Bridge over troubled waters
21 December 2016
Testy relationships can lead to damaged reputations and lost revenue, so it’s important to promptly repair the cracks, says John O’Hara of Taskize
Image: Shutterstock
What defines a relationship? Commercial or personal, we’d all agree on the importance of factors like trust, forgiveness, willingness to give and take, and a long-term commitment to mutually beneficial outcomes. These are hard for two people to maintain over time. Different—but no less difficult—challenges arise when building a long-term business relationship between two large organisations, due to the number of people, products and processes involved.
In a commercial context, it is always tempting for staff to focus on short-term wins such as the lowest price, the next sale or the latest technology innovation, rather than the less tangible, harder-to-quantify activities that add value for the long term. And if it’s hard to provide a high-quality, multi-faceted service over a long period, it’s just as hard to monitor and measure the value added, or benchmark it against alternatives. But without the transparency that metrics provide, abstract concepts remain just that, leaving relationships to fail to fulfil their potential at best, or to dissolve in acrimony and disillusionment at worst.
In today’s uncertain business environment, few can afford to take relationships for granted. Regulatory reforms have closed off certain high-margin product areas, while increasing the cost of delivering other services. Simultaneously, macro-economic conditions are reducing appetite for risk as well as lowering rate-based income streams.
In short, corporate and investment banking is becoming a lower-margin business.
As such, it is increasingly important for banks and brokers to understand the profitability of client relationships at a very granular level, as well as the value the client derives from any new investment in service provision.
Similarly, buy-side firms benefit from a clear understanding of the costs of servicing them, in part to help them improve their own internal processes and eliminate inefficiencies. The buy side is all too aware of the evolving post-crisis economics of service provision for banks and brokers. And no one wants to share the fate of those mid-tier and small hedge funds whose prime brokers have decided their relationships are no longer viable.
As major corporate and investment banks revert to total relationship management coverage models, both sell- and buy-side firms appreciate that every tactical point of contact can have a critical impact on the wider strategic relationship.
Measurement of costs, service levels and relationship profitability may be increasingly important, but the tools and processes are still lacking. Current evaluation or ranking mechanisms are deeply flawed, providing only subjective or stale input; focused on a subset of the overall service, such as front-office metrics on quality of research or performance of execution algorithms; and not reflecting realities of service provision.
The impact of a back-office glitch that delays settlement of a securities trade, perhaps resulting in a manually intensive buy-in, is rarely costed, nor is its impact on the broader relationship tracked.
As such, the underlying cause is not resolved—especially if it requires further discussion with a third-party provider or infrastructure operator—thus potentially storing up future problems.
The ultimate costs of failure to recognise or escalate a fault in service provision can be extremely high for both parties. Declining profitability for the sell side and plummeting service and satisfaction levels can lead to a downward spiral in which relationships and reputations are damaged. A key problem is the absence of a common mechanism that simplifies the collation of client satisfaction data. Relationship managers might be involved in ensuring clients participate in broker votes or industry surveys, but they are too often bypassed when it comes to flagging or resolving issues that really drive client satisfaction. It is simply too labour-intensive for a relationship manager to check in with every person or process the client touches, but technology innovation is easing the monitoring and measuring burden.
Collaborative platforms that enable buy-side clients and sell-side service providers (as well as other parties, if required) to work together to fix operational problems can not only address issues as they arise (rather than allowing them to remain unresolved and thus repeated), but also provide an enterprise-wide digital record of the resolution process. This helps to provide users with timely transparency on the costs of servicing client relationships, both individually and collectively, as well as metrics and insights into client satisfaction levels and recurring operational problems.
At one level, the service provider is better able to identify client service problems and costs per individual client, thus helping to quantify profitability and customer satisfaction. At another, the information could be compared across product areas, client segments and geographies to gain a consolidated view of operational issues, which would potentially uncover common causes, leading to new efficiencies. And if buy-side firms also had access to data across service providers, they would be better placed to benchmark not only provider quality and value, but also internal capabilities against peer performance. Relationship managers could also use such timely intelligence to drive meaningful, data-driven discussion and reclaim their role as agents of change on behalf of the client.
Over time, with widening use, such tools can provide analytics on operational issues across the industry, helping to share best practice and eliminate common causes of trade fails and other back-office glitches across instruments and asset classes.
A key characteristic of this reformed, lower margin commercial and investment banking market is a shift in how and where value is added. Technology innovation is being exploited in this sector on a communal, collaborative basis, with standardisation and interoperability being built in to automation. Rather than leveraging technology on a purely proprietary basis, banks and brokers are using it to refine and improve existing services collectively and develop new ones. Solutions that support higher client satisfaction levels and lower servicing costs will play a key role in maintaining collaborative relationships over the long term.
In a commercial context, it is always tempting for staff to focus on short-term wins such as the lowest price, the next sale or the latest technology innovation, rather than the less tangible, harder-to-quantify activities that add value for the long term. And if it’s hard to provide a high-quality, multi-faceted service over a long period, it’s just as hard to monitor and measure the value added, or benchmark it against alternatives. But without the transparency that metrics provide, abstract concepts remain just that, leaving relationships to fail to fulfil their potential at best, or to dissolve in acrimony and disillusionment at worst.
In today’s uncertain business environment, few can afford to take relationships for granted. Regulatory reforms have closed off certain high-margin product areas, while increasing the cost of delivering other services. Simultaneously, macro-economic conditions are reducing appetite for risk as well as lowering rate-based income streams.
In short, corporate and investment banking is becoming a lower-margin business.
As such, it is increasingly important for banks and brokers to understand the profitability of client relationships at a very granular level, as well as the value the client derives from any new investment in service provision.
Similarly, buy-side firms benefit from a clear understanding of the costs of servicing them, in part to help them improve their own internal processes and eliminate inefficiencies. The buy side is all too aware of the evolving post-crisis economics of service provision for banks and brokers. And no one wants to share the fate of those mid-tier and small hedge funds whose prime brokers have decided their relationships are no longer viable.
As major corporate and investment banks revert to total relationship management coverage models, both sell- and buy-side firms appreciate that every tactical point of contact can have a critical impact on the wider strategic relationship.
Measurement of costs, service levels and relationship profitability may be increasingly important, but the tools and processes are still lacking. Current evaluation or ranking mechanisms are deeply flawed, providing only subjective or stale input; focused on a subset of the overall service, such as front-office metrics on quality of research or performance of execution algorithms; and not reflecting realities of service provision.
The impact of a back-office glitch that delays settlement of a securities trade, perhaps resulting in a manually intensive buy-in, is rarely costed, nor is its impact on the broader relationship tracked.
As such, the underlying cause is not resolved—especially if it requires further discussion with a third-party provider or infrastructure operator—thus potentially storing up future problems.
The ultimate costs of failure to recognise or escalate a fault in service provision can be extremely high for both parties. Declining profitability for the sell side and plummeting service and satisfaction levels can lead to a downward spiral in which relationships and reputations are damaged. A key problem is the absence of a common mechanism that simplifies the collation of client satisfaction data. Relationship managers might be involved in ensuring clients participate in broker votes or industry surveys, but they are too often bypassed when it comes to flagging or resolving issues that really drive client satisfaction. It is simply too labour-intensive for a relationship manager to check in with every person or process the client touches, but technology innovation is easing the monitoring and measuring burden.
Collaborative platforms that enable buy-side clients and sell-side service providers (as well as other parties, if required) to work together to fix operational problems can not only address issues as they arise (rather than allowing them to remain unresolved and thus repeated), but also provide an enterprise-wide digital record of the resolution process. This helps to provide users with timely transparency on the costs of servicing client relationships, both individually and collectively, as well as metrics and insights into client satisfaction levels and recurring operational problems.
At one level, the service provider is better able to identify client service problems and costs per individual client, thus helping to quantify profitability and customer satisfaction. At another, the information could be compared across product areas, client segments and geographies to gain a consolidated view of operational issues, which would potentially uncover common causes, leading to new efficiencies. And if buy-side firms also had access to data across service providers, they would be better placed to benchmark not only provider quality and value, but also internal capabilities against peer performance. Relationship managers could also use such timely intelligence to drive meaningful, data-driven discussion and reclaim their role as agents of change on behalf of the client.
Over time, with widening use, such tools can provide analytics on operational issues across the industry, helping to share best practice and eliminate common causes of trade fails and other back-office glitches across instruments and asset classes.
A key characteristic of this reformed, lower margin commercial and investment banking market is a shift in how and where value is added. Technology innovation is being exploited in this sector on a communal, collaborative basis, with standardisation and interoperability being built in to automation. Rather than leveraging technology on a purely proprietary basis, banks and brokers are using it to refine and improve existing services collectively and develop new ones. Solutions that support higher client satisfaction levels and lower servicing costs will play a key role in maintaining collaborative relationships over the long term.
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