What do you do?

Restacking the industry: shaping organisational capabilities in retail

investments

The Investment Network 25 January 2013

OCP LLP 10 Greycoat Place London SW1P 1SB www.ocp.co.uk 020 3755 5191 1

Organisational capabilities are….

• what you are “good at”

• assemblies and combinations of underlying:

– skills

– processes

– systems

– structures….

• which enable value to be provided to a customer or user

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The only sustainable basis for competitive advantage?

“The ability of companies to find profitable investments in tangible assets depends mainly on their earlier investment in intangible assets – the skills, capabilities, brands and reputations that are the source of competitive advantage for businesses and national economies”

The Kay Review of UK Equity Markets and Long-term Decision Making, July 2012, p15

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Brand equity

• a weak solution of sulfamic acid and phosphoric acid

• retail price: £2.49 per litre

• also known as Easy-Off Bam and Easy-Off Bang

• a luxury grease remover with premium pricing

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Some examples of organisational capabilities

• consumer devices

– capabilities which produce product designs that are perceived to be “cooler” than competitors’

• computer manufacture

– accelerating the flow of information across the end-to-end supply chain

• aero engines

– expertise in turbine blade metallurgy

• food science

– deep technical knowledge of the development of a food ingredient (wheat) from seed to plate

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Topics explored

• current USPs?

• key capabilities underpinning these USPs?

• what capabilities do you value most?

• what capabilities are you investing in?

• is a new model already fully in place?

• is it a defensible moat? (as per Warren Buffett)

• what are the threats to this?

• what new developments are proposed?

• what about the rest of the industry?

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Research participants

• AXA

• Cofunds

• BlackRock

• Fidelity

• IFDS

• JP Morgan Asset Management

• Legal & General

• M&G

• SEI

• State Street

• Succession Advisory Services

• Time4Advice

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What do you do?

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Financial advice and sales

Private client stockbrokers Adviser networks

Adviser service providers

Employee benefits consultants Wealth managers

Life & pensions providers

Unit trust providers

Investment managers

Providers of software & systems

Third party administrators

Transfer agents

Custodians

The things the industry is “good at” today are the product of market conditions in the past

• tax-favoured and complex products

• longer holding periods

• greater switching costs and penalties

• restricted access to data and analytical and information-handling skills

• cheaper capital

• vertically-integrated models

• unsustainable assumptions

• less stringent solvency regimes

• focus on embedded value

• lack of recognition of losses

• two bull runs in equities

• internal incentive regimes

• “doing no worse than the competition”

• deeply embedded knowledge

• proprietary information systems

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Customised services to the end investor

Business support to end-investor service providers

Connectors/ integrators

Scale-hungry providers/ asset managers

Niche/ premium providers/ asset managers

Asset servicing process, system & infrastructure providers

A restacking of roles?

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PLAYER/OFFER ROLE & VALUE ADD CAPABILITIES ACTIONS OPINION

Customised services to the end-investor

• multiple contact points • scale economies • DIY • full-strength advice • trust • cost-effectiveness • transparency

• customer insight • point-of-sale • merchandising

• redefining value proposition

• professionalisation • aggregating demand

“Why should the client engage you and pay you? Unless you’ve got a compelling answer to this, you shouldn’t be in the industry” Adviser Services Provider “‘Distribution’ is anachronistic, provider-centric terminology” Adviser services provider

Servicing those who support the end-investor

• regulatory assurance • systems • training • cost-reducing • strengthen adviser

focus on customer relationship

• insight into distribution challenges

• exercising purchasing power

• building shared services infrastructure

• recruiting distributors

“We help advisers move to a new financial planning model in terms of platform strategy, infrastructure for ongoing service and value proposition” Adviser services provider

Connectors/ integrators

• platforms • supermarkets • lower-cost access to

portfolio management and reporting

• asset consolidation • facilitation of adviser

remuneration

• systems integration

• supply chain management

• process transformation

• collaborating and forming partnerships

• cost reduction & re-platforming

• added-value services

Co-opetition: the intentional collaboration (for example to exploit innovations more widely) between players who may otherwise still compete in all other respects.

“Co-sourcing is a vital theme for the future: think the Dreamliner or Apple’s apps marketplace” Third party services provider

Components of the restacking?

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PLAYER/OFFER ROLE & VALUE ADD CAPABILITIES ACTIONS OPINION

Scale-hungry providers/ managers of underlying assets

• connecting investors’ objectives with underlying assets

• exposure to an asset class or investment proposition, at minimum cost

• automation • brand presence

• exiting non-distinctive capabilities

• exploiting cost advantage

“In a logical world, fund management would cut its costs, by a step-wise hike in fund manager productivity, a reduction in the number of funds, and a reduction in reward. But it’s not a very logical world” Third party services provider “The pressure on margins will lead to a drive for scale. It will be uncomfortable to be in the middle ground” Fund manager

Niche/ premium providers/ managers of underlying assets

• superior returns • difficult-to-obtain asset

exposure • scarce/ valued

knowledge of insights

• product lifecycle management

• continuous innovation

• protection of distinctiveness of product offer

• identifying & exploiting unique expertise

“We deliver investment returns through capabilities that other businesses can’t easily reproduce, for example infrastructure, real estate debt, leverage loans, high yield – all requiring collaboration across the business” Fund manager

Asset servicing process, system & infrastructure providers

• custody & trade execution

• fund accounting • reporting and record-

keeping services • messaging infrastructure

providers • transfer agents • exchanges & trading

venues

• exploiting scale • insight into

front end of value chain

• collaboration

• proposition development

• systems investments

“The flow of new bids, re-tenders and extensions to current contracts (in some cases because of consolidation of the industry) requires continual rethinking about business models including operational processes, systems, resourcing and cost structures as well as risk and pricing” Third party services provider

Assemblies of capabilities: organisational models & metaphors

• manufacturing (RBS, Lloyds TSB, UBS)

• supply chain: division of labour/ increased specialisation

• automotive: re-use of global platform

• lean: do it once

• pharmaceuticals R&D: innovation treadmill; capital costs; healthcare regulation

• utilities: common infrastructure/ lower returns for commoditised service

• marketplace/ coffee shop: trading/ barter

• retail: clear metrics/ close-coupled/ rapid clock speed

• FMCG: brand equity

• agriculture: farming

• biology: metamorphosis/ transformation

• epidemiology: plague

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Emerging hybrid models? • A: vertically integrated direct-to-

consumer, execution-only, distribution-led model, with seamless integration to tax wrapper administration and open architecture investment via stockbroking functionality; with a rigorously controlled operational and systems model

• B: large-scale, active and passive investment management business, building towards the investor through liability-matching portfolio and product customisation

• C: a distribution-led financial services proposition across a broad waterfront of products and services; divesting non-core legacy functions and capabilities

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Emerging capabilities for the future?

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Strategic thinking & implementation

• analysing & handling soft data; multi-factor decision-making; building consensus

• change governance; political adeptness

Understanding & shaping markets

• customer intelligence & insight • innovation, creativity • product lifecycle management

Understanding the potential of synergies & managing the supply chain

• forming effective partnerships • contracting & negotiation

Squaring the circle of enhancing products & services while reducing costs

• value engineering • process transformation • systems specification, procurement &

delivery

Managing culture • internal & external brand management • managing the change levers

Change in the industry

Existing players

New entrants New models

Run-offs Disposals

The landscape for action

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Economy Demographics

Customer

Societal needs

Cost reduction • do less: exit sub-scale

capabilities • fewer people; pay people less • outsource; squeeze suppliers • seek economies of scale • re-platform/ new systems • partnering/ collaboration

Revenue protection & enhancement • Δ volume via scale • product/ service innovation • extend scope of offering • move towards distribution • partnering/ collaboration • leverage expertise better

Investment performance

Trust Brand

Culture

And what do you do?

• whom do you serve?

• what distinctive value do you add?

• what distinctive capabilities do your need?

• how can you get, sustain & strengthen those capabilities?

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David Taylor david.taylor@ocp.co.uk M: 07768 077 796 www.ocp.co.uk