Get Global and Get Specialised: Lessons in Global Financial Markets

Despite the end-of-the-century downturn, financial markets firms have enjoyed double-digit revenue growth in excess of 11% over the past decade. However, firms serving the world’s largest markets – such as the US, the UK and Japan – are now watching opportunity fade.¹ Even with a steady stream of innovative products and services, they will find it increasingly difficult to grow revenue in these saturated veteran markets where rivals are competing for a shrinking pool of opportunity. Firms need to look elsewhere, but where?

As we considered how best to answer that global question, we decided that customary forecasting techniques based on past performance would be too shortsighted and simplistic to assess the impact of globalisation on the financial markets. We needed a better model – one that projected with higher precision, examined a longer time horizon, and was based on factors that demonstrated the greatest influence over financial markets growth. In collaboration with the Economist Intelligence Unit, we developed such a model and have used it to trace the effect of globalisation across 35 of the world’s largest economies. We also surveyed 848 financial markets executives from around the globe and 107 of their corporate clients.

Our analysis resulted in some unexpected lessons for the financial markets industry:

• The worldwide opportunity is large – but it won’t necessarily be found in the same old places. Worldwide investable assets are expected to double by 2015 to just under US$300 trillion. By 2025, the opportunity quintuples to nearly US$700 trillion. However, 60% of this future growth will be from nontraditional places that we’re calling prospect markets – this contribution is more than twice that of veteran markets.² While veteran markets will remain large, these newer markets could soon have asset bases that rival those of their long-standing peers.
• Firms are not prepared to capture this emerging opportunity. Many financial markets firms are not in a position to capitalise on this more geographically dispersed industry opportunity. More than 93% of the executives interviewed acknowledge that their firms are not operating in a globally integrated fashion. And when asked to assess their proficiency with globally oriented organisational and operational practices, nearly two-thirds of the respondents rated the performance of their firms as poor to moderate.
• The business model executives generally believe is best may actually be the wrong bet. Among industry executives, the general gut reaction was that large diversified universal banks are the firms best positioned to compete globally. However, when reflecting more deeply about the capabilities required, executives actually rated specialists higher than universals on some critically important global capabilities. This self-contradiction reinforces the point that being the best in every niche of the industry is increasingly difficult and costly.
• The people side of financial markets firms may be getting short shrift. It might sound heretical – given the high salaries and enviable perks they offer – but many financial markets firms may be neglecting the people-related implications of running a global business. Executives pointed out a number of barriers to becoming globally integrated, and most are related to culture and associated intangible assets.

Collectively, these lessons suggest that financial markets firms may literally be moving into unfamiliar territory. Globalisation is changing the nature of the financial markets industry. To lead the worldwide playing field, we believe firms should differentiate by focusing on those particular areas of the business that matter most to their clients. Equally important, firms need to systematically shift away from rigid, multinational organisational structures toward more fluid, globally integrated enterprises that enable them to capture opportunities whenever and wherever they emerge. In short, firms must get specialised and get global – or get out.

Three Concurrent Globalisation Phenomena

Three concurrent globalisation phenomena are contributing to the inversion of opportunity: the flight of capital away from veteran markets, the potential leapfrog effect, and ongoing asset absorption by prospect markets. The second two shifts will admittedly take longer to come to fruition, but each of these phenomena is evident already.

• Flight of capital – As taxation, litigiousness and regulation become increasingly onerous in veteran markets, clients are actively considering other financial market centres with more attractive regulatory and legal frameworks. For example, in the past five years alone (2001 to 2006), the number of IPOs in the US fell by one-third.³ Though some might argue this is a temporary situation that can be rectified, the proverbial dam has broken: clients have been test-driving other markets, and the switching costs that historically kept them close to home have largely been overcome.
• Leapfrog effect – With fast-growing talent pools, more-liberal regulatory environments and increasing investments in technology, prospect markets will have the ability to compete with – or perhaps even leapfrog – traditional veteran market leaders. For example, in terms of percentage of population that has a university degree, South Korea now ranks third in the world – behind only Norway and the US.⁴ This trend makes globalisation matter to national firms that have no intention of pursuing foreign revenue opportunities; teaming with prospect market firms might be one of the best ways to gain access to leading practices and industry innovation.
• Asset absorption – With their expanding wealth, investors from prospect markets are on a spending-spree, buying up critical assets in veteran markets – ports, manufacturing facilities and more. These investments are making their way into the financial markets as well. In May 2007, the Chinese government, for example, announced plans to invest US$3bn of its foreign-exchange reserves in an American private-equity firm.⁵ With China’s US$1.2 trillion in investable assets, people are wondering where it will invest next and how its financial clout will affect the global financial markets.

Importance of Being Global

So what do all these changes mean? Simply put, it is imperative for financial markets firms to become more global – at least in mindset if not also in footprint.

The majority of financial markets executives we interviewed agree with this in principle. Eighty-six per cent believe globalisation will be an important factor in their firms’ strategies within five years’ time.

It’s also important to their clients. More than 93% of corporate clients are convinced of globalisation’s strategic importance. Although their companies’ foreign revenues and global presence are significant already, the corporate executives we interviewed anticipate further global expansion within five years.

But aspirations aside, financial markets firms are not yet very global. Even when comparing some of the most rudimentary indicators of global operations – foreign assets, sales and shareholders – the financial markets industry ranks far behind other industries. It’s probably no coincidence that the industries at the top of this list are more product-based, while service-oriented industries fall much lower in the ranking. Purveyors of products have substantially different business models than those of more relationship-based enterprises. Still, this seems to indicate that financial markets firms can learn valuable globalisation lessons from product manufacturers.

Actions to Consider

Our analysis suggests several key actions that can help financial markets firms break through the constraints of their current business designs and become more globally integrated:

• Align portfolio with emerging profit pools.
• Reconsider role in industry.
• Eradicate client disconnects.
• Recalibrate operating model.
• Win minds.

Align portfolio with emerging profit pools

As financial markets products become heavily adopted in multiple local markets and pricing discrepancies across borders disappear, those products become candidates for offering on a global scale. Indeed, products typically move along a maturity lifecycle: locally immature, locally mature, globally immature and finally globally mature.

However, there are a few products – such as advice – that will probably always be local because their delivery needs to happen in market, usually face to face. But over time, even those products tend to break out components that can be delivered globally. Continuing the advice example, this might be standardised advice incorporated directly into a product, such as a balanced mutual fund or an asset-liability matching product.

Reconsider role in industry

The executives polled in our survey believe that diversified universal banks, those with a fairly even split between retail and wholesale revenue, are the type of firm most likely to succeed in the future global market.⁶ Across all categories of respondents, buy-side, sell-side and processors, executives ranked universal banks highest – naming them twice as often as the second-highest ranked type of firm (Wall Street/tier-one broker-dealers). This perspective seems understandable given the global presence many universals already enjoy.

Interestingly, when we probed beyond respondents’ surface-level perceptions, we found a different story. We asked executives which type of firm (universal versus those with more specialised business models) had the greater advantage in each of the capability areas they designated as future drivers of value. At this more granular level, specialists emerged on top

This analysis calls into question the conventional assumption that a universal strategy is best. We believe financial markets firms of all stripes – particularly universal banks – should be looking for ways to focus and specialise in order to deliver differentiated value in the future.

Eradicate client disconnects

To specialise effectively, firms must have a keen understanding of their clients’ needs and priorities – and adjust their focus accordingly. And in an increasingly global financial market environment, what clients need may not be the same as it was in the past.

Regardless of the type of client relationship – individual investors and their advisors, corporate clients and their investment banks, and asset managers and their broker-dealer and processor service providers – the majority of clients consider advice, performance, superior execution and service excellence as critically important. Even more interesting, clients ranked the ability to provide a ‘one-stop shop’ and best-of-breed products at the bottom of their lists, calling into question many of today’s dominant business models. In fact, we found a fair amount of disparity between what clients say they will pay for as they become more global and what service providers think clients will value.

Recalibrate operating model

To be in a position to capture global opportunities, a firm’s operating model must be built on three key tenets: global asset leverage, dynamic capability assembly and open collaboration.

To date, global asset leverage has mainly been driven by the need for cost reduction; but increasingly, firms will depend on geographically dispersed assets for revenue growth and innovation. The goal is to leverage best-of-breed assets (for example, talent, shared services, knowledge, sources of innovation and partners) across value chains, industries, and geographies.

Also, open collaboration is critical to the future operating model. For decades, financial markets firms have gone solo. They rely heavily on proprietary intellectual capital and home-grown IT solutions. A do-it-yourself attitude is part of their DNA. But today, easy profits have disappeared; market share is harder to capture; and financial markets firms are faced with the need to collaborate more extensively. When addressing the global opportunity, for instance, local partners with in-market expertise can help firms enter new geographies more successfully. Clearly, collaboration introduces risk (e.g. intellectual property protection) and is subject to constraints (e.g. regulatory restrictions on sharing private information). However, these hurdles can be addressed. And we believe the alternative – going it alone – will not be viable much longer.

Win minds

There is a common thread that weaves through the suggested actions described thus far: changing the corporate culture. To manage the inherent tensions of going global, firms will have to adjust attitudes and management practices, employee biases and incentives. In short, leaders will have to win minds.

Determining risk versus return across geographies, balancing friend versus foe in industry relationships, centralising versus decentralising operations are all part of executing a global strategy. Executives acknowledge the challenge ahead: In the course of becoming a globally integrated enterprise, they told us cultural change is half the battle. Cultural constraints like organisational fiefdoms, resistance to change and lack of global management can derail global integration, as can technology limitations.

How Globally Integrated and Specialised Are You?

Though it seems like semantics, there really is a difference between being global and being globally integrated. The former refers to mere presence; the latter gets at the heart of how you operate as an enterprise. There is also a difference between organisations that specialise by focusing on their core competencies and those that specialise in areas clients value. The first firm has simply focused – the other has a true specialty recognised (and rewarded) by the marketplace.

In less than 10 years, financial markets firms could be looking at twice the amount of investable assets available in the world today. The question is: will they be looking in the right places? And will they be capable of capturing these more globally dispersed opportunities? We believe the future leaders of the industry will be those firms that can successfully specialise around what clients value most and become fluid, adaptable, globally integrated enterprises.

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