Archive for February, 2012|Monthly archive page

Rebooting financial institutions

The challenges facing the financial services industry are legion, ranging from a global economic slowdown and increasing regulation, to low interest rates and the possible defaults of Greece, Italy and Portugal. For financial institutions to prosper in this ‘new normal,’ they will need to refocus most of their efforts to the right side of their balance sheet.  This is the part of the business that contains customer liabilities (i.e. deposits), debt and capital – what is used to fund assets and loans found on the left side of the balance sheet.  

Before the 2008 financial crisis, most banks de-prioritized the right side in favour of aggressive left side strategies that drove ever-higher revenues and earnings (and expectations).  This impetus combined with a loss of valuation transparency in many of the complex assets left the banks dangerously exposed from a risk perspective and unbalanced from a liabilities and capital standpoint.  The 2008 crisis showed how vulnerable even the largest and most august firms were. While many banks have reduced their reliance on unstable sources of funding and increased the stability and duration of their borrowing, many have not made any appreciable progress. 

Given market precariousness, a repeat of 2008 is still possible.  Leaders will need to improve  their right side performance, with the right mix of strategies and client liabilities, to reignite their growth engines and ensure financial stability.  Three ways managers can achieve this is to get much closer to their target customers, optimize their product portfolios, and improve risk management practices.

  1. Get closer to the target customer

With flat consumer and corporate demand, financial institutions must deploy strategies that improve customer satisfaction.  Achieving this will enable them to: maximize retention (strong loyalty correlates with high profitability) of their most valuable customers and increase cross-selling of higher margin products. Customer-centric strategies benefit both the left side (higher revenues, lower costs) and the right side (better quality deposits) of the balance sheet. American Express has successfully followed this strategy through the launch of a small-business focused brand, the Open card.  By delivering a broad offering – from credit services to business networking – to a dynamic segment, American Express has been able to access new liquidity pools and refashion its funding profile, potentially reducing their reliance on capital markets. 

  1. Optimize the product portfolio

Banks should emphasize strategies that rebalance the portfolio, towards clients and products that are rich in liabilities (such as vanilla checking accounts) and require minimal capital reserves, and away from low margin businesses that need high levels of capital.  A pioneer of this strategy, according to strategy+business magazine, is the credit card provider, Capital One.  In the late 1990s, Capital One realized that they can no longer properly fund their business model through wholesale markets or brokered deposits. The company avoided failure in the mid 2000s by aggressively revamping their funding pools and buying two stable and profitable retail banks. Later, Capital One continued on with this strategy by purchasing the online bank ING Direct.  These strategic moves have helped the firm outperform its rivals since 2008.

  1. Improve risk and capital management

The credit crisis brought to light misalignments in many banks between their risk policies, practices and credit structures.  Powerful software tools and risk management approaches (economic capital for one) have been available to better translate multiple risk positions into equity capital requirements.  However, many firms have neglected to use them. This must change.  At the same time, leadership teams need to also consider the people part of the equation.  For example, most companies would benefit from a culture change around risk (i.e. risk is not something that is bypassed through regulatory loopholes) and by underscoring the importance of risk management training and compliance practices.

Given competitive yet risky financial markets, there is some urgency for banks to use right side strategies to rebalance their balance sheets.  What they need is strong leadership, strategic finesse and executional excellence.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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Winning Social Media Strategies

For leading-edge marketers, social media has moved beyond the novelty stage to a point where it can now produce real business value.  There are now a variety of winning strategies that many organizations can emulate.  However, most firms continue to pursue social media 1.0 tactics – Facebook pages, Twitter accounts, LinkedIn profiles – to attract new customers and engaging existing ones.   Collecting many “friends” and “followers” is good but it generally does not lead to higher revenues and profits.  Companies looking to reenergize their social media programs would be smart to follow the examples of some pacesetters noted below. 

A new study – recently published in the Harvard Business Review – looked at the social media strategies and results of more than 60 companies across multiple industries.  The researcher, Mikołaj Jan Piskorski, discovered social media strategies that perform well and other strategies that failed to drive the business. 

The poorly performing companies universally imported their digital strategies into social environments by broadcasting marketing messages or seeking customer feedback. These programs failed because they do not satisfy the needs of people who come to social media:  to meet new people and to strengthen existing relationships.  Simply put, users are interested in other people, not companies who flagrantly or subtlety look to sell them something.

The successful firms generated revenue and cut costs by implementing social strategies that help people establish and enhance relationships. These programs worked because they were congruent with the users’ expectations and behaviors on social platforms. Social-based strategies are superior to purely digital ones because they tap basic human needs around social connection. With a social-based strategy,  the company assumes the role of facilitator of these interactions.

Firms looking to deploy social strategies have 4 strategic options, that vary by business impact (e.g., reduce marketing costs, increase/retain revenue) and social goals (meet new people, improve existing relationships)

  1. Reduce costs by helping people meet

The reviewing site Yelp (50m visitors per month) decreases the cost of acquiring its most valuable content by helping people meet. The most passionate and prolific reviewers are invited to join through social media platforms the Elite Squad, a select group within the Yelp community. The squad meets and socializes at exclusive and fun Yelp-hosted events and parties. To maintain this access, squad members must regularly submit quality reviews over an extended period of time thereby ensuring a strong content flow and reducing the need for quality reviewers.

  1. Increase willingness to pay by helping people meet

American Express drives membership revenues by helping small business owners meet like-minded members.  AE launched a members-only social network called Connectodex, which allows users to post profiles, list services they offer & need, and freely connect to network. To take advantage of Connectodex’s social, business and networking benefits, members must obtain or continue holding an AE OPEN card. To date, more than 15,000 small businesses have joined the network.  This program has effectively reduced customer churn and increased the willingness to pay for the card.

  1. Reduce costs by helping people strengthen relationships

Zynga is an online games provider that runs on the Facebook platform. Their free social games, FarmVille and CityVille, could generate close to $1B in revenue in 2011. According to a survey done by Information Solutions Group, almost a third of players reported that the games helped them connect with family and current friends; another third said the games facilitated connections with old friends; and a third used the games to make new friends. Zynga’s social strategy has helped drive down the cost of player acquisition and strengthen existing relationships, in order to enable up-selling.

  1. Increase willingness to pay by helping people strengthen relationships

eBay’s Group Gifts online application allows people to enhance their relationships by enabling them to pool their funds to purchase gifts for their friends.  Individuals ask friends in Facebook to purchase a gift for a recipient (based on the recipient’s “about me” profile) through a link to a GG gift registry.  To participate and garner social benefits, individuals must advertise GG to their Facebook friends and respond to their friend’s advertisements.   The service has clear social and business benefits: it helps people purchase more appealing and more expensive gifts than they might otherwise do by themselves. Furthermore, this strengthens the connection with the recipient and helps foster relationships among the joint gift givers.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Avoiding M&A pitfalls

Improving growth and business confidence usually triggers a flurry of M&A activity. Bold CEOs will use M&A to outflank competition, build strategic capabilities and drive profitability. Sounds like a winning formula If only these deals are a proven way to improve financial performance.  Numerous studies have shown that in 60-80% of cases, acquisitions and mergers have not led to long term increases in shareholder value.  While many of these failures can be attributed to business reasons, a great number can be blamed on the failings of human psychology and corporate culture.  Issues such as organizational bias, management self deception and weak planning can all contribute to poor M&A performance. 

Below is a list of the most common deal foible we have seen, with further insights provided by strategy+business magazine.

Dealmaker bias

Deals are often difficult to walk away from because they take on a life of their own.   Since they have invested so much of their time, effort and career equity, dealmakers will typically feel intense psychological pressure to shepherd the deal through to completion.  This pressure can lead to managers favouring information that supports the deal while ignoring information that should give them pause. In other cases, transaction urgency is institutionalized and magnified by a reward system that emphasizes deal completion over ROI. Finally, significant momentum or ‘deal fever’ can often take over an M&A process leading to management blinders around transaction risk or the cost of the deal.   

Self deception

Many organizations regularly and inadvertently deceive themselves into thinking they follow M&A best practices when in fact they don’t.  For example, managers often delude themselves around the extent of their market knowledge, only to bump against deal-breaking information deep into the process.  While companies may have a disciplined M&A approach (designed to reduce risk and streamline their efforts), they will regularly ignore the process out of laziness or arrogance. Finally, leaders will frequently over-estimate their firm’s capabilities and under-estimate competitive threats, resulting in a significant increase in deal risk and resources required.

The numbers trap

Naturally, many companies focus on the purchase price as the primary way to make the business case work.  However, an over-emphasis on the price ignores many other vital factors that can significantly impact long term value and cost.  These include:  the cultural fit between the firms; the ease of post-acquisition integration and the availability of talent in the target firm.

The myth of confidentiality

It is rare that prospective deals stay under the radar for very long, particularly when low to mid-level managers become privy to the process. A confidentiality breach can have major consequences including: a rapid and unexpected rise in the target firm’s stock price (suddenly making the deal less attractive); inciting a competitive response or; provoking turnover in the target firm.

Ignoring the day after

Given the size of many deals, one may be surprised to learn that many companies under-plan around what should happen after the deal is consummated.  This occurs for two reasons.  In the rush to do the deal, managers put off what they think could be easily done after closing.  Secondly, the people running the deal usually lack the expertise to plan and implement the messy work of post-transaction integration. This lack of attention will quickly derail the initiative and push out the time to value. 

There is no bulletproof way to making every M&A deal work.  However, CEOs can improve their odds of success by avoiding these pitfalls. 

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Fix your culture to drive innovation

My most frequently asked client question in 2011 was around innovation.  Senior managers wanted to know: “What is the best way to foster innovation in my organization.” This came as no surprise. Ongoing economic uncertainty, relentless global competitiveness, sustainability concerns and the high cost of R&D has put innovation near the top of most corporate agendas.

My answer is as simple as it is complex.  In our experience, firms can drill deep into their customer’s needs, hire the best minds and allocate generous amounts of capital, and still fail to ignite the innovation engine. Though investment and ideas are important, delivering real innovation comes down to getting the “soft” factors right, such as a company’s culture, management systems and leadership.  

A new survey published in strategy+business magazine supports these learnings. The authors, Booz & Company, canvassed 600 innovation leaders from 400 companies on their innovation strategies, practices and results. For perspective, these high-flying B2C and B2B firms represented $182B in 2010 R&D spending. Below are some of their key findings, mated with our insights:

  1. Spending lots of money will not necessarily lead to more innovation.

High R&D funding does not correlate with financial performance. Whether the measure is absolute investment or R&D spending as a percentage of revenue, there is no relationship between the amount invested and the results it generates.  In fact, some notable innovation and financial leaders like Apple and GE tend to rank at the bottom of R&D spending tables.

  1. Innovation is expensive and must be effectively managed.

R&D spending has a large and growing bottom line impact.  Thanks to improving business confidence and growth prospects, 68% of respondents (across all sectors) increased their 2010 innovation spending to $550B, up 9.3% versus 2009 and 5.6% versus the 2008 pre-recession high. And, these investments represent only part of the picture.  All initiatives carry significant indirect costs such as management time, business risk and opportunity cost. As a result, CEOs need to remain diligent around innovation priority-setting, program ROI and commercialization challenges.

  1. Innovation goals do not account for the difference in financial performance.

Both financial leaders and laggards shared the same innovation goals. Specifically, “superior product performance” and “superior product quality” were ranked as number one or two by a plurality of more than 40% of respondents.

  1. Having an enabling and aligned organization is the key innovation driver.

Organizational enablement (i.e. supporting cultural attributes and strategic alignment) is strongly associated with superior financial performance.  Firms with a high level of organizational enablement (interestingly, only 44% of the total sample) outperformed the average firm in the study by approximately 15% in terms of enterprise value and by 8% in terms of gross profit.

Many companies do not fully support innovation, notwithstanding the substantial amount of capital deployed. For example, 36% of firms did not strongly align their innovation initiatives to their corporate strategy while 47% reported that their culture did not support innovation.  Ominously 20% of the respondents reported having no innovation strategy at all.

Our client experience has identified two other prerequisites for innovation germination. For one thing, an innovation mandate can only flourish when accompanied by supportive management systems – business processes metrics, scorecards, and capital allocation mechanisms. Secondly, corporate leaders must maintain a strong commitment to innovation in order to sustain project momentum, reduce conflict and ensure alignment across functions and lines of business. 

  1. Cultural and alignment enablers will vary by organization

Significant research and market experience underscores the critical importance of culture – a firm’s norms and practices that govern behavior – in driving long term financial performance.  Innovation-friendly cultural attributes would include tolerance for failure, a focus on the customer, silo-spanning collaboration, and openness to external technologies or ideas. Although most firms will agree with these enablers only a minority such as P&G, Google and 3M have been able to fully inculcate and leverage them.  Other companies seeking to be more innovative will need to consider transformational strategies like redesigning their organization or bringing in innovation through M&A or alliances.  

Importantly, the vital role played by culture and alignment is not impacted by the firm’s approach to innovation, for example, whether they are customer needs seeking, technology-driven or market-based. How these 3 innovation strategies stack up in terms of effectiveness and efficiency will be the focus of a later column.

The last word on the role of organizational enablement goes to Dover Corporation’s Soma Somasundaram:  “Poor innovation performance is usually not caused by a lack of ideas or aspirations.  What some companies lack is the structure needed to effectively dedicate resources to innovation.  It’s the lack of will to develop a strategy that can balance today’s need with tomorrow’s.”

For more information on our services and work, please visit the Quanta Consulting Inc. web site.