Editor’s note: IBM’s plans to acquire Promontory Financial Group and making it part of Watson Financial Services reflects IBM’s strategy of making cognitive computing solution offerings a top priority.Promontory lifts IBM’s technology and services for financial institutions However, IBM Global Business Services also will benefit.
HAMPTON, N.H. – As IBM continues to pursue an industry-aligned, cognitive-driven portfolio, acquisitions remain core to adding domain expertise and IP that speed creation of new platforms. Announcing plans to acquire Promontory Financial Group to be part of the solution unit Watson Financial Services, rather than as a subsidiary of Global Business Services (GBS), demonstrates enhancing the industry utility and repeatability of its cognitive solution offerings is IBM’s top priority.
However, the acquisition and continued investment in industry-focused Watson capabilities will also benefit GBS through increased consulting, implementation and managed services opportunities. Though the investments come from outside GBS, IBM’s corporate initiative to promote industry use cases for Watson enables GBS to stay competitive with management consulting peers that continue to invest in industry-tailored technology offerings.
- IBM to accelerate its development of cognitive solutions for financial services clients
On Sept. 26, 2016, IBM announced plans to acquire Promontory Financial Group, a U.S.-based consulting firm providing regulatory, risk and compliance advisory services to financial institutions, for an undisclosed amount. The acquisition is expected to close in 4Q16. Promontory will join IBM as a wholly owned subsidiary in Watson Financial Services, which is part of the Industry Platforms business IBM launched in August. The move marks IBM’s third major organizational initiative around Watson since the creation of the Watson unit, following the launches of the Watson Health unit in April 2015 and Watson Internet of Things in December 2015. Promontory also represents IBM’s first acquisition of a financial services-focused consulting firm since the company bought Palisades Technology Partners in 2006. The impetus behind the Promontory acquisition aligns closely with IBM’s Watson Health strategy: apply industry and domain knowledge to train Watson to generate actionable insights from massive sets of unstructured data to solve complex business problems. For example, IBM’s development of the solution Watson for Oncology relied heavily on its collaboration with healthcare providers such as Memorial Sloan Kettering Cancer Center. Memorial Sloan Kettering’s clinicians and analysts used their experience treating thousands of patients and working with various specialized, unstructured data formats, from physicians’ notes to clinical research papers, to teach Watson how to detect and interpret data that might be useful for cancer treatment decisions. Though the training process took a few years due to the sheer volume of data Watson had to ingest, Memorial Sloan Kettering’s deep industry expertise enabled IBM to bring Watson for Oncology to market more quickly than it could have otherwise. The uptick in usage by hospitals worldwide over the last year, including Bumrungrad International Hospital in Thailand, Manipal Hospitals in India and Gachon University Gil Hospital in Korea, indicates IBM’s efforts to refine the solution were worth the wait.
Promontory’s 600 professionals, including former regulators, accountants, lawyers and compliance officers, and presence across six continents position IBM to repeat its success with a Watson-enabled solution for regulatory compliance, which remains a top pain point for financial institutions. The increasingly complex regulatory environment stemming from the 2008 financial crisis creates challenges for financial institutions in keeping up with the changes and ensuring sales and marketing, customer service, product development, and back-office operations meet evolving obligations. Promontory’s insight into how regulatory processes work — in multiple regions, from regulators’ and financial institutions’ perspectives — will be invaluable in teaching Watson to recognize regulatory changes from hundreds of millions of pages of regulatory requirements and make appropriate recommendations to financial services clients for adjusting their processes to remain compliant.
In healthcare IBM had to spend billions of dollars on marketing and acquiring healthcare-specific software and cloud capabilities to create a market for cognitive solutions that support physicians making clinical decisions. However, the financial services industry appears primed for a technological answer to a human resource challenged problem. According to TBR’s recently published 3Q16 Analytics & Insights Professional Services Customer Research on analytics buying behaviors, 43% of survey respondents in the financial industry are considering new analytics solutions and another 18% consider expanding their analytics capabilities a top priority over the next two years. Our research also confirms that changing laws and regulations are top of mind for financial services organizations as external factors impacting them over the next five years.
IBM’s well-established presence as an IT provider to the financial industry (representing nearly one-quarter of corporate revenue, according to TBR estimates) will help facilitate client discussions at a strategic level around the potential for cognitive solutions to assist compliance teams with managing this change. The question, however, will be whether IBM and Promontory can train Watson fast enough to meet demand. IBM and Memorial Sloan Kettering began training Watson on cancer treatment data in 2012, but Watson for Oncology did not start gaining traction until 2015. IBM has been piloting cognitive risk and compliance solutions with banking clients over the past year and continues to develop its Watson technology to increase the rate at which it can process new information. We expect this, in addition to incorporating lessons learned from the Memorial Sloan Kettering partnership, will reduce the time in which IBM can bring a repeatable regulatory compliance solution similar to Watson for Oncology to market.
- What Watson Financial Services means for GBS
GBS will serve as one of Watson Financial Services’ implementation partners providing regulatory, risk and surveillance managed services to implement Promontory Financial Group’s strategies that address clients’ regulatory compliance challenges. The acquisition of Promontory and creation of Watson Financial Services also increase systems integration and business process services opportunities for GBS. The Watson-enabled regulatory compliance solution would provide targeted recommendations for a particular client, based on the client’s data as well as current and new regulations. GBS can help implement a cost-efficient solution for clients to sift through and adapt to ever-changing financial regulations. Beyond implementing and managing the Watson solution, GBS can also provide BPO services to help clients manage regulatory compliance processes on an ongoing basis.
As GBS has well-developed BPO capabilities for its financial services clients, integrating regulatory compliance with business process services would be a natural extension. Developing business process services for financial services would differentiate GBS from peers such as Deloitte, which also partners with IBM on Watson solutions for financial services but does not offer BPO services. While GBS traditionally works with larger enterprises, we expect it will develop repeatable, “as a Service” offerings with built-in regulatory compliance measures to enable clients in smaller institutions to reduce operating costs.
- What Promontory Financial Group means for IBM in management consulting
Within the management consulting space, we believe the risk and regulatory compliance experts gained from Promontory Financial Group will enable IBM to better compete with vendors, such as the Big Four that benefit in financial services from their legacy F&A practices and are continually building their implementation and technology capabilities. We believe IBM’s decision Promontory Financial Group will remain its own unit will help IBM retain the Promontory Financial Group’s brand and client relationships, likely allowing for cross-sell and up-sell opportunities with its longstanding client base.
In our Management Consulting Benchmark we found clients prefer to work with local experts they trust and increasingly look to adopt digital and analytics solutions to improve operations and position for growth. Promontory Financial Group’s scale spans North America, Europe, the Middle East, Australia and Asia, adding local expertise to IBM’s bench that will help IBM differentiate its consulting-led financial services offerings backed by IBM’s global scale as well as its end-to-end portfolio offerings.
This acquisition varies relative to IBM’s recent purchases of industry-focused technology firms, such as Truven Health Analytics, in that the value Promontory brings is in its people, following a trend we have observed among its solutions-led management consulting peers. Accenture has also made recent pure play consulting acquisitions with specific industry expertise. For example, Kurt Salmon added retail expertise and Beacon Consulting strengthened Accenture’s capital markets practice. On the other end of the consulting spectrum, strategy consultancies that house extensive business and industry expertise have been acquiring firms that add data scientists, web designers, engineers and technology emphasizing Internet of Things, digital, analytics and cybersecurity.
These investments paired with traditional, industry-specialized consulting services enhance the value proposition of their offerings and their ability to deliver strategy through implementation. For instance, in 2016 McKinsey purchased Risk Dynamics, which builds on the firm’s consulting and analytics offerings bringing risk model validation applied through the business-centric lens. We expect Risk Dynamics to be folded into McKinsey’s Risk Advanced Analytics unit, comprising 120 professionals, and scaled beyond its Brussels-based headquarters. While McKinsey is not as well known for its analytics practice relative to vendors with strong technology portfolios (e.g., IBM and Accenture), the firm will be a competitor in this space if it successfully leverages its established relationships with the C-Suite.
In the Management Consulting Benchmark, financial services remained the largest vertical, dominated by the Big Four, whose combined financial services revenue generated 55% of overall benchmarked revenue for the segment in 2015. We noted consultancies’ investments focused on emerging technologies to compete and differentiate in the financial services space. We believe IBM’s financial services-specific, Watson-enabled offerings differentiate the company in the market, from the technology standpoint, and pairing Promontory Financial Group consultants with these offerings strengthens IBM in the heavily targeted financial services vertical.