Archive for July, 2012|Monthly archive page

Shifting fortunes in wealth management

Wealth management, an industry long accustomed to steady growth and healthy profits, is now facing significant headwinds — and opportunities. How traditional banks and private money management firms respond to these new realities will determine whether they can stay relevant to their clients and sustain historical growth and profitability.

Though definitions and numbers vary, the Canadian high-net-worth or HNW market (typically defined as households with $1M+ in investible assets) consists of the top 4% to 5% of households, which collectively hold roughly $3.4 trillion in assets.  The Big 6 banks love managing HNW assets due to their healthy revenues (fees average 0.35% of a client’s money according to McKinsey).  Furthermore, the client’s assets do not have to be backstopped by large amounts of regulatory capital plus these assets are balance sheet positive — rich people deposit more money into banks than they borrow from them.   Given today’s financial industry challenges (i.e., capital markets profits are down, implementing new regulations like Basel 3 is expensive), it is no wonder many bankers now consider wealth management a key driver of growth and profits.

This once cushy business, however, is quickly finding itself caught in a vise of declining fees and increasing costs. For example, ongoing economic uncertainty continues to put pressure on fees and is triggering a shift away from complex (and high-margin) products like hedge funds to safe (but lower revenue) fixed-income assets.  Periodic financial scandals are reducing client trust in the industry and exposing breakdowns in compliance.  Growing client demands (particularly around technology, premium talent and product sophistication) are increasing service costs. Finally, increased regulatory requirements are boosting operating costs and business complexity.  Oded Orgil, managing director of Corporate Office Strategy at Manulife Financial, says, “Clients today have higher expectations for service and value.  They are more active in the management of their portfolios and are cognizant of a firm’s reputation, compliance record and risk management processes.”

At the same time, well-positioned companies can look forward to a promising medium-term market outlook.  The number of HNW households and the assets they hold are increasing (the recession notwithstanding), an aging population will be monetizing their equity from hard assets like homes and businesses to financial assets and; currently low-equity valuations have a solid upside.

Nimble wealth management companies can pursue a variety of strategies to leapfrog competition, improve their value propositions and sustain margins, including:

Bolster margins

Segment client’s better: Move beyond flat fee and service levels to a model where different clients are given different levels of services and fees.

Sell more to existing clients: A challenge for many companies, but driving higher cross-selling rates will improve revenues, lower client-acquisition costs and boost retention.

Optimize the back office: Look for efficiency gains and cost savings in back office operations like custody, accounting and record keeping.

Regain trust 

Reinforce the value proposition: Rich people have watched assets plunge along with everyone else’s and rightly question what they get for their money. Firms should invest in enhancing the client experience in order to drive measurable client satisfaction.  Target areas include staff training, client education, cross selling complementary services and client-supporting technology.

Improve transparency: It’s no longer acceptable for a client not to know their financial position at any given time.  Deploying advanced record keeping and online information delivery tools can provide clients with better visibility into their holdings, transactions and asset mix.

Foster simplicity: For the vast majority of clients, investing has never been a more complex and arcane activity.  Companies can foster trust by making the language and process of investing much more “user friendly”

Enhance the offering

Leverage global networks better: In many cases, the rich of 2012 live in multiple residences, travels extensively and have kids in disparate geographies.  To better serve these clients, wealth management companies should leverage their global retail network or establish strategic partnerships in key markets with symbiotic firms.

Become mobile enabled: The wealthy increasingly are performing daily activities including financial transactions through mobile computing devices such as a PC, smart phone or iPad.  Providers must keep pace by supporting their offerings through mobile channels.

Offer tailored solutions: Many clients are looking for bespoke, one-stop solutions that satisfy their unique investing needs.  This could include providing access to alternative assets like private equity investments in their portfolios and bringing in other complementary services like tax and estate planning.  Furthermore, wealth managers need to learn work better with emerging institutional-like structures like family offices.

Go for “smart” scale

Provider fragmentation, the need for scale and steadily increasing compliance and technology costs makes the fragmented HNW sector ripe for further consolidation. However, this strategy will only pay dividends only if the acquisition can be profitably integrated and the client sees value as part of a larger entity.  Otherwise, the firms run the risk of losing their top wealth and relationship managers, along with their best clients.

“The complexities of the investing world” says Orgil, “are unlikely to abate.  This ‘new-normal’ opens up new opportunities for the wealth manager to forge a better, more profitable relationship with their clients. The quicker firms understand this the more sought after and competitive they will become.”

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

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Strategy or execution?

I recently attended a corporate town hall. As part of the Q&A, the CEO stood up and said, “Execution is about results, everything else is a luxury we can not afford at this time.”  The sub-text of his statement was that strategy is about thinking (i.e. inaction, indecision) and execution is about getting things done (i.e. something more important).  This CEO is not alone.  Under considerable pressure to hit aggressive financial targets while minimizing risk, most managers will batten down the hatches and focus on execution. Is this smart business?

Strategic banality

No, but it is understandable given the state of strategy development in many organizations.  Many firms have generic corporate and product strategies that are based on frothy and self-evident statements such as “Our strategy is to become the market leader” or “Our strategy is to maximize customer satisfaction.”  Not surprisingly, these strategies often do not produce the desired results; they are not differentiated, aligned with the enterprise’s core capabilities and well understood internally.  Deploying ineffectual “strategies” can be worse than having no strategy at all, as the process to create them depletes finite resources, uses up valuable time and often leads to employee cynicism. No wonder many results-driven leaders are jaded.

On the surface, the view that strategy is less important than execution is hard to refute. Virtually every manager would agree that you cannot achieve good results without having good execution; similarly, most would concur that having a good strategy alone is no surefire formula for success. But too many people jump to the incorrect conclusion that this makes execution more important than strategy.

Back to basics

Experienced leaders know that strategy is more than clichés. Rather, it is the series of strategic choices (based on thorough analysis and deliberation) organizations make on where to compete and how to win such that they maximize long-term competitiveness and shareholder value at minimal risk. Within this paradigm, execution is about producing results in the context of those decisions. The reality for most companies is that they can’t have great execution without superior strategy. Two well-known examples illustrate this.

Smart phones

It is a foregone conclusion that Apple bested RIM in the battle for smart phone supremacy. Clearly, a large part of Apple’s success traced to its outstanding execution.  However, Apple also made definitive and more coherent strategic decisions about where it would play and how it would compete. These included better choices about its target customers and how to reach them; its value proposition in terms of products and features; and the superior capabilities it needed to deliver that proposition to those customers. It was these superior strategic choices that delivered the profitability, brand loyalty and supply chain agility that enabled Apple to out-execute RIM.

Airlines

Another example can be found in the competitive U.S. airline industry.   Southwest Airlines has outperformed peers for decades primarily due to their more defensible and profitable corporate strategy. Southwest has a more defined target market (the point-to-point economy traveler), a more compelling value proposition (superior price, convenience, and experience), and a closer fit between the value proposition and the capabilities needed to deliver it (e.g., maintaining a simpler fleet, running a point-to-point operation). Of course, the company is a terrific operator in its own right.  But having a better strategy made it possible for Southwest to consistently out-execute its competitors. Unless other airlines improved their strategies, they will never be able to use execution to overcome Southwest’s inherent advantages.

The execution trap

Firms can fall easily into an execution mind-set – to their peril. Market leaders looking to protect their hard-won market share (initially based on a superior strategy) and fully exploit legacy assets will be biased towards execution to drive incremental improvement and minimize risk. Ignoring strategy, however, will leave leaders blind to disruptive products and technologies.  Followers, on the other hand, often succumb to a different kind of cognitive trap.  To grow, these firms will mistakenly look to out-execute the leaders by mimicking their strategies through the flawed use of benchmarking and best practice tools.  Yet, no matter how well followers execute they will still be unable to challenge the leaders who possess superior and proprietary capabilities, technologies and cultures.  Followers will usually be better off finding a more distinctive and compelling strategy.

Companies need a good strategy to have first-rate execution. Developing a winning strategy takes time, and requires systematic analytical thinking plus the courage to challenge prevailing assumptions around customer needs, technology etc.  The ability to execute with excellence depends on how well the strategy is aligned with stakeholders as well as how it fits with the culture and capabilities.  For firms in a rut, refining the strategy may hold the key to unlocking better execution and producing breakthrough results.

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

Four secrets of innovation success

Before Silicon Valley, there was Bell Labs the R&D organization of the former telephone monopoly, AT&T.  For much of the 20th century, New York/New Jersey-based Bell Labs led the world in groundbreaking R&D that spawned some of the greatest inventions ever created.  A new book by Jon Gertner, “The Idea Factory:  Bell Labs and the Great Age of American Innovation,” documented the history of the lab and what companies can learn to kick start their innovation engines.

Among its many accomplishments, Bell Labs can take credit for many disruptive innovations that have impacted virtually every consumer and organization.  These include the invention of:  the transistor and semiconductor, the communication satellite, the silicon solar cell (precursor of all solar-powered devices), optical fiber, the UNIX operating system, the C programming language, foundational cell phone technology and the laser.  Importantly, Bell’s breakthrough thinking also crossed over into management practice. Their mathematicians were the first to apply statistical analysis to manufactured products, creating what is today known as quality control.

It would behoove managers to explore the secrets behind Bell Labs stunning success. Based on my 20 years of helping organizations innovate, I think they got 4 key things right.

Leadership

Behind every innovative organization there is usually strong, consistent and visionary leadership.  At Bell Labs, the man most responsible for building a culture of creativity was Mervin Kelly.  Between 1925 and 1959, Kelly was employed at Bell Labs, rising from researcher to chairman of the board. His vision was to establish an “institute of creative technology” that needed a “critical mass” of talented people to foster a “busy exchange of ideas.”  Kelly provided the critical leadership and management practices that allowed innovations and a supporting culture to flourish.

Credo

The Bell Labs’ mantra could have been stated: to boldly envision the future, move deliberately and build things.  It was clear to everyone that the ultimate aim of their organization was to transform new knowledge into transformational things that can be commercialized.  Behind this credo was a recognition that the innovation process was serendipitous and that real breakthroughs took a long time. This required both management and researchers to exhibit patience – having the time to do what was necessary – and to be practical, working on things with a commercial focus in mind.

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This institution employed some of the smartest people in America, purposely recruiting across many disciplines, thinking styles and roles.  They put them under one roof, giving them the freedom to create and the duty to support each other.  Providing this autonomy was critical in ensuring the researchers were empowered and not hamstrung by organizational barriers to creativity.  Forcing collaboration was essential to mobilizing the necessary brain power, breaking down information silos, and avoiding politics.  For example, every expert was required to mentor new hires in order to transfer their subject matter expertise and to reinforce the organization’s esprit de corp. Bell Labs would end up pioneering the development of cross-functional, cross-specialty teams working under one roof on major initiatives.  Although harmony and sharing were important values, there was also recognition that creative tension and project competition was useful in solving certain hard-to-crack problems.

Organizational dynamics

At Bell Labs, management used a variety of organizational strategies to encourage a busy exchange of ideas and to create a culture of collaboration.   For example, satellite labs were set up in the phone manufacturing plants to improve the odds of commercialization and to foster 3-way collaboration between the manufacturers, design engineers and researchers.  From an office perspective, the laboratories and common areas were physically laid out to ensure that people and ideas flowed freely and randomly.  The physical proximity of individuals was seen as important to driving collaboration; communicating via the phone was not enough.  In another case, there was an office open door policy (this before the era of cubicles) to encourage free-flow communications.

Two fundamental lessons can be drawn from the Bell Lab’s story.  First, to generate breakthrough innovation (as opposed to incremental improvements that are easily matched in the market) organizations must leverage both sides of the R&D coin:  basic research plus commercialization-focused development.  Second, innovation can just as easily happen with deliberate corporate teams as it could with young entrepreneurs working out of their garages.  Today’s dominant approach to innovation in IT – Facebook’s “move fast and break things,” and Google’s “gospel of speed” – is not the only way to produce R&D breakthroughs and winning products. Though technological revolutions happen quickly, they tend to evolve slowly.  Firms would be wise to spend the requisite time getting the technology, culture and products right.

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

Are bundles bad for business?

According to conventional wisdom, product bundles are a great way to build customer loyalty, drive revenues and improve your brand image.  With a bundling strategy, consumers who purchase one product are tempted with incentives to buy  another, often complementary product.  The marketing premise – supported by solid evidence in many firms – is that companies can maximize total customer revenue by offering a second product at discount versus selling each product individually. Not surprisingly, bundling has become popular in many B2C and B2B markets ranging from telecommunications to financial services.

Bundle with care

Does bundling’s good reputation hold up to research? No, according to professors Alexander Chernev and Aaron Brough in a recent article in the Harvard Business Review.  Their research found significant problems with bundling. Specifically:

  • Consumers will pay more for a single expensive item, such as a TV, than they will for a combination of that item and a cheaper one, such as a radio.  In their study, people were willing to spend $225 on one piece of luggage and $54 on another when the items were offered separately. However when the bags were offered as a package, people were willing to spend just $165 for both
  • Bundling will have a negative effect on the perceived value of a product when a less expensive item is added as part of a bundle. The research found that when consumers were offered a choice between a gym membership and a home gym, slightly more than half preferred the home gym. But when a fitness DVD was included with the home gym, only about a third chose it.

It’s all in your head

In 5 experiments, real consumers were shown a series of real brand name products—phones, jackets, backpacks, TVs, watches, shoes, luggage, bikes, wine, and sunglasses – varying in price.  Respondents in one group were asked how much they would pay for each item by itself, and those in another group were asked how much they would pay for a bundle combining a high-priced and a low-priced item.

Psychological factors – specifically a process named categorical reasoning – are behind this consumer behavior. People naturally tend to classify products as either expensive or inexpensive.  This categorization influences how they judge products. When an expensive item is bundled with an inexpensive one, people categorize the bundle as less expensive, and this lowers their willingness to pay for it.    

It’s the bundle and price points that matter.  Categorical reasoning does not happen when lower priced products are valued side by side against more expensive products. This effect is only seen only when the two items are considered part of the same offering. Moreover, categorical reasoning does not arise out of differences in the perceived quality of the bundled products. Devaluation can happen when both items are of similar quality and brand image but different price points.

Marketing implications

Bundles aren’t and shouldn’t go away so fast.  However, this research suggests that firms should use them carefully. For example:

  1. Get consumers to focus on non-price attributes like reliability, performance or design.  This will eliminate the price effect since people categorize along just one dimension at a time. The findings show that when customers focus on one of those attributes, they’re much less likely to categorize items in terms of their expensiveness.
  2. Design bundles where each product has similar perceived value, image and price points.

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