Bold Moves by Investment Banks Can Lead to an 'Industrialization of Finance'

NEW YORK, Dec. 20, 2012 (GLOBE NEWSWIRE) -- Since the economic crisis, global investment banks (GIBs) and the bankers who run them have been denounced in the media as having contributed to – if not having caused – the largest financial meltdown since the Great Depression, triggering massive government-led bailouts. Today, the panic of the crisis years may have subsided, but damage in the investment-banking industry remains – which is dangerous to the overall economy, given the important role the industry plays in capital formation and business growth. For GIBs to thrive again, they must not wait for further governmental actions and regulations but rather transform themselves from within, implementing 10 strategic steps for a sustainable future. That's according to a study released today by AlixPartners, the global business-advisory firm.

A new, holistic management of the overall GIB value chain is needed, according to AlixPartners, with a dynamic approach focused directly on the value chain's truly value-added components, allowing some unbundling of traditional business models through "open platforms" (the use of tools and products from the outside). Focusing on "sweet spots," "low-hanging fruit" and new arbitrage opportunities won't suffice, says the study –From Steroids to Fair Play: Global Investment Banking's Long Road to Industrialization.

"We believe global investment banking players should change proactively before any rule, report or commission forces change upon them," said Claudio Scardovi, managing director in AlixPartners' Financial Services Practice. He further argues the need for GIBs to solve, using a sports metaphor, their past "steroid"-driven contradictions (questionable business models allowed by the go-go days of the past), and to design new businesses and operating models for the future.

The study outlines a roadmap for creating a bold new course in investment banking through 10 steps. Together, the 10 steps impact revenues, costs, risks, capital, reputation and brand equity. While embracing these steps may prove challenging for banks used to bygone paradigms, the steps, says AlixPartners, if considered and realized in the short- to mid-term, can quickly impact bank performance.

The first five steps concern revenue. They are: 1) implementing "smart" investment banking, where alliances with small financial institutions could allow GIBs to reach millions of customers at the point of use; 2) mid-market extension, through reconsideration of the time-tested "80/20 rule" and enhanced methods of market segmentation, to address the opportunities provided by small- to mid-sized clients, as other industries have already done; 3) proactive restructuring, to ensure direct participation in the optimal global reallocation of viable resources still tied to troubled situations; 4) investigating new intermediation "corridors," to exploit new revenue opportunities deriving from two major asymmetries today: geopolitical (developed countries' "old wealth" vis-à-vis emerging and growing countries' "new wealth") and demographical (the growing possibility of future generations not being able to sustain social safety nets); and 5) continuous innovation, focusing on solving hard problems for end users, in particular when those problems concern inefficient industry activities.

Three additional steps could be considered and realized in the short- to medium-term to impact banks' profitability, says the study. Step 6 is the development of a competitive internal marketplace, one that's able to price the cost and contribution of any single unit directly to the business, to ensure transparency. No. 7 is the ability and willingness to share, pool or even fully outsource IT, back–office, and other service and production platforms, again following the example set by industries outside of banking. No. 8 is productivity benchmarking of compensation systems, focusing on the remuneration of human resources compared with that of other industries.

"Benchmarking with global, best-in-class industrial companies could be a good start," said Scardovi. "They had to reinvent themselves a number of times over the last several years simply to survive, and they can now demonstrate some examples of truly successful transformation. What has worked on the factory floor ought to be looked at for the trading floor as well."

The study argues that big investment banks should be at the forefront of such actions, as top lines have been decreasing rapidly; bottom lines have been getting more rigid and thus, more unsustainable with each passing quarter; and both price/earnings ratios and expected growth rates are at low points in history.

The final two steps called for by the study address intangibles important to rebuilding public goodwill toward investment banks. Step 9 is the development of truly objective strategic advice for customers, driving business-model unbundling and allowing for a greater access to mid-market clients. Finally, Step 10 is instituting a new overall culture inside banks, truly focused on providing the greatest value to the client – even if it requires third-party products and services and even if it doesn't directly contribute to the short-term profitability of the bank.

According to Scardovi, investment banks will have to find a new way of doing business, even if it requires difficult decisions and revolutionary thought and action. "An evolution based on 'back-to-basics' values and the long-term view – and not on short-term performance alone – is required to get the industry not just back on track but on a viable path to the future," he said.

Research Methodology

AlixPartners analyzed the top 15 global investment banks (GIBs) from 2007 through the second quarter of 2012 according to three key dimensions – business model, geographic scope and scale – as a basis for this study, as well as consulting various financial and other industry-specific references and success stories. The firm did not act on any instructions from any of the banks referenced in the study.

CONTACT: Tim Yost +

Source: AlixPartners