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Financial services must focus on future while optimising the present

Doug Leather, MD, REAP Consulting

No managers in financial services need to be told that their world is changing quickly, or that managing change is difficult, or that short-term success is no guarantee of long-term success or even survival, or that short-term failure is not a guarantee of demise. However, DOUG LEATHER, founder and MD of REAP Consulting, says all managers need to understand that balancing change for tomorrow and for the day after tomorrow is probably the best trick they can pull off - for their own careers, for their shareholders or stakeholders, and for their customers.

The opportunity for choice delivered by new entrants to the financial services market and new technologies has increased the power of the customer. Evidence of this can be seen in the growing resistance to product and service fee structures, decreasing loyalty to primary providers, acceptance of non-traditional brands and propositions, and the willingness to shop for a better offer and self-select the solution.

Several trends have clear relevance for the financial services industry and are already affecting its development. The speed and impact of these trends is likely to increase, demanding ever more agility and ever more diligence over risk. If the traditional financial services industry is to survive, it needs not just to make better use of data and information; nor just to be smarter or more knowledgeable; but to develop wisdom.

Steering your company successfully through change Companies may ignore certain factors at their peril, because if they are not understood, they lead quickly to a company drowning in a flood of detailed decision-making:

* Companies may have to run their business in separate business units, divisions, silos, but they must have a simple overview of where they are and where they are going, at senior management level. Information systems should provide support to this process, but not drown senior managers in data. They should provide data, not only the classic financial variables such as profit, capital investment, working capital, cash flow and revenue, not just the older and newer marketing, sales and service measures such as orders, customer wins and losses, customer satisfaction and service delivery, but also data in areas of risk such as operational risk, economic/financial risk, capability risk and compliance risk.

* That overview is best generated by simple scorecards at each level, with tough, measured and disciplined delegation of performance, with the right data delivered to manage it at each level, and accountability for performance and contribution to higher level measures delegated and measured. This can only be done if companies manage people issues well.

* Business performance cannot be measured just by current value (sales, profits, cash, headcount, inventory, working capital), for these only measure the past and present. Managers manage the future, and in most businesses the present is determined by others (customers who decide to buy now, sales people who are motivated to sell now, workers who are motivated to work now). Managing near-term performance requires developing a clear picture of what it is, and this includes not only the likely future values of the measures mentioned above, but risks around them.

* Risk is everywhere and is normally badly managed when different categories of risk emerge and are detected but are not raised to the level at which they can be managed (or raised at all). Particularly hazardous are risks, which multiply when combined (as we saw on 11 September, when operational, physical and market risk were combined).

* Personal accountability is the key to long-term success. The board is accountable not just for performance, but also for image, customer service and risk management. Ownership of these issues can only be achieved if they are properly understood and the information on their status and how they interact is taken to the level where it can be managed - at the top. From there, it can only be transferred to the people who can do something about performance: senior and middle managers downwards. These people must understand what the company is trying to do and what their contribution is to achieving it. This requires motivating, measuring and rewarding people by relatively simple sets of incentives and measures, which are transparent to the individuals affected.

* Companies must be very clear about which models they run their business by. Many managers do not understand what is meant by model. It is simply a picture of the main entities or factors that account for how the business is run, and of how they must relate to each other for the company to succeed. For example, in the CRM area, a business which gets most of its profit by selling through intermediaries who influence final customers strongly in their choice of product must determine what makes for successful relationships with intermediaries. There is no point in developing a strong relationship with final customers without a strong relationship with intermediaries.

* Intermediation is changing. New technologies for handling relationships between businesses allow new market models to evolve. These often involve the introduction of new intermediaries between companies and those they formerly regarded as their customers. In some cases, this intermediation is only partial - for example the partial outsourcing of the service they deliver. This is because these new systems reduce the cost of inter-organisational communication. Pretending that these opportunities do not exist is no solution, as competitors who use these opportunities to reduce the costs of dealing with customers, or to increase the focus on specific aspects of service, will win away customers based on level of service or cost.

* Value is becoming a focus, but most companies are very confused about value. There are many different kinds of value - here are some examples: value of customer to the company (present and over time), value of the company's offer as perceived by customer, stakeholder or shareholder value, and allocation of value chain tasks between customers, the company and its business partners. These different values can be related in a positive way, but the relationship may be counter-productive. For example, allowing customers to extract much more value than they return can create problems, unless this is a prelude to the reverse taking place (investment in customers). Similarly, not understanding the full value chain costs of a particular way of dealing with customers can lead to a whole value chain becoming uncompetitive.

* Understand what the company is doing today. One of the commonest patterns is "the board illusion" - a situation where the board of a company does not really understand what is going on in all the areas mentioned above. In most cases, this weakness can be resolved by use of one or other more or less structured audit methodologies, sometimes involving a comparison with a database of practice. These are not easy to interpret, but they are very likely to remove the illusion. * Senior managers must learn to see their company from outside - from the point of view of customers, business partners, suppliers, government and other interested parties. They also need to see it from their people's point of view - for inside people manage outside people. Unless senior managers understand the inside view and the outside view, they will not be able to manage either.

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Contact

Doug Leather, REAP Consulting, 083 327 1010, dougl@reap.co.za

Frank Heydenrych, Predictive Communications, 011 608 1700, frank@predictive.co.za