Archive for the ‘Strategy’ Category

Sales: Process or Art?

ManOboe Partners is admittedly a quantitatively and analytically driven consultancy, with our recommendations focused on making strategic changes that leverage rigorous analysis and information. We attempt to change our client’s internal behavior and external perception by helping create a more intelligent organization. We have also primarily worked with sales organizations, many who are looking to become more disciplined in their approach to their clients.

This has always been an interesting intersection since traditionally sales has been considered more of an art than a science. Writers like Dale Carnegie, Zig Ziglar, and Og Mandino, whose books are about building relationships, understanding customer needs, and the art of persuasion, are held with reverent regard by many in sales. We were recently debating this and we challenged ourselves a bit. Are we missing anything significant in our quantitative approach to rethinking sales organizations? Worse, is our methodology possibly harming the delicate juju found in top sales teams?

We feel that our approach is unique in the industry because we are taking into consideration not only the tangible impact of a data driven organization, but we also incorporate strategies that help foster intangible sales assets as well. Our mantra from our beginning has been that creativity is our top virtue and that collaboration is a critical element in organizational strategy.

A recent article in the Harvard Business Review called Dismantling the Sales Machine validated our approach. The authors argue that a certain process-driven discipline has dominated current sales management thinking, based on scorecards and activity metrics intended to ensure compliance to an “established optimal behavior”. They state that sales managers can gain significant advantages by shifting emphasis towards “judgement of individual reps” and manager’s focus on “providing guidance and support rather than inspection and direction”. We agree. We feel that managers create outperforming teams by nurturing creativity and collaboration, which can be achieved by defining very clear strategies and goals, then using information and productivity tools to make client teams more effective. Managers should think of data and analytics as ammunition that can direct teams to perform in a more coordinated and intelligent way.

We feel that oversight metrics, while they can provide certain “fear” motivators, have the potential of harming a sales team in the long run.

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Strategy in the New Year

AngelThe New Year is upon us. I always view these last days of the year as a time to think as broadly and as strategically as possible about the coming few years. Many managers have just been through the planning and budgeting “ringer” in preparation for activity in the new year. As important as this process is in directing limited resources to the largest opportunities, I’ve always felt that this process sometimes limits strategic thinking. 

I always like to hark back to an HBR article titled ‘Strategic Intent‘ by Gary Hamel and C.K. Prahalad. The authors argue that many firms fall into a pattern of competing through imitation, and that a great deal of the planning process involves evaluating the competition, then deploying resources in areas that managers feel they can tackle share away from their rivals. Not enough time is spent seriously thinking about how to create a focused winning culture that drives radical change and innovation that not just gains marginal advantages over the competition, but drives to create a new playing field that the company can dominate. This drive is what they call “strategic intent”.[more…]

Strategic intent, the authors argue, is not a concept that can easily fit into a traditional planning process, because the stringent rules prevent stretch ambitions from being approved. The quote that has stayed with me most is that “most managers, when pressed, will admit that their strategic plans reveal more about today’s problems than tomorrow’s opportunities”. Industry leadership is something that can definitely be planned for, but it has to be an explicit goal that the organization adheres to and is infused into the culture. 

I talk about developing strategic intent quite often in client engagements, but admittedly it is the one concept that raises the most amount of skepticism. It sounds like consultant-speak that points out a rather obvious concept of a having a corporate goal. Even when there is agreement that an overarching strategic goal is missing and needs to be defined to drive the business forward, the conversation becomes fluffy, abstract, and hard to link back to the specific tactics that need to be implemented. My recommendation in these instances is to define a stretch goal, although not one that is limited to the existing resources of the firm. This has to be an ambitious goal that if achieved places the firm in an enviable spot relative to its competitors. Next there has to be a plan put in place to not just clearly communicate that goal to everyone in the organization, but also to get buy-in from all levels. It’s so important to give a sense of urgency and also a perception of flexibility and support to innovate. Overtime an organization will create new advantages that it can compete with. 

This leads, in a round-about way, to the message I want to leave you with this year. As we start the new year, plans and budgets in hand, we should constantly remind ourselves what it is that we ultimately want to achieve in the long-run and ask whether what we are doing on a day-to-day basis is in line with those goals. Taking some time to reflect on our true strategic intent should clear our thinking and allow us to be more creative on our approach. 

I wish everyone a Happy New Year and see everyone on 2014!

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Truths in Cost Management

Sunny cloudsOne of the most dramatic changes that has occurred in Institutional Banking since the financial crisis hit in 2008 is an increased focus on management of costs. This is isn’t anything incredibly new. Financial firms have been focusing on cost management for years. What has changed is an increased intensity and urgency due to margin compression driven by increased regulatory pressures and more aggressive competition for a quickly shrinking client wallet.

Many banks have created teams fully dedicated to the analysis of their costs. We’ve worked with a few of those organizations to help them define the scope of their work. It’s important to determine upfront what kinds of costs will be targeted for analysis and what will be on the table for aggressive management.[more…] The sizing of the initiative is critical in order to make sure that expectations are in line with what can realistically be achieved. Senior management have to be on board with most of the changes that the analysis identifies. It’s all too common for management to have high hopes only to back down when they perceive that they are cutting too much into meat and bone.

It’s important to get comfortable with a few truths:

  • Cost efficiencies in some cases will only come from additional investments in the platform and will be realized only some years later.
  • Cutting costs implies in many cases a cutting of some revenue streams
  • The perceived “fat” that people talk about in an organization is not a discrete element separate from the productive “meat and bone”. Most banks now are running pretty lean, so the exercise is one of objectively evaluating prioritization of businesses, functions, and initiatives.
  • Every business or project has their merits which should be fully understood before any rash decisions are made about them, especially…
  • Projects with longer horizons often have less potential impact that is less visible on the organization so they have higher risk of being cut. The long-term strategy of the organization should weigh heavily upon evaluation of these.
  • Cost and profitability analyses use a great deal of assumptions to come up with their results. All layers of management who are part of the cost management decision-making process must be well-versed in these assumptions to ensure that implications of decisions are well understood.

I’ll be writing more about cost management in the next few posts as its a topic that seams to be top-of-mind for many managers as they plan for 2014.

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Velocity of Information

Photo Aug 28, 5 26 15 PM (2)An interesting concern that we often have to address is the worry that manager and salespeople risk being overwhelmed with information. Most people can barely keep up with their existing information flow. What would new screens and automated emails do to their inboxes?

We discourage people from looking at information as a collection of valuable pieces of data that have to be stacked and reviewed, like a stack of magazines. We think it more like a river of information that doesn’t need to be read every time it updates, but rather the flow increases the perceived proximity to the most current information.

Proximity of Information

“Proximity” is the operative word. Decision-makers at all levels need to feel that the information they need is close and easy to acquire. This could translate to several different delivery scenarios depending on factors such as sophistication of the userbase, technology available, volume and rate of change of the information.

The analogy that we like to use is that information is the lifeblood of any dynamic organization, so if information flows at the pace of molasses, the organization will stagnate. What’s interesting about this perspective is that we are actually striving to reduce the value of a single given piece of data crossing someone’s desk. An email with a snapshot of revenue information that is only made available once a month, for example, is going to be held at higher value relative to a weekly or daily revenue alert with the same information.

Understanding Molasses

What holds information from flowing more quickly isn’t bad intentions, even though this tends to be an often cited cause.  It’s usually a combination of legacy behaviors ingrained in people’s habits and routines, as well as embedded hierarchical structures and legacy technology issues.

Because it’s a combination of things, not just one, it’s difficult to find one simple solution. By tackling only technology, for instance, and not addressing the other institutional obstacles, the promise of realizing higher information velocity may not be realized.

Getting everyone comfortable with the idea that what matters is increasing data flow is critical to dislodging information and weakening the molasses.

People need to feel that they can easily dip into the information flow naturally and not stress about “missing” or “losing” critical data points. Increasing information “velocity” increases the ease in which people interact with knowledge within their firm.

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Strategic Trends for Global Asset Managers

2013-07-03 16.30.18In the years since the 2008 financial crisis, we have seen major shifts in trends influencing growth in the global asset management industry. Four key changes are significantly affecting strategic thinking in the industry:

  • A continuing movement towards bifurcation of vehicles that provide “alpha” and “beta” exposure to market returns. This isn’t by any means new news, but we feel that this is clearly understood by professional investors, but is not fully understood by most non-professional investors. The impetus to find value for fees paid will accelerate the demand for “beta” products further which will cause a sea-shift in assets. Interest in index funds and ETFs will increase even more than they have in recent years.[more…]
  • Increased volatility in the market coupled with increased difficulty in identifying uncorrelated returns will push many alternative strategies into the limelight. Expertise in global emerging and frontier markets, private equity, quant and derivatives-based strategies are becoming the core way of generating any portfolio’s “alpha”. The game is up for those managers that are trying to sell what is effectively beta as alpha.

  • A global macro context is becoming core to any portfolio strategy, including those that bill themselves as focusing on a very targeted market. Even some of the most basic fundamental domestic equity portfolios are now subject to impacts from global markets. It’s becoming less relevant to specialize in one country, region, asset class, or sector. Asset allocation is becoming a more important overlay, especially in understanding movements in correlation over time and ability to shift strategy as correlations shift. Because of massive US corporate investment in China, for instance, many funds that bill themselves as US equity-centric may actually have huge China exposure and need to be managed as such.

  • It’s becoming much more imperative to be able to clearly communicate a firm’s expertise and points of differentiation. The days of asset managers being abstract or vague about their investment philosophies are quickly coming to an end. Many hedge funds and other specialized firms will gain favor because they provide unique value propositions that are not currently offered in the marketplace. What will be critical for their success, though, is the creation of a strong, recognized brand and clear messaging about their differentiation. Additionally, they will need to develop a highly efficient sales organization that can carry that message to investors. As successful as some investment strategies are, the ability to clearly (and sometimes simply) articulate why these strategies are worth investing in is just as important. This is no small effort and should be a core part of the business strategy.

We feel that there is still significant “life” to the traditional fundamental asset management model, mostly because of the huge asset pools that sit in those strategies today and the inertia built into these. But we think that this will shift very soon and very rapidly as competition accelerates and the industry continues to consolidate and chase limited opportunities. The firms that prepare for these shift will be the ones to thrive.

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What Does It Mean to ‘Collaborate’ in an Organization?

WalkWe have been having a lot of discussions recently about the definition of collaboration. For most of our clients, increasing collaboration is one of their ultimate goals. But what does it mean to increase collaboration? At first thought, it would seem obvious what it is: increasing the amount of communication exchange among team members in order to identify new opportunities to increase business. The natural next step that sprouts from this conclusion is to invest in technology solutions that allow for an exchange of information: CRM, instant messaging, collaboration sites like Sharepoint.

These tools facilitate collaboration, but they don’t in and of themselves create or inspire collaboration. Collaboration is at its core a cultural phenomenon. Collaboration springs from the development of a community that has shared interests and common goals, and clear visibility of the path to take to reach those goals.[more…] Organizations need to develop a culture where everyone buys into the idea that sharing information benefits the greater good of the firm. Leadership sets the cultural agenda, by creating principles and providing guidance on expected behaviors.

At this point in the conversation is when we start to lose our more systematic-minded peers, who object to the abstract direction of the discussion. In their view, people by nature want to collaborate but there are systemic barriers that prevent the free exchange of information. They feel that these barriers can be broken down with the use of technology. They state examples of how new media has expanded the ability to share information which, in the cases of Wikipedia and Twitter for example, are being done with little financial incentive. It’s human nature to share.[more…]

It’s important to try to balance the two dimensions; they work in tandem. You can have an organization where everyone buys into the benefits of sharing information, but without the tools that enable a free, relevant, and targeted exchange, people will easily give up. In firms with the right culture but the wrong systems, people will want to collaborate, they can’t, and they will feel guilty about it everyday. Alternately, you can have an organization that spends millions of dollars on any variety of tools to talk to each other, but no cultural transformation to buy into a broader benefit, then the investment is completely wasted. Worst of all, these are usually recurring costs.

The leadership of any organization needs to understand how interrelated these are and have a coordinated plan to address them. In the simplest terms, they represent the ‘why’ and ‘how’ of collaboration.

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Should You Cull Your Account Base?

PaintingWe’ve written in the past about how the key to success and sustainability is ensuring that your account base is profitable, and having robust client profitability metrics are critical to achieving that goal. It’s easy to say this, but much harder to implement because the implication of this analysis is something that most managers and salespeople find completely unintuitive: cutting clients off from doing business with you.

Years have been spent developing these relationships and these clients are paying hard dollars for your service, so why is it rational to turn that spigot off because some financial model is telling you that the account isn’t a good one. Instinctively sales managers start challenging the results of the profitability analysis, putting into question the assumptions that were used in cost allocations or other methodologies. Salespeople are usually closer to their clients than they are to the finance guys or consultants that put the analysis together, so they will be reluctant to bring up these issues with clients. Inaction often results.

So comes the question: should your organization force a culling of the account base? The answer is ‘yes’, but it has to be done in a disciplined fashion that ensures three things:

1) Accounts that are growing, but have not reached a level of acceptable profitability, are ring-fenced and provided a chance to prove their potential

2) Accounts that are going through temporary difficulties are given fair consideration and an opportunity to reestablish themselves

3) Open communication: The shut-off process should not be a simple discrete event, rather it’s a communication process over several periods where the salesperson and sales management learn about the client’s position, condition, and intent. They also communicate the firm’s new client strategy and economic realities.

The discovery process to either categorize the account or initiate frank discussion with a trouble account often leads to better understanding of clients over all and increase in business over time. In other cases, it leads to civil, less painful cease of business that may resume at some point in the future. These outcomes are much better than the alternative of bitter former clients who can negatively impact your reputation.

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Measuring Client Profitability in Institutional Equities

BPCThe Institutional Equities business is a unique animal relative to its Capital Markets peers, with the big distinction that no one individual is responsible for revenue generation for any given account. Clients pay en effective lump sum, through trading, that goes to compensate the broker for a myriad of services. Between research sales, sales trading, program traders, electronic sales, research analysts, strategists, economists, and corporate CEOs that the brokers facilitate meetings with, the contact points can be large and hard to keep track of, making it a particularly challenging business to manage profitably.

Targeting Profitability

Success in the Equities world isn’t just defined by the amount of revenue coming in the door. Strategically, brokers need to ensure that the business coming through is profitable. There are a number of implications to this statement: [more…]

– Control of a broker’s profitability is driven by a delicate balance between targeting revenue opportunity and optimally managing expensive resources. Managing how resources are distributed to clients is the most effective way to increase profitability. Costs can be managed down through expense management initiatives to some degree, but these can only go so far given that the majority of expenses are compensation related which are market-driven. This is assuming, of course, that the firm is on a growth strategy.

– Management needs to develop capabilities to measure and track profitability at the client level so that they can have an ongoing tally of the impact their resources are having on overall profitability.

– As revealing as an understanding of an account’s profitability is, it’s critical to understand the future potential revenue for each account. In addition, managers need to develop a view on what resources are required to capture that potential revenue for any given account, and develop plans to migrate resources for lowest revenue potential to highest revenue potential accounts.

– Firms need to be willing to concentrate their resources towards the highest return accounts, meaning that they need to entertain culling accounts. The idea of cutting off revenue generating accounts is not intuitive for many managers, so this has to be handled in a methodical and intelligent way. More on this is a future post.

Profitability Analysis

Developing a detailed profitability analysis of accounts is a critical step in the process to maximize profitability. First, managers need a clear understanding of revenues across all Equities business lines, specifically an agreement what contra-revenue items (CSA, commission splits, third-party broker fees, trading loses) to subtract from gross revenues to reach a net revenue number that reflects true retention. These vary from sub-product to sub-product, where the dynamics of block cash equities differ from programs which differ from equity derivatives. Differing methodologies reach different conclusions, so it’s important for managers from all business lines agree on approach.

The second step, allocation of resource costs, can range from simple approaches that allocate using simple rules to highly complex allocation methodologies that attempt to be scientific about measurement of time spent and derivation of detailed unit costs. The degree of complexity  should be dictated by the complexity of the organization and the amount of information that being captured, or are willing to invest to capture. Regardless, each resource type should be thought through individually to make sure it makes sense. Salespeople and research analysts could be done through periodic time-spent survey, through a time billing system similar to law firms, or activity capture through an integrated CRM system. Sales traders and program traders can be done through number of trade orders and time-spent survey. Middle Office can be done using number of trade order, or even better, number of trade orders weighted by client processing automation to allocate more costs to more manual accounts.

The results of the analysis should be a full income statement detailing a net income for each account. Because of the sometimes complex nature of this kind of analysis, we often find managers who want to circumvent the process, asking for instance, if we can create profitability analysis for just the top 25 or 30 accounts. While it is possible to estimate costs for a subset of accounts in order to create an income statement, we strongly advise against this because the goal of the exercise isn’t to create an income statement; the goal is to have an analysis that will allow managers to effectively manage resources by moving them from low profit/low potential accounts to high profit/ high potential accounts.

Analysis on the Analysis

The income statement is not the end of the analysis. In fact, we feel that this is just the beginning. The value of really comes from the ability to make sense of the new profitability data and create actions that change how the business is engaging with clients. A second layer of analysis using the profitability results should give deep insights into the structure and dynamics of the account base. Managers can categorize accounts based on type of revenue and intensity of resource consumption. For instance, grouping accounts that predominantly trade on block and consume a ton of research versus accounts that have send a ton of smaller orders and only consume research opportunistically. What’s important is to better understand the drivers of profitability (or lack thereof) and then create strategies around those drivers to maximize profits by targeting resources to the right accounts.

Future Potential

It’s tricky, and in some cases risky, to assume that you can easily increase profitability by taking resources away from unprofitable accounts and move them to profitable ones. Pulling resources from large, yet unprofitable accounts may risk large chunks of stable revenues and may in the end decrease profitability. Similarly, an increase in intensity on profitable accounts may not result in an increase in revenue and will effectively make these accounts less profitable. An important element in the overall analysis is estimating the future potential revenue of the account, and trying to understand what effort and what resources will be needed to capture that revenue potential. In many cases this is not a straight-forward analysis. Size of wallet, market share, right resource matching, depth of relationship – these are all considerations in identifying and quantifying opportunities. In some cases you want to make the account less profitable by dedicating resources in order to gain a foothold with a new product, which is something that many Equity houses are doing to capture chunky prime services business.

Working Smarter

We’ve seen a general reluctance by many firms to tackle the problem of understanding account profitability because they feel it’s going to be a significant investment in time and money, with results that are not immediately tangible (or at least not as tangible as hiring a salesperson who can easily bring in two million dollars or more if incremental commission just from their existing relationships). Our message to them is that there is most likely a lot of low-hanging fruit within their account base and this is the best approach to realize those returns. In addition, once the strategy and analysis are in place, which no doubt will requires some investment, the maintenance going forward will be inconsequential to even the most conservative gains.

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Preventing Success Bias in Client Priority Lists

2013-03-04 17.35.08An interesting question came in on our discussion of client priority lists asking “Isn’t there an inherent success bias built into any client priority list?”. This is a great question and great observation. There is definitely a built-in bias with these lists because by nature they tend to include accounts that have either the biggest production or the biggest upside relative to the rest of the client base. Also these lists tend to be modified continuously to add accounts that have recent increased focus and to remove accounts that are proving difficult to realize their opportunity. These factors lead to lists that are artificially positive/successful and are also difficult to track their overall success.

I have some guidelines to help address these problems.

1) Set a schedule on when lists can be modified. Ideally lists shouldn’t change very often, maybe once or twice a year. Any more and it would be difficult to allow for any traction of new prioritization and it will make the list difficult to track and evaluate.[more…]

2) Define clear rules around how and why a list is modified. In the most formal form, a committee can be created to evaluate the composition of the list and the details of the service offering. The committee should be comprised of representatives of all client-facing groups and all should have a voice. Make sure that any addition or upgrade in the list is matched with a deletion or downgrade in order to keep consistency in service across the platform, and prevent the list from continuously growing.

3) Measure and track the performance of a list like an investment portfolio in order to track the success of the program overall. The “performance” of the program can be viewed as performance year-to-date, over 1 year, over 2 years, etc. Performance of dropped/downgraded accounts should factor into the overall performance over time. It’s important to realize that what you want to understand is not only the impact of an account being on the list, but also whether all the components of the program are working to promote the programs goals.

4) Although this final point may be overkill, it has proven useful when testing new client prioritization programs. Each time a new priority list is created, it should be labeled and tracked separately. For example, you could have 1H 2012, 2H 2012, 1H 2013, and 2H 2013 as separate lists. Overall this is a good benchmarking exercise to help test assumptions about the list and component parts.

There’s usually a concern that by putting too many rules around client priority lists, the organization loses flexibility in targeting resources to potential opportunities. Managers need to find a balance between that flexibility and a structure that allows visibility into priority list’s effectiveness.

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Implementing a Client Priority List

2013-08-10 15.39.42I received a lot of interesting comments from my post last week on client priority lists. I didn’t think this was a topic that would have such broad interest. Most of the comments were along the lines of “sure, this is what you should do, but how do you actually do it”. I’ll attempt to provide a bit more detail on actual implementation here, driven off of specific comments I received.

“How do you create one list when you have competing purposes and objectives for different accounts?”

It is simplistic to assume that one list with a simple purpose is going to satisfy all needs for client prioritization, especially at larger firms. When creating your list, we recommend implementing a combination of different tiers and a series of qualifiers that designate the kind of accounts they are and what kind of service they require to achieve a specific objective. It’s important for the organization to all be on the same page on who the priority accounts are, but also have an ability to see what specific service model to apply.[more…]

“How do you go about defining, articulating, and communicating differentiated levels of service?”

We recommend putting together a service charter that describes three things: (1) what the differentiated level of service is for each tier and client type, including non-tiered accounts, (2) who is responsible for providing a certain service and what the expectation is on them, and (3) how each point of service is going to be measured and monitored. This charter should be part of the communication of the client priority list when this gets published.

How formal the communication is depends on the size and nature of the organization, but could include emails, laminates, teach-ins, or discussions in team meetings. We recommend having a forum where staff can ask questions to make it crystal clear what is being asked. In our experience people end up with very different interpretations of the asks, so anything that mitigates confusion helps.

“How do you get your resources to follow the new focus?”

People are generally much more comfortable engaging with their usual clients in a usual way. It has to be made clear that the expectation is that behavior needs to change to provide more focus on priority accounts. It has to be made clear that the organization is OK with a deprioritization of non-priority accounts given that there is only a finite amount of capacity available.

What becomes clear very quickly when implementing a client prioritization plan is that some organizations don’t have the right capacity, skills, and relationships in place to execute the plan effectively. These might need to be developed (through training, senior mentorship) or acquired if it becomes clear that they can’t be effectively nurtured in-house. In many cases, it may be most effective to acquire personnel with already established relationships and skills. In the harshest sense, this would call for an upgrade of existing staff.

“How do you ensure compliance and how do you track the success of implementing the list?”

A client priority list isn’t a static document. It should be part of the day-to-day life of the organization. To the extent possible, it should should be systemized and included in the any routine reporting, including:

  • Inclusion of a priority indicator for a given account in any dashboards, reports, and screens used by staff and management.

  • Periodic monitoring of services provided and communications to priority accounts, through a CRM or similar systems.

  • Benchmarking performance and activity of these accounts, against different tiers as well as non-priority accounts.

  • Monitoring of changes in depth of relationship and penetration over time.

In the end, the success of the list will be measured on the absolute increase in performance of these accounts, but also in the relative outperformance of the rest of the client base.

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