Appearances can

deceive

A clearer picture of the way forward
for the financial services industry

The image projected by...
1

Contents
	 Foreword: a distorted perception	

3

1 	Context: a pause for reflection	4
2 	The nature and impact of leade...
2

Appearances can deceive

Five years on from the crisis,
we find many financial firms
working in ways that are
out of st...
3

Foreword: a distorted perception
The common message emanating from leading firms within
the financial services industry...
4

Appearances can deceive

1 Context: a pause for reflection
Times have changed in financial services.
The post-recession...
5

This competitive landscape requires financial
services firms to develop a new combination
of skills and capabilities. T...
6

Appearances can deceive

2  he nature and impact of leadership
T
Many of the barriers to renewal that we have identifie...
7

Fig 1.2 The impact of leadership
Engagement impact of leadership
Fig 1.2 The– to what extent the workforce feels ‘engag...
8

Appearances can deceive

Leadership styles
n oercive
C

A coercive style demands compliance
and can contaminate everyon...
9

Fig 1.4 Products over customers
FS Firms lag in customer focus and innovation
Customer Focus
90

Values

Focus on Compe...
10 Appearances can deceive

b) Self-serving innovation

c) Lack of diversity – a small gene pool

To meet rapidly evolving...
11

A long look in the mirror
As we will outline in the next section, leaders
will need to be agents for renewal if their
...
12 Appearances can deceive

©2013 Hay Group. All rights reserved
13

3  reaking the cycle
B
Renewal starts at the top and requires courage.

Transformation strategies in this naturally
co...
14 Appearances can deceive

Step one: develop self-awareness
Beyond the necessary focus on improving
efficiency, structure...
15

Step three: learn and multiply
The strongest leaders and organizations
consciously learn from experimentation.
Such le...
16 Appearances can deceive

The coming three to
five years will see a form
of natural selection in
the industry.

©2013 Ha...
17

4  head of the curve
A
To address the on-going crisis, most firms have
embarked on cutting cost and improving effectiv...
18 Appearances can deceive

Successful financial services institutions will:
Focus on the customer
Winning firms will acce...
19

Reward contribution

Diversify recruitment

The new outside-in, client-centric approach
will reshape compensation in t...
20 Appearances can deceive

Conclusion
A shift in mindset is essential if financial
services executives are to reform curr...
About this research
The data referenced in this report is drawn from in-depth analysis of Hay Group’s proprietary financia...
iv

Appearances can deceive

Africa
Cape Town
Johannesburg
Pretoria
Asia
Bangkok
Beijing
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Hong Kong
Jakart...
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Fs 2013 appearances_can_deceive_report_singles_lo_res

  1. 1. Appearances can deceive A clearer picture of the way forward for the financial services industry The image projected by leading firms in the financial services industry is still one of a profitable sector led by effective leaders. Hay Group research highlights that this does not accurately reflect reality. Many financial organizations have yet to adapt to the post-crisis environment and therein lies an opportunity for renewal >>
  2. 2. 1 Contents Foreword: a distorted perception 3 1 Context: a pause for reflection 4 2 The nature and impact of leadership 6 3 Breaking the cycle 13 4 Ahead of the curve 17 Conclusion 20
  3. 3. 2 Appearances can deceive Five years on from the crisis, we find many financial firms working in ways that are out of step with the new competitive landscape. ©2013 Hay Group. All rights reserved
  4. 4. 3 Foreword: a distorted perception The common message emanating from leading firms within the financial services industry is one of change. Barclays, Citibank and HSBC have all heralded major cultural, structural or remunerative changes during the early part of 2013. We know financial services firms realize that the strategies of the past will no longer generate the prolonged success they enjoyed prior to the global collapse. In the postcrisis landscape, they are facing poor share performance, squeezed margins, tightening regulation and growing competition from emerging markets, start-ups and new entrants from outside the sector. In a market where consumer behavior is rapidly changing and the choice of alternatives multiplying, the perception of value is shifting. Value will soon be – if it is not already – determined by simplicity, transparency and trust, rather than by product features and number of branches. Author Brett King summarized the nature of the new game with the memorable phrase: ‘Banking is no longer somewhere that you go, it’s something that you do.’ 1 In the face of this, financial services institutions sense they must adapt if they are to preserve profitability, protect their competitive position and reinvigorate performance. Drawing on over sixty years’ experience of working with global financial organizations, Hay Group sets out to examine how firms are addressing the need for change. Five years on from the crisis, our analysis finds an industry – and its leaders – yet to adapt to the new competitive landscape. Many firms are locked in once-successful, pre-recession business models and ways of working, which are now out of step with the current climate. But our ambition is not to heap further criticism on an already beleaguered sector. Our research suggests that there is real opportunity for renewal and outstanding performance for those institutions ready to address the embedded cultures and practices that are preventing change. To make this fundamental transition, financial services organizations need to cast their eyes to the top of the tree. It is the most senior leaders who must drive the necessary change, starting with an honest look in the mirror. Financial services executives must be ready to acknowledge leadership challenges in order to set their organizations on a path to sustainable renewal. Welcome to Appearances Can Deceive. This report, based on a review of dozens of cases and the systematic analysis of a wealth of hard data, explores how financial services can resume growth and improve profitability, and use transformational leadership to leave crisis behind. Jean-Marc Laouchez, managing director, global financial services, Hay Group, May 2013 1 ‘Bank 3.0. Why banking is no longer somewhere you go, but something you do.’
  5. 5. 4 Appearances can deceive 1 Context: a pause for reflection Times have changed in financial services. The post-recession environment is at best uncertain and, at worst, hostile for financial institutions, which face a fierce battle to attract and retain profitable customers in an increasingly competitive climate. Profits are under siege as financial firms are confronted with a perfect storm of low interest rates, disruptive technologies and high capital adequacy requirements, as well as restrictions – self-inflicted or regulatory – on proprietary trading. The balance of power has shifted inexorably towards clients and customers, whose expectations – and options – have never been higher. Retail customers demand greater choice, transparent prices and a more personalized, multichannel service experience. Corporate clients want tailored, cost effective advice and solutions. And when things do not go their way, they are increasingly quick to air their grievances very publicly over social media, or shift to other providers. Customer trust in the industry has been severely damaged by behaviors uncovered by the financial crisis and ensuing high-profile ‘scandals’, from Libor and Peregrine, to the London Whale. Weak banking systems, from Belgium to Cyprus, have also taken their toll on public confidence. What worked yesterday no longer works today, and as a result, the financial industry – in contrast to other sectors – is struggling to recover from the 2008-2009 crisis. Since spring 2011, The KBW Bank and Dow Jones US Select Insurance and US Asset Managers Indices have all consistently underperformed the Dow Jones Index by up to 40 percent. And, for the first time, the sector did not feature in Hay Group’s last top 20 Best Companies for Leadership, global research which ranks organizations against dimensions such as ability to meet customer needs, agility, collaboration and innovation. In response to the public clamor for retribution, politicians have taken an increasingly vociferous stance against the industry, prompting waves of new regulation and more power to regulatory bodies. As the European Central Bank, for instance, readies to become the eurozone’s single banking watchdog, EU leaders sent shock waves across the industry with the recent proposals for bonus caps.2 But, all too often, new regulation has been a knee-jerk response to popular concerns over media-friendly topics such as executive pay, rather than a considered, collaborative attempt to reduce the systemic risk of future institutional or market failures. As a result, financial services boards and leaders are left navigating a confusing patchwork of codes, guidance and regulations at national and regional levels, which often overlap and even contradict each other. The reputational fallout from the financial crisis has also affected the sector’s ability to attract the very best young talent – a potential ticking timebomb for future success. The best and brightest graduates are now more attracted to the progressive and egalitarian climate offered by the technology giants, or by highly lucrative hedge funds. This measure indicates that regulators are not yet satisfied with the industry learning from and response to the crisis. However, Hay Group does not support a cap on bonuses for bankers or fund managers, because it could restrain financial services firms from making positive contributions to the economy in the future. Indeed it may cement the way they reward their people, rather than encouraging them to explore approaches that fit the new environment. 2 ©2013 Hay Group. All rights reserved
  6. 6. 5 This competitive landscape requires financial services firms to develop a new combination of skills and capabilities. They must: n reinforce discipline to avoid risks they do not fully understand and continue to increase productivity and efficiency. n make clients their priority and learn new ways to partner, innovate and develop solutions and business models to serve them. n excel at leading change in a volatile environment. This changing climate has laid bare the need for financial institutions to renew. The market has changed, but the leaders and institutions have not. Yet. Our research uncovers widespread use of outdated leadership styles and practices, inappropriate to the current competitive context. Rapid change and increasing complexity are placing sector leaders under unprecedented pressures. In short, they are feeling the heat like never before, but many are clinging to the strategies and behaviors bred in the ‘good old days’ of financial services boom. So what common leadership styles and practices are holding back organizations within the financial sector? …all too often, new regulation has been a knee-jerk response to popular concerns over a media-friendly topic…
  7. 7. 6 Appearances can deceive 2 he nature and impact of leadership T Many of the barriers to renewal that we have identified stem from the prevailing leadership profile in the sector. A formula suited to pre-crisis times is now out of step with current requirements. ‘Just do it’ leadership To succeed in a more competitive and volatile climate, leaders in financial firms will need a highly engaged workforce, capable of successfully executing rapid change. However, our research shows that leaders tend to heavily rely on a ‘coercive’ style, demanding specific actions, rather than enabling and nurturing their peers and team members. Nearly half (43 percent) of financial services leaders adopt the coercive style as their dominant approach, compared to only a third (34 percent) of leaders across all sectors. This indicates a ‘paternalistic’ style of leadership, which is not conducive to building the capabilities required to win and sustain performance in the new competitive context. Such capabilities include responsible risk taking, partnering and customer-focused innovation. Perhaps not surprisingly then, 55 percent of leaders in financial services are creating demotivating climates for their teams, and less than a third (31 percent) of their employees are likely to be performing at or near their best. In a reversal of what is commonly observed, where employees report engagement but are frustrated in their ability to deliver through organizational barriers; the biggest gap for financial services firms is engagement. Fig 1.1 ‘Just do it’ leadership 8.9% 3.8% 1.1% Coercive Coaching 1.0% Visionary Affiliative 0.4% Pacesetting Participative -3.9% Difference in average scores of leadership styles between financial services sector leaders and leaders from other sectors. Like their peers from other industries, financial services used a broad range of styles. However significantly more financial service leaders rely on the coercive style. Source: Hay Group’s leadership climate and styles data. ©2013 Hay Group. All rights reserved
  8. 8. 7 Fig 1.2 The impact of leadership Engagement impact of leadership Fig 1.2 The– to what extent the workforce feels ‘engaged’ to perform High performing companies Engagement – to what extent the workforce feels ‘engaged’ to perform All industries average High performing companies Financial services firms All industries average 0 20 40 60 80 100 60 80 100 60 80 100 Enablement – to what extent the workforce feels ‘enabled’ to perform Financial services firms 0 20 40 High performing companies Enablement – to what extent the workforce feels ‘enabled’ to perform All industries average High performing companies Financial services firms All industries average 0 20 40 Financial services firms A comparison of financial services and general industry20 employee opinion data. In a reversal of what is commonly 0 40 60 80 observed when employees report engagement but are frustrated in their ability to deliver through organizational barriers; the biggest gap for financial services firms is engagement. Source: Hay Group’s Insight database. A comparison of financial services and general industry employee opinion data. In a reversal of what is commonly observed when employees report engagement but are frustrated in their ability to deliver through organizational barriers; the biggest gap for financial services firms is engagement. Source: Hay Group’s Insight database. 100 Fig 1.3 The impact of leadership Intention to stay Fig 1.3 The impact of leadership High performing companies All industries average Intention to stay High performing companies Financial services firms All industries average Company motivates me Company motivates me Job conditions allow productivity Job conditions allow productivity Job provides challenging and interesting work Job provides challenging and interesting work Financial services firms High performing companies All industries average 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 High performing companies Financial services firms All industries average Financial services firms High performing companies All industries average High performing companies Financial services firms All industries average Financial services firms High performing companies All industries average High performing companies Financial services firms All industries average Financial services firms 0 40 60 80 100 A comparison of financial services and general industry20 employee opinion data. Feedback highlights the fact that there is a lack of pride or belief in their job or firm. Source: Hay Group’s Insight database. A comparison of financial services and general industry employee opinion data. Feedback highlights the fact that there is a lack of pride or belief in their job or firm. Source: Hay Group’s Insight database.
  9. 9. 8 Appearances can deceive Leadership styles n oercive C A coercive style demands compliance and can contaminate everyone’s mood and drive talent away. To be used sparingly and for a short time – in a crisis or to kick-start an urgent turnaround. n Visionary Inspires and is able to explain how and why people’s efforts contribute to the ‘vision’. Moves people towards shared outcomes through empathy and clarity. n Affiliative Creates harmony that boosts morale and solves conflict – a useful style for healing rifts in a team or for motivating during stressful times. n Participative This style is manifested in those leaders who are effective listeners, team workers, collaborators and influencers. They value people’s input and get commitment through participation. n Pacesetting This style is used by those who have a strong drive to achieve through their own efforts and have high personal standards and initiative. They may be impatient, prone to micromanaging and only lead through example. n Coaching This style involves listening and helping people identify their own strengths and weaknesses. Coaching leaders encourage, provide feedback and improve performance by building their people’s long term capabilities. ©2013 Hay Group. All rights reserved Feedback from financial employees highlights the fact that their ‘heart isn’t in the job’ and that that there is a lack of pride or belief in their role or firm. Fewer than 63 percent of employees in the sector feel engaged and able to do their job, compared to 71 percent in the best-performing organizations across all sectors. That’s a lot of talent and discretionary effort left on the table by high value knowledge workers. So as a result the prevailing leadership profile in the sector is fostering a lack of engagement and pride. It’s also leading to an insufficient focus on clients and customers, self-serving innovation, limited diversity and an inability to look beyond the short-term. a) Lack of external and client focus As the balance of power shifts in favor of the customer in financial services, customerorientation will be critical to future success. And yet employee opinion data from our Insight database indicates that just two thirds of financial services employees (67 percent) describe their organization as customer-focused, compared to 79 percent of the world’s best performing companies. See fig 1.4. Financial services employees rate their own listening abilities lower than those in other sectors. And while an encouraging 72 percent of employees agree that their firm attempts to understand and meet customers’ needs, this is lower than the 82 percent among high-performing organizations. See fig 1.5. Similarly, fewer financial services employees have faith in the quality of their firm’s customer support compared to top performing companies (61 versus 75 percent). Leaders in financial services firms appear more removed from the field and their clients than in other industries, making it difficult to react to new trends with the speed needed.
  10. 10. 9 Fig 1.4 Products over customers FS Firms lag in customer focus and innovation Customer Focus 90 Values Focus on Competitors 80 70 60 Ethics Quality 50 Operational Efficiency Long Term Horizon Innovation High performing companies Social Responsibility Financial services firms All industries average Employee opinion data from our Insight database indicates that just two thirds of financial services employees (67 percent) describe their organization as customer-focused, compared to 79 percent of the world’s best performing companies. Source: Hay Group’s Insight database (2007-2011). Fig 1.5 Products over customers Being customer focused seeking to understand and meet customers’ needs and requirements High performing companies All industries average Financial services firms 0 20 40 60 80 100 60 80 100 80 100 Focus on the quality of the products and the services produced by the company High performing companies All industries average Financial services firms 0 20 40 Quality of customer support, responsiveness, flexibility, turnaround produced by the company High performing companies All industries average Financial services firms 0 Source: Hay Group’s Insight database. 20 40 60
  11. 11. 10 Appearances can deceive b) Self-serving innovation c) Lack of diversity – a small gene pool To meet rapidly evolving customer demands, financial services leaders will need to encourage creativity and innovation that delivers significant value to their markets. The financial services industry tends to recruit in its own image. Candidates currently attracted to, and sought by, the industry typically have very high IQs and display strong logical and numerical reasoning. They also tend to be goal-oriented, resilient individuals. We have seen handfuls of institutions and senior executives being extremely creative in developing new products, from derivatives to securitization. They have also found new ways to go to market with financial engineering, or developed innovative business models – Berkshire Hathaway’s GEICO direct-to-consumer auto insurance sales and advertising model is one such example. Where such firms lead, others will follow. However innovation is often focused on delivering immediate returns to the institution, without offering systematically longer-term client value. It thereby fails to generate loyalty. Our research shows that financial leaders are not always equipped to foster a culture of innovation for a wider group of stakeholders. This requires leadership and vision. It also requires commitment to support collaboration and give employees the space and opportunity to try radically new ways of doing things, within the parameters of acceptable risk. But, as we have seen, financial leaders currently depend heavily on the ‘coercive’ leadership style. This has worked well in a context of high margins or in the dark days of the crisis, but it is counter-productive when used continuously and over the long term. Excessive use of this approach erodes the adaptive capabilities of a workforce. Not surprisingly, therefore, financial services employees lack confidence in their firm’s capabilities to innovate. Just over half (53 percent) believe that their company is able to develop better products and services than competitors for customers, compared to 70 percent of high performing cross-industry companies. ©2013 Hay Group. All rights reserved These bright, driven and articulate employees were perfectly suited to generating immediate value in the fast-growth, sales and deal-driven environment of yesteryear. However, the new environment calls for more ‘disciplined listeners’ with the skills to drive performance and effective risk-taking through responsible empowerment and leadership of others. d) Rewarding short-term, company-oriented outcomes Since the onset of the financial crisis, the sector’s and in particular banks’ incentive structures for the sector – and for banks in particular – have been under intense scrutiny. Media, politicians, shareholders and regulators have been quick to criticize a culture that they view as rewarding short-term results at the expense of longer term success and value creation. Our analysis suggests that the industry’s pay and reward practices are providing leaders with little imperative to focus on the long, or even medium term. Until recently, bonus potential was discretionary, and what the sector considered long-term incentives were, in fact, backward looking and mainly determined by annual performance. In contrast to practice in other sectors, pay and bonuses were also pegged to market rate rather than sized to job. While various regulations have been created to address this, the resultant changes to incentives have merely painted over the cracks. What needs to be dealt with is what is incentivized. What is the strategy? And what are the behaviors required to support it?
  12. 12. 11 A long look in the mirror As we will outline in the next section, leaders will need to be agents for renewal if their firms are to succeed amid the shifting sands of global financial services. Self-awareness will be a critical success factor in achieving renewal. But, when asked to rate their own emotional and social intelligence – the ability to bring out the best in themselves and their employees – financial services managers consistently score themselves higher than others rate them in each of the twelve competencies that make up emotional and social intelligence. This is particularly true of achievement, emotional self control and positive outlook. Rather than promoting renewal, these significant gaps indicate a high level of overconfidence, which is limiting leaders’ ability to acknowledge the need for change and to embrace it. Fig 1.6 Financial services leaders ‘more overconfident’ Emotional and social competency inventory (ESCI). Gaps between self-assessment and others' assessment. Financial services leaders and leaders from other industries, 2011-2012. 0.15 0.10 0.05 0 g rin to en ,m ng hi ac Co k or t w en am m Te ag an m ict nfl Co ce en flu In s y es lit bi en ta ar w ap la Ad na tio za ni ga r Or de s lea es en ng ar iri sp aw In elf ls na io ot Em -0.10 y th pa ok Em tlo ou ive sit Po t** en l** em tro ev hi on Ac lf c se al ion ot Em -0.05 -0.15 -0.20 ** Significant Financial services firm managers and leaders Other industry managers and leaders Working with leaders over the decades, Hay Group has found that managers typically rate their abilities across the 12 areas of emotional intelligence higher than their colleagues and their reports rate them. Within financial services however, the gap between leadership perception and reality is even wider. Source: Hay Group’s emotional and social competency inventory.
  13. 13. 12 Appearances can deceive ©2013 Hay Group. All rights reserved
  14. 14. 13 3 reaking the cycle B Renewal starts at the top and requires courage. Transformation strategies in this naturally conservative sector have typically involved bringing in fresh blood, shifting teams around, outsourcing operations or investing in new technologies. But the key driver of renewal should be leadership itself. Leaders have the power to improve performance by fostering customer-focus and inspiring new models of innovation. But it will need a profound change in mindset and behavior. Creating innovation capability requires a drive from the top. It demands a commitment to establish an engaging vision and a new definition of risk and risk-taking. It also involves the encouragement of real collaboration across units and functions. In a time of increased uncertainty and volatility, we all need a compass: a simple and compelling sense of direction, which informs the right trade-offs and decisions as we go. Only a few financial firms’ leaders provide this clear purpose. Citigroup CEO Michael Corbat recently provided just such direction: “Without the appropriate discipline and targeting, our resources can be spread too thinly or too evenly across the portfolio, under-investing in our best opportunities and opening ourselves to mission creep in less attractive areas.” “And having just spent four years selling off assets that came on to our balance sheet as a consequence of mission creep, I believe the right framework needs to be more granular today than in the past, with a balanced view across markets, clients, and products. We also need to make sure we measure our progress in real-time so we can make mid-course corrections as necessary and respond to the operating environment.” When leaders commit employees and stakeholders to a shared direction and explain the nature and extent of the transformation, it arms the firm against uncertainty, engages clients and stakeholders and provides clarity about the nature and the extent of change required. In addition, the notion of risk, at the center of the business of banking, insurance and asset management will have to be revised. The challenge will be for leaders to develop controlling processes and disciplined mindsets that limit inappropriate financial risk, while encouraging the experimentation that supports new, differentiated business models and solutions. It is possible. New entrants such as PayPal are gaining ground in the payments market by redefining the risk-trust relationship between customer and provider, dispensing with traditional paper methods and sharing the cost benefits with their users. Fundamentally, institutions will need the kind of leadership that not only creates value for the company and its shareholders, but more crucially, its customers. Leaders will therefore have to take a longer-term view, as future success will depend on generating more sustainable returns – which could be nonetheless considerable – over a longer period of time. So the renewal of financial institutions starts with the renewal of their leaders. This can be achieved in three simple, yet meaningful steps.
  15. 15. 14 Appearances can deceive Step one: develop self-awareness Beyond the necessary focus on improving efficiency, structures and technology, financial services leaders now face a critical choice. One option is to go ‘back to basics’. Sound practices in insurance underwriting, lending, balancing assets and liabilities or investment will provide many institutions with decent returns for a foreseeable period of time. Cost cutting will boost profits for a while. However it might not be enough to consistently achieve ROE of over 15 percent, as ‘business as usual’ might accelerate commoditization. Alternatively, leaders can decide to position their firms for a radically different competitive context and renew their business models, technologies, partnerships and underlying practices. If they choose the latter approach, they will have to embark on an honest appraisal of their own leadership profile against the capabilities required to win in the new financial market. This will ultimately yield sustainable, long-term success. Step two: experiment with new behaviors and lead by example The leadership approach, styles and practices that are less relevant in the new financial services context have been identified. Leaders must experiment with alternative behaviors and attitudes, such as coaching rather than lecturing, listening rather than asking and engaging rather than tasking. These leadership behaviors will bring new levels of rigor and management maturity into the institution, which will translate into competitive advantage. Leaders that ‘role model’ these behaviors and types of interactions will inspire others to do the right thing and develop a culture of accountability and responsible performance. One COO of a large European lending institution has acknowledged: “I led an army of specialists and subject matter experts to turn our firm around after the financial crisis. I must now change the profile of my teams and seriously alter my leadership style if we want to bridge across silos, collaborate and grow.” Leaders must experiment with alternative behaviors and attitudes, such as coaching rather than lecturing, listening rather than asking and engaging rather than tasking. ©2013 Hay Group. All rights reserved
  16. 16. 15 Step three: learn and multiply The strongest leaders and organizations consciously learn from experimentation. Such learning can occur at the organization level: what digital solution draws the best market response? What new branding or channel partnership worked, and why? Which factors really explain high degrees of employee engagement and could be replicated across the firm? Learning should also happen with individuals and teams. Leaders should reflect on the impact of their new behaviors on others and on themselves. Why has coaching worked in one situation and not in others? Why are peers and other leaders more open to a given line of argument? The most effective behaviors should then be ‘embedded’ into explicit leadership models to inspire others and provide a clear benchmark for success. The experience of one large insurance company provides an illustration. It views its competency model as its main competitive advantage, together with its brand. It has made extraordinary efforts to understand the distinctive leadership behaviors that have helped increase the volume and profitability of sound insurance policy underwriting. It has now rolled these out to thousands of professionals and has rapidly gained market share.
  17. 17. 16 Appearances can deceive The coming three to five years will see a form of natural selection in the industry. ©2013 Hay Group. All rights reserved
  18. 18. 17 4 head of the curve A To address the on-going crisis, most firms have embarked on cutting cost and improving effectiveness and compliance. This is often based on heavy investment in new competitive technology platforms. But when it comes to resuming growth in the new competitive landscape, there are broadly three types of response according to strategy and leadership approach. The coming three to five years will see a form of natural selection in the industry. Those institutions whose leaders quickly evolve their styles and practices, establish a clear vision and lead by example in the execution of sound strategies will thrive. Firms where executives fail to renew their leadership may survive or undergo a turbulent ‘Traditional/ rear view.’ Unaware of gaps 1. Rear view Leaders’ Leadership posture posture “We’re going through a   n“We’re just going through a slow phase in sector’s cycle” ‘low’ in the the financial business cycle” “We must do what we and execution” already know how to do but better”   ‘Back to basics’ “focus on executing well what we already know how n reduction, Cost to do”   Strategic and organizational focus Strategic and organizational focus n “I focus on efficiency efficiency period of change before grasping the fundamentals of the new landscape. Some will disappear as many prepare for the next wave of mergers and acquisitions in the sector. In this final section, we describe the common traits of success which will characterize the survivors in the new context. ‘Blurred.’ Aware but not accountable 2.Blurred n “The financial sector   financialsector is is “The changing” changing; we need to adapt”   “We need to adapt” n “I expect my leaders, peers   “I expect my bosses, peers and and employees to evolve” employees to evolve”   “I manage our change effort” ‘Clear.’ Fully aware and accountable 3. Clear n world is changing”   “The world is changing” “The   “I“I n listenand transform myself, learn to clients and employees”   “I am transforming myself” and help others to evolve”   “I help others through their evolutions” Same as ‘back to basics’, plus: Same as ‘back to basics’, plus: n Explicit strategic intent, n Clear aspiration and but unclear business and actionable strategy n management and Risk ‘Back to basics’   Cost reduction compliance   nRisk management Rebuilding capital base   Compliance Preservation of existing   nRebuilding of capital base   Preservation of existing business franchise business franchise e.g. (eg. clients, brand, clients, brand, expertise organizational trade-offs ‘Back to basics’ plus: n Extensive change   Explicit strategic intent, but unclear business and management effort ‘firing organizational trade-offs   on all cylinders’ management Extensive change n effort, ‘firing on all old and Tension betweencylinders’   new models Tension between old and new models n Entry ‘back to basics’ plus: Same asinto new markets n   Rebuilding internal actionable Clear aspiration and and strategy external trust   Entry in new markets n   Robust transformation strategy Engaging transformation   strategy, using relevant Co-development of distinctive business models change levers   Building new skills capabilities , n sufficient critical mass Building of new capabilities with   and clientrelevant change levers Focus on relations with Best historic performance Immediate results n historic Best   Inward-focus   Reference are ‘best ‘players in the n financial sector Inward-focus   Outward-focus   Reference are new entrants and best players in financial and other n Outward-focus industries n entrants, ‘best’ players New channels, expertise) sufficient critical mass Benchmark/ reference Benchmark/ reference     performance n Immediate results n ‘Best’ players in the financial sector as well as other industries
  19. 19. 18 Appearances can deceive Successful financial services institutions will: Focus on the customer Winning firms will accept the need to serve customers’ needs as much as the interests of their shareholders and ahead of their own. As forthcoming regulations, such as the Volcker Rule in the US will force institutions to limit proprietary activities, successful firms will rebalance their organizations towards driving value for the customer. They will use client understanding for competitive advantage. How will banks retain the increasingly digitally-literate customer who is ready and able to abandon traditional banking in favor of a ‘mobile wallet’? It’s a question to which payments disruptors in retail banking, such as Simple and Square in the US are already finding the answers. Square’s ‘Square Wallet’ enables people to pay for goods and services via their smart phone. The same is true for other sectors of the industry, with the likes of the similarly named Square1 bank founded in 2004 to provide financial services to entrepreneurs and venture capitalists. Its stated commitment is to ’add value in an industry that deserved a more focused approach’ and to ‘earn business, not trap it.’ Devolve power and restructure along customer segments A central focus on customer value will have implications for the organizational structure of the fittest firms. Survivor institutions will be increasingly organized along meaningful customer segments. This is not simply a case of plugging in big data, ©2013 Hay Group. All rights reserved but of re-orienting operating models around the client, to ensure that the organization is attuned to their needs. How do you configure your organization to serve a customer who no longer cares (if they ever did) which section of your business delivers the service? They just want to get their financial transaction done, when they want it done. Power within winning firms will be far less centralized. Frontline staff will be empowered and developed to be able to provide a flexible, intuitive and bespoke customer experience. The best firms will increase loyalty as a result, and enjoy lower turnover of client-facing employees. Foster creativity and encourage the right risks In the war for clients, survivors will harness innovation to develop products and services aligned to rapidly evolving customer demand. And with new and nimbler market entrants from other industries and start-ups born for the new environment, staying ahead of the curve will be critical to the future of larger and incumbent players. Creativity in the fittest institutions will no longer be predominantly correlated to product and transaction profitability. Teams will be discouraged from chasing alpha without due consideration to the risks associated with the returns. Leaders will have a more sophisticated understanding of risk – encouraging that which will add value to the customer and therefore the firm and its shareholders.
  20. 20. 19 Reward contribution Diversify recruitment The new outside-in, client-centric approach will reshape compensation in the financial sector in the future. Winning firms will have more segmented recruiting to attract a more diverse range of skills and behaviors to their institution. Fundamental questions will be increasingly asked at board level to validate the compensation of executives. Successful firms will have made difficult decisions on how much money they make available for compensation overall. As is currently the case, compensation will continue to be linked to the creation of economic value, but that value will no longer excuse a lack of effective leadership. This will not be a specific recruitment initiative to improve the diversity of the workforce, but rather a natural consequence of the new leadership approach. Recognizing they don’t have the solution to every challenge, evolved leaders will be less inclined to recruit purely in their own image. The fittest firms will have evolved the calculation of reward from a primarily market-based approach, to one based on a broader view of the contribution of managers, incorporating measures of effectiveness and business and people leadership. Executives’ know-how, the scale of the problems they solve, their top or bottom line accountabilities, the complexity of their function and their ability to influence and lead change may all be taken into account. Having accepted that they want to understand different customers better, empower their frontline people, garner creative ideas on how best to serve their clients and encourage appropriate risk-taking, the leaders of financial firms will have identified the need to expand their gene pool for recruitment. One innovative approach taken by some leading banks is to recruit from the Ecole Hôtelière de Lausanne in Switzerland. They believe that the world’s oldest and most prestigious college for the hospitality industry will provide talent that truly understands the nature of customer service.
  21. 21. 20 Appearances can deceive Conclusion A shift in mindset is essential if financial services executives are to reform current practices and end the cycle of underperformance. Leaders will need to ask themselves: ‘Who do I serve?’ and place customers before their institutions. Their own leadership style will then follow that refreshed vision, in order to effect rapid transformation into a customer-focused, innovative organization. Encouragingly, some financial institutions leaders are indicating their commitment to reform. Barclays’ chief executive Antony Jenkins issued a strong statement of intent to transform the bank’s culture and internal practices and create a more customer-centric institution. HSBC’s Stuart Gulliver justified the biggest changes in the bank’s history by admitting that its structure was not “fit for purpose for a modern world”. And Citigroup, following a shareholder defeat over the chief executive’s pay package, announced that bonuses for top executives would be more closely linked to performance in future. An excellent opportunity exists for renewal. Long-term success awaits those leaders who pause to take a long look in the mirror, and realign their approach. To the victor belong the spoils. Long-term success awaits those leaders who pause to take a look in the mirror, and realign their approach. ©2013 Hay Group. All rights reserved
  22. 22. About this research The data referenced in this report is drawn from in-depth analysis of Hay Group’s proprietary financial services organizational data. n Hay Group’s Best Companies for Leadership study Hay Group has researched the Best Companies for Leadership since 2005. This, latest, 2011-2012 survey includes responses from nearly 7,000 individuals at more than 2,300 organizations worldwide. The survey was based on the organization’s response to an online questionnaire and peer nominations. Respondents that completed the survey were from 103 countries, with 11 percent from North America, 35 percent from Europe, two percent from the Middle East, 21 percent from Asia/Pacific/Africa and 31 percent from Latin America. n Talent Q database 2012 online, work-focused psychometric tests. These online work-focused psychometric assessments screen and assess large talent pools, measuring work-related personality attributes (Dimensions) and numerical, logical and verbal reasoning (Elements). This study has drawn on the results of 5,018 personality assessments from three types of financial services organizations (asset management, retail banking and insurance). They have been compared against the Talent Q global norm of over 30,000 managers, professionals and graduates. The review has also looked at Elements completions in financial services, specifically 34,648 numerical assessments, 14,144 logical assessments and 29,046 verbal assessments and these have been compared against the professional graduate and managerial norm for each of these assessments (170,119 numerical, 65,244 logical and 145,916 verbal). n ESCI: Hay Group’s emotional and social competency inventory (ESCI) This is an online survey tool which delivers a 360º assessment of an individual’s behaviours across the 12 competencies that comprise emotional and social intelligence: emotional self-awareness, achievement orientation, adaptability, emotional self control, positive outlook, empathy, organizational awareness, conflict management, coaching and mentoring, influence, inspirational leadership and teamwork. This study refers to data collected during the period 2011-2013 from 1,021 financial services senior executives, benchmarking them against 12,385 of their peers from a variety of sectors including professional services, pharmaceuticals, technology, manufacturing, retail, energy, public services and education. n Motives and values database (2005-2011) Hay Group’s motive profiling methodology, is one of the most widely researched instruments in the entire field of psychology and personality assessment. By scoring individuals against the three social motives that collectively explain the widest range of human social behaviors – this diagnostic tool generates a personalized ‘motive profile’ and allows you to explore how this relates to your work and life in general. This study draws on the values data of 6,863 financial services leaders and the motives of 7,303. n Hay Group’s leadership styles and climate data 2005-2012. For over 60 years we have conducted research into the links between how leaders learn and change as well as the types of performance climates they create. The full data file used for this study comprises data from 202,198 leaders from 1,992 organizations. This report looked at 31,000 financial services assessments, from 28,359 financial services managers. Those assessments come from 208 organizations. n Hay Group’s Insight database analysis (2007-2011). Hay Group’s Insight database comprises employee opinion data. This study, looked at responses collected from more than 50 financial services companies around the world and includes data from over 725,000 employees. It was compared against a general industry norm (GI) and a high performing company norm (HP). GI: 350 companies globally with data from over 5.5 million employees. HP: 35 companies around the world in a wide variety of industries and comprises data from over 1.4 million employees.
  23. 23. iv Appearances can deceive Africa Cape Town Johannesburg Pretoria Asia Bangkok Beijing Ho Chi Minh City Hong Kong Jakarta Kuala Lumpur Mumbai New Delhi Seoul Shanghai Shenzhen Singapore Tokyo Europe Amsterdam Athens Barcelona Berlin Bilbao Birmingham Bratislava Brussels Bucharest Budapest Dublin Enschede Frankfurt Glasgow Helsinki Istanbul Kiev Lille Lisbon London Madrid Manchester Milan Moscow Oslo Paris Prague Rome Stockholm Strasbourg Vienna Vilnius Warsaw Zeist Zurich Latin America Bogotá Buenos Aires Caracas Lima Mexico City San José Santiago São Paulo Middle East Dubai Riyadh Tel Aviv North America Atlanta Boston Calgary Chicago Dallas Edmonton Halifax Kansas City Los Angeles Montreal New York Metro Ottawa Philadelphia Regina San Francisco Toronto Vancouver Washington DC Metro Pacific Auckland Brisbane Melbourne Perth Sydney Wellington Hay Group is a global management consulting firm that works with leaders to transform strategy into reality. We develop talent, organize people to be more effective and motivate them to perform at their best. Our focus is on making change happen and helping people and organizations realize their potential. We have over 2,800 employees working in 86 offices in 48 countries. Our clients are from the private, public and not-for-profit sectors, across every major industry. For more information please contact your local office through www.haygroup.com

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