In the dynamic world of financial services, rapid innovation, rising customer expectations, and increasing complexity are the norm. This reality necessitates a shift from traditional in-house operations to more specialized, external partnerships.

Historically, these relationships have predominantly followed a customer-supplier model, focusing mainly on financial negotiations. However, there’s a growing trend towards* long-term strategic partnerships*. Financial considerations remain crucial, but there’s an increasing awareness that squeezing partners for short-term gains is unsustainable and leads to higher long-term costs. The emerging model emphasizes long-term trust, striving for a win-win-win situation for both partners and their customers. Successful partnerships are marked by shared risks and rewards, fostering mutual investment in each other’s success.

A vital component of these partnerships is aligning commercial agreements with shared objectives. For example, consider Company A, which profits from customer transactions based on a percentage of the transaction amount, and partners with Company B, to whom it pays a fixed amount per transaction. Company A benefits from fewer, high-value transactions, which is not in Company B’s best interest. Despite seeming balanced, this model reveals a clear misalignment in mutual interests and goals.

The consequences of such misalignments may not be immediately apparent, as they can even lead to short-term gains. However, in the long run, they result in instability, poor cooperation, and ineffective communication, potentially ending the partnership.

Examples of misalignment are all too common in business:

• Consultancy firms, for instance, often have objectives misaligned with the financial service companies they serve. A consultancy’s primary goal is to maximize billable hours and revenue by staffing numerous consultants for extended periods. In contrast, a bank or insurance company aims to complete projects quickly with minimal staffing to reduce costs and speed up platform launches. Moreover, consultancies may inflate the importance of trends like AI, cloud, and blockchain to create future business opportunities.

• Rating agencies and auditors are another example. They are paid by the companies they rate or audit, but their work is meant for shareholders to validate the company’s financial reporting. High-profile cases of such misalignment illustrate this issue, e.g. the role of rating agencies in the subprime financial crisis or financial scandals overlooked by auditors like Enron and Wirecard.

• Certification agencies face a similar dilemma. They aim to deliver certifications with minimal effort, while customers seek quick certification with little change to existing systems. This often results in certifications based more on documentation and interviews rather than actual practice, diminishing their value.

• Law firms, too, have a tendency to draft complex contracts and highlight legal risks that rarely materialize, inflating perceived risk to generate more business.

• A common scenario in financial services involves IT support desk outsourcing. Payments are typically made per closed ticket, with set SLAs for ticket response and resolution times. However, the quality of resolution is hard to quantify and often overlooked, leading to hastily closed tickets without proper resolution. This results in lost time, frustration, increased costs, and reduced revenue.

These external misalignments are mirrored internally within organizations, as seen between different departments of the same firm. For example, IT departments may focus on system stability and bug reduction, which can conflict with the company’s overarching goal of continuous improvement and innovation. Similarly, sales teams may push for quick sales with custom, tailor-made solutions that negatively impact operational costs, ultimately making some customer relationships unprofitable.

These examples highlight how misaligned objectives can lead to inefficient outcomes, increased costs, lost revenues, delayed deliverables, and strained relationships. Performance-based remuneration and shared revenue models are generally effective in aligning objectives, but perfect alignment is an ongoing challenge that requires continuous revision and strategic foresight.

Maintaining this alignment calls for open communication channels, regular joint strategic planning sessions, and transparent measurement of shared objectives. Value-stream mapping exercisesare particularly useful in identifying and quantifying each party’s contribution, ensuring mutual benefits are clear and balanced.

While perfect alignment in partnerships is an elusive goal, striving for it is crucial. It ensures that both parties work towards shared financial outcomes, strengthening the partnership. However, this requires a long-term strategy, careful consideration of how to maintain alignment, and planning for transitions in response to strategic shifts by either party.

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• Source: https://www.finextra.com/blogposting/25415/the-shift-to-trust-based-partnerships-in-financial-services-aligning-the-objectives?utm_medium=rssfinextra&utm_source=finextrablogs