As traditional revenue streams face headwinds and cost pressures are ever present in investment banking, knowing your clients and harnessing their value are increasingly critical for delivering profitability and revenue growth. In the past, banks have typically looked at revenues and costs within specific business lines, regions or products. Few have been successful in developing a holistic vision of—and long-term strategy for—client relationships across the entire business.
Maximizing the profitability of overall client relationships sounds simple enough on paper and a sensible way to manage the business, but the organizational switch to a client-centric model can have significant implications and ripple effects. To see results, most banks will need to bridge organizational divides and rethink their data models, their processes and their corporate culture.
You can begin to bolster client centricity in three ways in investment banking: by pursuing better client intelligence, by tailoring client services, and by simplifying operations and restructuring your workforce. Let’s take a closer look at each area in turn.
Pursuing better client intelligence
Creating a consolidated view of the revenues, costs and risks associated with each client is an essential step toward client centricity. For many banks, the results are surprising. Our industry insights indicate that, on average, 10 percent of clients usually generate more than 80 percent of an investment bank’s revenue. Interestingly enough, clients with significant assets or trading flows might often not be the most profitable ones.
Most organizations are aware of the direct costs associated with sales, trading and research, but few consider indirect servicing costs related to finance, compliance and technology. Why? Because it’s hard to achieve in a fair and equitable way. Indirect costs can vary widely among services, business lines and clients, making tracking and allocation tricky. Establishing a reliable measure of client profitability that truly reflects the full cost of a relationship is likely one of the biggest challenges you’ll face during this process—but it’s a worthy endeavor.
By segmenting clients into different categories based on their value to the organization (e.g., high-value clients, low-value clients and tail clients), you can begin to understand who is boosting or dragging your profitability – and act accordingly.
Tailoring client services
Based on the results of that segmentation exercise, you’ll need to take a different approach with each client group to enhance profitability:
- Treasure high-value clients. Contemplate creating small, senior teams to deliver personalized experiences and bespoke services, including special access to research and thought leadership. Explore opportunities to cross-sell and standardize service across adjacent businesses, including wealth management.
- Understand low-value clients. If trading volumes are low, try swapping in a new relationship manager or different service offerings. If trading volumes are modestly high, but the cost of service is eroding profits, consider adjusting the price of service, for example by restricting access to research and high touch sales personnel, by switching up the product mix or charging for certain services.
- Exit unprofitable relationships. If tail clients are eroding value, it may be necessary to exit or “offboard” those relationships. If your organization currently lacks a comprehensive offboarding process, consider creating that capability and establishing exception rules for setting it in motion.
Simplifying operations and restructuring your workforce
Identifying and deepening valuable client relationships could well require important behavioral and organizational changes within your organization. The following internal simplification and restructuring initiatives could help and may well apply:
- Establish onboarding controls. Take steps to confirm that the front office is identifying and bringing in high-value clients rather than low-value or tail clients going forward by looking at historical patterns for low profitability clients.
- Adjust incentives. Align rewards for front-office employees to incentivize for profits, not simply revenue growth.
- Redesign your workforce. Align resources to client value, leveraging lower cost resources or electronic channels to serve lower value clients.
- Create a new data model. Re-engineer your client data model to increase simplicity and deepen your client understanding.
Why client centricity matters
A client-centric focus has the potential to not only help investment banks improve profitability, but also unlock exciting opportunities for new services in the future. There’s no easy path to client centricity, but pursuing better client intelligence, tailoring client services and restructuring your workforce are three great places to start.
For more on client centricity, read our Top 10 Challenges for Investment Banks 2017 report on Liquid Standards: Improving the Client Experience.