

Interesting article in the McKinsey Quarterly about digital strategy. They suggest that following the leader is a dangerous game. It’s better to focus on building an organization and culture that can realize the strategy that’s right for you.

With the pace of change in the world accelerating around us, it can be hard to remember that the digital revolution is still in its early days. Massive changes have come about since the packet-switch network and the microprocessor were invented, nearly 50 years ago. A look at the rising rate of discovery in fundamental R&D and in practical engineering leaves little doubt that more upheaval is on the way.

For incumbent companies, the stakes continue to rise. From 1965 to 2012, the “topple rate,” at which they lose their leadership positions, increased by almost 40 percent as digital technology ramped up competition, disrupted industries, and forced businesses to clarify their strategies, develop new capabilities, and transform their cultures. Yet the opportunity is also plain. McKinsey research shows that companies have lofty ambitions: they expect digital initiatives to deliver annual growth and cost efficiencies of 5 to 10 percent or more in the next three to five years.

To gain a more precise understanding of the digitization challenge facing business today, McKinsey has been conducting an in-depth diagnostic survey of 150 companies around the world. By evaluating 18 practices related to digital strategy, capabilities, and culture, we have developed a single, simple metric for the digital maturity of a company—what might be called its Digital Quotient, or DQ. This survey reveals a wide range of digital performance in today’s big corporations.

Their examination of the digital performance of major corporations points to four lessons:

  • First, incumbents must think carefully about the strategy available to them. The number of companies that can operate as pure-play disrupters at global scale—such as Spotify, Square, and Uber—are few in number. Rarer still are the ecosystem shapers that set de facto standards and gain command of the universal control points created by hyperscaling digital platforms. Ninety-five to 99 percent of incumbent companies must choose a different path, not by “doing digital” on the margin of their established businesses but by wholeheartedly committing themselves to a clear strategy.
  • Second, success depends on the ability to invest in relevant digital capabilities that are well aligned with strategy—and to do so at scale. The right capabilities help you keep pace with your customers as digitization transforms the way they research and consider products and services, interact, and make purchases on the digital consumer decision journey.
  • Third, while technical capabilities—such as big data analytics, digital content management, and search-engine optimization—are crucial, a strong and adaptive culture can help make up for a lack of them.
  • Fourth, companies need to align their organizational structures, talent development, funding mechanisms, and key performance indicators (KPIs) with the digital strategy they’ve chosen.

Collectively, these lessons represent a high-level road map for the executive teams of established companies seeking to keep pace in the digital age. Much else is required, of course. But in our experience, without the right road map and the management mind-set needed to follow it, there’s a real danger of traveling in the wrong direction, traveling too slowly in the right one, or not moving forward at all.