Strategy & Value
For the past 10 years, financial services firms have publicly acknowledged that they needed to change. Chances are, your organization was one of those.
Commoditization meant a systematic erosion of margins for banks; reduction in interest rates has been challenging both interest and non-interest income sources of banks and investment firms as well as the economics of insurance; and technology has posed a constant threat of disintermediation and radical value-adding substitutes.
However, just like the proverbial frog in the heating water, most business leaders have responded incrementally – aiming at matching the pace of change they observed in the market and improving their results within the parameters of their existing business model.
The problem is that change has arrived and it does not look like we expected. While COVID-19 ravages lives, economies and markets, clients and stakeholders alike are looking at financial service firms and asking that they help them weather the storm. They are calling you to change with them.
Most companies will find this call very difficult to answer and will cower. If they did not have the resolve to change during good times, the chances of doing this now are even lower. Practically all financial services sectors were already in cost-cutting mode before and are now being asked to be even more so.
For example, even great organizations like JP Morgan Chase and Bank of America which were valued at 1.6x and 1.2x their book value in December, are now valued at 1.1x and 0.7x. Most other banks are well under 1.0x signaling that investors fear that a dollar may be worth much more in their hands than in the banks’ balance sheet. And real change is costly and, even worse, risky.
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The Strategic Crucible
While this may sound like the worst possible scenario imaginable, there is also good news: the economy is strong and companies have reasonable cash reserves – which gives us all some additional room for maneuvering. Technology is at a point where it should no longer be the most important bottleneck to innovation (bottlenecks should be around Application and regulatory response, which can be accelerated more easily). And also, ironically, it may be good news the fact that this crisis comes reasonably well defined and urgent.
This is good because well-defined, urgent problems are more amenable to solutions than vague, long-term ones – even important ones (just think of problems like income distribution or the social divide which have eluded us despite the brainpower and resources we have thrown at them).
What can you do?
- Find your calling: In the short run, this will include protecting your employees, clients, and partners and improving yours and their resiliency and adaptability.
Protection starts with health and extends to other aspects of their lives: for example, most of your clients (and stakeholders) will need to understand and reprice risk just like you will and you may be in a good position to help them.
Thus, even if the shock is short-lived, after this period is over, there will be opportunities for you to continue playing a leadership role in new areas that are critical to your stakeholders.
- Evolve and de-commoditize: The needs of your clients are changing. In the short run, businesses and consumers will have a tough year ahead – strapped for cash, needing to manage new risks and reposition themselves to a new reality.
In the long run, a new norm should emerge, with new needs, new players and new ways of working. Supply chains will be redesigned and remote work will look different from today.
If you are successful at reaching these new players and providing superior responses to these new needs you will differentiate your value and create a stronger bond between your success and your clients’.
And because these needs are changing, you will need to be nimble and adaptive. But you can leverage your current relationships with clients and stakeholders to get a head start in this new stage of the race.
- Reforge your ways of working: Some of the changes to our ways of working are obvious: most companies have scaled up remote work, e-commerce has got a significant boost and supply chains are being reviewed. Besides, smart companies are also reviewing their cash cycle and working capital needs by business, running resiliency tests and repricing risk.
Many of these changes were not “ready for prime time” so many companies are experimenting, learning and adapting. The financial sector is one of them: activities like trading that depend on high availability and speed still defy home-office settings and most remote activities add new complexities to risk and compliance.
And while some less imaginative players are just trying to do remotely what they were doing in the office, you can use this opportunity to radically redesign their businesses for value productivity: improving meetings, reporting & decision making, rethinking processes, documentation & client experience and redefining strategic footprint & coverage models.
- Take the technology plunge: New needs and new models will call for technology to support them and it stands to reason that financial services firms will be pressed to reevaluate their current investments and plans. At the same time, traditional areas like cyber-security, support to legacy systems and analytics have if anything increased in complexity and importance. All of this while cash has become even more scarce.
In many cases, this calls for a strategic solution: before looking into Technology, businesses should take the opportunity to reposition themselves within a more limited scope where they can excel and win. In some cases, this means giving up on performing (but “out of scope”) business units, products and clients – which is always an unpopular and nerve-wracking decision. But reducing your scope can have a transformative effect on the impact of your technology (and other) investments.
