Archive for November, 2012

Can Institutional Equity Sales Be Transformed?

Institutional Equity Sales had been going through an existential crisis since 2003, starting around the time of the Eliot Spitzer rulings. The once noble profession became tainted with suspicions of fraud and conspiracy.  Since then the role has been systematically attacked from several fronts:

– a precipitous drop in commission rates paid by clients leading to drop in margins (and ultimately compensation)

– significant cynicism around the research product they are tasked to sell

– financial crisis at the banks that employ them, which has also led to…

– …instability and irrationality in the markets, making it difficult to provide rational, money-making advice to clients

– drop in the aggregate number of new deals coming to market, which is where a strong distribution platform proves its value [more…]

Within some banks, there have been discussions on whether to exit this area all together, if not strategically pull-back from non-core markets. Salespeople sitting in those seats are nervous, which is not unreasonable given the long-term prospects of the role. Language coming from the executive floors speak of drastic cuts across all Sales & Trading floors, with an emphasis on producers who can’t be easily aligned to a certain threshold of revenue. This is especially concerning to Equity Sales since the commission their clients pay is a bundled payment covering a whole host of services that make it difficult to isolate their contribution.

So is there long-term value in the Equity sales model? I would argue yes, but for the model to have long-term viability, organizations need to think differently about that role and how it can add additional value to clients. They also need to change some key business processes to enhance the impact that salespeople provide across the platform.

Better capture of client interactions

If salespeople had better information about all the interactions that their clients have had across their business and across time, they would be able to create a much more productive relationship. In speaking with many buy-side professionals, it’s clear that one of their top criticisms is lack of continuity and consistency from their counterparties. Through a robust CRM platform that features easy capture of client interactions, capture of research consumption data, and to easily log in notes, the coverage team will easily see client behavior over time and spot opportunities to better the relationship.

There are many CRM vendors in the market and for most people finding the right solution can be overwhelming. When first investigating the options, one is faced with endless possibilities, but also boundless risk. From a quick survey, there are at least 25 enterprise-ready vendors, with about as many upstarts to choose from. Also, CRM implementation projects have a horrid reputation of easily failing. In capital markets businesses, the risk is even higher because of the specialized workflow, compliance, and end-user data needs. Picking the right solution is critical, which I’ll be covered on a future posting.

Institutional Equity salespeople are probably the best positioned to take advantage of these systems and the data that they capture. They have been an integral part of their jobs and most salespeople have faced the challenges of sub-optimal systems.

Integrate with other client activity and client relevant information

IT spending at most broker-dealers has been historically concentrated on the development and optimization of trading technology in order to increase trading profits, to the detriment of the sales side of the business. With the 2008 financial crisis and subsequent reorientation to the client, there has been some shift of investment to Sales IT. There is now a desire to integrate other information into a client profile in order to have a more holistic view of the account to salespeople, including security holdings, fund performance, transaction trends from other asset classes (FX for instance), and client interest-driven information such as stock trends and twitter feeds. The more information that can be integrated into a client’s profile, the better the salesperson can provide guidance to the client. This can be a big differentiator.

The mechanics of integrating this information and rendering it in a useful fashion to salespeople is a complicated proposition, one which falls under the umbrella of the newest management buzz-term “Big Data”. There is a tendency by sales managers to avoid this complexity, but the advantage that we have today is that the cost of gaining a competitively advantageous insight though data has fallen dramatically. Although more discussion on specific strategies and considerations will be addressed in another post, it’s worth taking some time to look at applications like Qlikview, Tableau, and Spotfire to get a flavor of what they can easily do with data. Institutional Salespeople serving as the pivot point of all this information could make them immensely valuable. Of all the people in this role that I’ve spoken to, the one key complaint they all have is that they feel they are constantly chasing information from multiple sources and that they miss a lot of information that can make them more successful. This can be efficiently delivered to them so that they can spend more time with their clients.

Position this role as relationship manager for key accounts, even beyond Equities

The Institutional Equity Sales role is unique relative to other roles in Sales & Trading in that their responsibility goes way beyond executing transactions. Salaried salespeople at many large firms have little involvement with client trades at all. Their core competency is in providing access and insights from across their platforms. Their role and responsibilities should be expanded to provide insight and access across all asset classes. They should be at the center of many of the relationships, especially with clients who are not product specialized, such as macro and event-driven hedge funds.

Buy-side clients constantly say that they want to have salespeople who “think like portfolio managers”.  Institutional Equity Salespeople are the best positioned of anyone in Sales & Trading organizations to evolve into broader experts that can provide clients with innovative solutions. The key is to make sure to provide them with the best tools and information so they can execute the broader mandate.

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Measuring Profitability: Initial Questions

Over the past 10 years, the trend of measuring profitability of clients and products within financial companies has gained momentum, with a steep up-tick since the 2008 financial crisis. Managers have become interested, in some cases obsessively so, in understanding what nuclear parts (clients, products, initiatives) of their businesses are contributing to the bottom line and which are taking away from it. It’s become apparent that managing by looking only at business unit or desk level does not provide the right strategic insight necessary to compete effectively. Profitability analysis, when executed correctly, can significantly impact product pricing, resource optimization, process streamlining, and client relationship management.  We’ll talk further about uses and specific methodologies in later posts, but I want to address three main questions that I get asked when clients start looking at implementing a profitability discipline within their firm.[more…]

How complicate and detailed should the analysis be?

It goes without saying that the complexity of the analysis is largely driven by the complexity of the firm or business unit being analyzed. The key thing is to make sure that the analysis drives toward some kind of action, so it’s important to define the key questions you are trying to answer with the results. For example, the level of detail to determine whether a client is getting over-serviced is different from the detail necessary to perform a process reengineering project.

A lot of people, when in the throes of analysis, get bogged down on precision and complexity, which in many cases adds no additional directional insights.  In many cases many interesting insights can be gained from very simple analysis.  I recommend taking a look at a book by Douglas Hubbard called ‘How to Measure Anything’ which gives some useful cases studies.

Should I hire an expert or consulting firm?

I’ve often said that profitability/costing analysis is a specific skillset that is different from other finance or accounting functions. Absolutely it requires a command of the financial accounts, but it also requires a clear understanding of the underlying drivers that impact how the expenses are “consumed” by clients, products, or projects. This requires an understanding (and an ability to model) business process flows. Probably most importantly, it requires an ability to create useful insights from the model results once it has been complete. A consultant or expert in this area are usually very good at ferreting out and mapping underlying business processes and have experience turning the large mound of results data into actionable strategies. They don’t have to completely own the entire profitability initiative, but they can provide invaluable perspective on methodology at the beginning of the project and have an arsenal of profit-enhancing solutions once the profitability results have been created.

Should I bring in an ABC/ABM tool, or can I build it on Excel?

This is a tough question because most managers are extremely hesitant to invest too much at the beginning of a profitability initiative, which is completely understandable.  They want a cheap proof-of-concept first with one or two people, and Excel, which is a fine place to start. I would argue, though, that you should incorporate an ABM tool (such as Acorn ABM or SAS ABM) as soon as humanly possible, for three main reasons:

1)       As the model becomes more and more complicated, with incorporation of more clients, client segment, products, expense groups, and driver data, the harder it is to maintain and manipulate.  In the end, it’s usually one person who understands the model and if they happen to leave, it’s a massive setback.  ABM tools standardize the logic and methodology which make them much easier to endure a transfer of ownership.

2)      Allocation methodologies often lead to multiple allocations across the model, so transparency is lost almost immediately. In the end, you may be able to determine what is profitable or unprofitable, but not why. ABM tools maintain the integrity of multiple allocations, so you can always easily trace the assigned cost (to a client for instance), back to the financial account detail. Reconciliation then becomes a cinch rather than a painful two week exercise.

3)      Version control becomes a big issue as the model gets updated over time with new financial or driver data, or allocation methodologies change. ABM tools allow you to not only better organize and track version of the model, they also allow you to make changes that retroactively impact past models. This is absolutely required if you want to do period-on-period or trend analysis of results.

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