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Focus on 6 key pillars of your business

The last few issues of frontiers in finance have sought to track the impact of the financial crisis on the financial services sector, and offered a number of perspectives on how to survive one of the most turbulent episodes our industry has suffered in many decades. It now looks as if the most dangerous period may have passed; nevertheless the full impact of recession in the real economy has yet to be felt. As financial services companies struggle back towards a new business-as-usual, they should consider how they align with the six strategic pillars which underpin successful business. Although each of these is familiar, all require reassessment in view of the return to level flight in financial services.

1 Managing the cost base
When simply surviving is the priority, cost control is an over-riding imperative. Often, valuable long-term initiatives or secondary support activities may have to be sacrificed, in order to better control costs. As the business gets back on course, the challenge can become rather more subtle. There is no doubt about the need for cost control as the economy moves forward but its position with other business needs will become more balanced. The competitive environment is likely to become more intense. Regulation in some countries is likely to drive capital requirements higher and squeeze margins. Many customers are going to demand simpler, more transparent and cheaper products. The trick will be to sustain a competitive cost base which does not compromise high standards of service, the development of a high-value brand and expansion into new products and markets to meet customer aspirations. For many, a return to 'level flight' will depend on getting this balance right.

2 Optimizing the business model
The business model should be re-evaluated and attuned to the new realities of the financial services marketplace. In many cases, this may mean greater simplicity, transparency and focus on core products and services. Companies deciding to reposition themselves in response to the emerging 'narrow banking' model may have to re-evaluate marginal activities for possible divestment or closure. But even those companies that decide to remain full service providers with a broad portfolio, will have to ensure that their business model is sustainable in the new competitive environment; consistent with brand values and that it can be managed at acceptable cost. As with all parts of the business, understanding and integrating a sound risk management framework into the organization will also be essential.

3 Ensuring robust capital and liquidity
New regulation in many jurisdictions is going to mandate changes to capital and liquidity requirements. There is a danger here that financial services firms take the view that compliance is sufficient. But optimizing the balance sheet and ensuring that it supports the requirements of the business in the most flexible and cost-effective way is likely to require more active management, not less. It is as yet, unclear how the balance between regulation by individual domestic authorities and a return to global markets for financial products and services is going to be struck. Companies should be alert to the risks - and for some, possible opportunities - of regulatory arbitrage and design their business models and operational costs accordingly.

Companies should be alert to their product and services offerings to assist clients in achieving their own management of capital and liquidity requirements. The competitive environment is likely to become more intense. Regulation in some countries is likely to drive capital requirements higher and squeeze margins. Many customers are going to demand simpler, more transparent and cheaper products.

4 Retaining and recruiting talent
Hiring and keeping the right people is still perhaps the single most important contributor to building a sustainable and successful business. But this is simple to say, much more difficult to do, especially as the environment changes. During the worst of the crisis, few financial services companies dared to maintain their normal recruitment levels and many had to let large numbers go. Many other senior people have started or joined boutique organizations. As the recovery gathers pace, this situation is going to reverse quite rapidly. Demographic changes mean there are fewer young people available for recruitment than 20 or 30 years ago. They can then strike a hard bargain. As we have discussed in previous issues of frontiers in finance1, they may be motivated by other priorities, looking for more fulfilling or ethically satisfying employment, and then perhaps wanting to take time out and travel. In the case of mature, more experienced employees, the core of any successful business, increased competition will lead to more people being hired away. The battle for top talent will be more intense. The professional services world is still globally mobile. Will the tarnished reputation of financial services make it more difficult to attract idealistic youngsters? In the UK, for instance, will new regulation on pay and bonuses drive talented senior professionals elsewhere? In all cases, recruiting and retaining the best people will depend on building the best brand and reputation of the organization.

5 Rebuilding reputation, trust and enhancing the brand
All successful businesses depend on developing relationships of trust with customers and other stakeholders, and on building brands which embody that trust. For financial services companies selling intangible products, this is possibly more the case than for other sectors. It is widely recognized that the crisis has severely damaged trust in banks and other financial suppliers. In this environment, it is more important than ever to focus on regaining trust and reinforcing brand values. The implications extend across all business operations as we have seen, from business models to talent management. As was outlined in our last issue in 'Addressing the trust gap: Renewing confidence in the financial services industry'2, brand management is not just about public relations and advertising. It is about managing the whole of the business in ways which articulate, embed and communicate the desired brand values. The most successful companies will be those which get this right.

6 Developing new products and markets
The financial services sector remains dynamic. Economic and demographic change will continue to open up new opportunities; following the crisis, new attitudes to risk and consumer demand for safer and more transparent products will become more significant. Effective customer and market segmentation will be essential to a robust product development strategy. Incumbents are going to continue to be challenged by new market entrants: in the UK, for example, Telefonica's O2 mobile phone company has just announced its entry into the personal financial services market3. The constraints of cost control, new business models, talent and brand management have to allow space for product and market development which is responsive to the new environment.

These six strategic pillars can be the foundations of a successful strategy. Once the immediate threats to basic survival have been overcome, these foundations should have clear and focused attention. But what will be critical is ensuring that they take account of the new financial services landscape in the aftermath of the crisis. Failure to do so may jeopardize an organization's ability to thrive or maybe survive in this new environment.

Article author

Brendan Nelson
Vice Chairman,
KPMG in the UK
Global Chairman, Financial Services
+44 20 7311 6157 Brendan Nelson View all articles by this author

1. See article: 'Connecting with Generation Y: What drives the next generation of wealth accumulators?', frontiers in finance: What next?, KPMG International, December 2008.
2. 'Addressing the trust gap: Renewing confidence in the financial services industry', frontiers in finance: The long road to recovery, KPMG International, June 2009.
3. 'O2 enters personal finance market with NatWest', http://www.independent.co.uk/, July 15, 2009.