There are solutions across the entire ecosystem of finance: payments, trading, clearing, and so on. Each piece has a number of new entrants and incumbents. It is very hard for an outsider to understand what’s going on, and its EVEN harder sometimes for an insider to understand as well. Competition is fierce and many incumbent firms think they have to start thinking like a “Start up” in order to be competitive. I am here to tell the incumbents you don’t need to go into “start up mode”…..not only that, you don’t want to.
If you are an incumbent, a leader, you need to focus on what you have NOW and where you want to take your business in the era of digital transformation. Digital strategy is a bit like playing chess…. WITH 7 other people. Everyone has a solution and everyone has an idea of what the next few moves after the first one will be…..but NO ONE knows the what the first move SHOULD be. No one wants to “risk” losing based on a one or two ill thought out moves. Like chess, how you position your firm and products for the next 10 years can be a hard decision. A Start up, with virtually no track record has the advantage of being able to make mistakes, as well as knowing what the competition has. A Start up can change tactics and strategy on a dime. They worry less about what they HAVE and more about what they can GET. Incumbents are usually on the defensive and many times ascertain that in order to survive the digital revolution that they have to reinvent themselves to be more like a Start up. Wrong.
A Start up is wired to take risks and celebrate failure, it’s nimble and can pivot if need be. It’s the pursuer. An incumbent is the pursued, but THAT’s its advantage. Incumbents can dictate where their products and market will go, Start ups can’t do that initially and thats why incumbent Capital Markets players need to stop thinking like a Start ups. They must take advantage of their position and lead the market in the direction that’s best for them and their clients.
It can be rather elementary, and the strategy requires you evaluate and renovate (NOT reinvent) your business. If I were to talk to an incumbent I would tell them to evaluate 3 critical areas:
Your digital strategy needs one very important constituent: Your customers. What’s your Value to your clients, what product are they paying for? You would be amazed at how many firms have a hard time articulating just what their value is. A software company for example might think it’s many things, their operating system. Their service? The integrity of their system. Their GUI? You ask anyone who manages each part of that business and you will get a different answer.
As important as they are , customers might be even more divided on your value and you might receive a whole slew of new answers. The point is though when you are looking to digitally transform YOUR business, you had better know which products and services you need to can and which ones you CAN’T. How is that done? Well that leads me to the next critical piece of the puzzle.
The biggest investment to be made in the transformation of Capital Markets will be the cost of good human capital, the PEOPLE. a big investment with even bigger rewards. Good talent and great culture are the keys to every successful business and business transformation for that matter. The emphasis needs to be LESS on entry level coders and designers and more on experienced talent that has done this before, emphasis: DONE THIS BEFORE. Experience is what incumbents have MORE of than anything else and that goes for both their employees and their clients. Your culture must be an enabler. It must become (or remain) more decentralized. Start ups are generally centralized, led by a visionary who NEEDS to steer the strategy and create the culture. That works in the beginning, but if successful they must start to decentralize.
Incumbents already are decentralized, especially if they are a leader in their field then their culture has already evolved. These firms already have a bench full of leaders and visionaries just waiting to cultivate opportunities. As an incumbent I would advise you to decentralize everything you can, in other words enable as many people as you can! Invest in new employees who have a track record, reward decision making, reward risk taking. Yes you will always need to have an ultimate decision maker (see below) but if your culture is filled with idea generators who are aligned globally then that ultimate decision maker will have a very easy job.
Ok so you know WHAT products you want to transform, you know WHO will design that transformation, but now comes the HOW. Just saying you want to digitize your capital markets business means nothing unless you know HOW. It’s not simply a matter of changing a “process” or automating a task. This is probably the one area that will keep everyone up at night, because if you get this wrong, then you’ll worry less about those start ups and more about your stakeholders and shareholders.
Here’s where you must take the time to map out your strategy to transform your business. Alignment and buy in across the enterprise is the most critical piece of all this. In effect you are creating a new North Star. You need to set realistic deliverables and milestones that you will hold individuals accountable for. Again, Start ups have the luxury of changing deliverables, and moving milestones, incumbents don’t. There’s no going back. Look at every Process. Look at every task. Understand things like simplification (transforming tasks) versus automation (eliminating tasks). Know what the costs are, have a finite ROI!
While I have said that decentralization is the key to empowering talent, for technology it is not. You need profound and confident centralized technology leadership to lead your transformation. Technology leadership must be inquisitive as well as strategic, it needs to explore solutions and innovations inside and outside the company and be a driver of those solutions and innovations.
To conclude, while some people think that Start ups have an inherent advantage over incumbents because they can do things like A and B testing, or release a Minimal Viable Product the truth is they don’t. Incumbents have a FAR greater advantage as I have outlined above:
- Value: They understand their value and the products their clients want, and;
- People: They have empowered the right people to focus them on building and selling those products, and
- Technology : They have focused and invested in their technology to enable digital transformation.
The digitalization of Capital Markets and Asset Management continues to accelerate, it will be very interesting to look back in 3, 5 and 10 years to see how the incumbent players fared.
Thanks for reading, if you enjoyed this or any of my pieces, please share or drop me a note, I really appreciate it!