The retail investments industry is not giving enough of its customers what they want, at a price they are willing to pay. This is because the industry is not sufficiently good at what it aspires to do. The route to a sustainable solution lies in a deeper examination of organisational capabilities – the joined-up skills, systems and processes that enable companies to understand the needs of the end-investor, rapidly develop products and services, manage operations, and collaborate with industry partners. OCP conducted a research project through a series of qualitative discussions with 15 senior people across the industry. We talked to asset managers, product providers, third party service and system providers and distributors. We spoke to people at various stages of the supply chain, some with strong consumer brands, and others whose main profile is with other counterparties within the industry.

1. 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

2. 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
2

3. 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
3

4. 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
4

5. 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
5

6. 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?
6

7. Research participants
• AXA
• Cofunds
• BlackRock
• Fidelity
• IFDS
• JP Morgan Asset
Management
• Legal & General
• M&G
• SEI
• State Street
• Succession Advisory
Services
• Time4Advice
7

8. What do you do?
8
Financial advice
and sales
Private client
stockbrokers Adviser networks
Adviser service
providers
Employee benefits
consultantsWealth managers
Life & pensions
providers
Unit trust providers
Investment
managers
Providers of
software & systems
Third party
administrators
Transfer agents
Custodians

9. 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 9

10. 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?

11. 11
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 engageyou
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 platformstrategy, 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 innovationsmore widely)
between players who may
otherwise still compete in all other
respects.
“Co-sourcingis a vital theme for
the future: think the Dreamliner or
Apple’s apps marketplace” Third
party services provider
Components of the restacking?

12. 12
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
managementwould cut its costs,
by a step-wise hike in fund
managerproductivity, a reduction
in the number of funds, and a
reduction in reward. But it’s not a
very logicalworld” Third party
services provider
“The pressure on margins will lead
to a drive for scale. It will be
uncomfortableto 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
consolidationof the industry)
requires continualrethinking about
business models including
operational processes, systems,
resourcing and cost structures as
well as risk and pricing” Third
party services provider

13. 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
13

14. 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
14

15. Emerging capabilities for the future?
15
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

16. 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

17. 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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18. 18
David Taylor
david.taylor@ocp.co.uk
M: 07768 077 796
www.ocp.co.uk