13 CRM in investment banking and financial markets Genevieve Findlay, Peter Mathias, Paris de L’Etraz and Merlin Stone INTRODUCTION In this chapter, we discuss just a few of the considerations involved in implementing CRM in investment banking or financial markets. Although nearly all of the rest of this book focuses on retail financial services, we thought it appropriate to cover briefly some aspects of a research programme focusing on investment banking and financial markets CRM that was being undertaken at IBM at the time of writing this book. In the past few years, insurers and retail banks have made most of the running in CRM. Increased competition and shrinking margins have forced them to deploy CRM strategies and technologies in order to respond to the needs of shareholders and clients. More recently, investment banks have begun to realize the intrinsic value of CRM. The principles of CRM hold true for this sector. Just because investment banking is a business-to-business application does not take away the fact that recognition of the client is still key for CRM success. However, most of CRM in investment banking is still work in progress. It is a missed opportunity since it offers banks a chance to rethink their fundamental approach to client management, to redesign their coverage strategies and to use technology to bring this about. Better client management is no longer optional. In nearly all business-to-business markets in which clients are as large as, or as in this case, often much larger than their suppliers, the latter must respond quickly to pressures from their clients to improve client management processes and systems. Banks can no longer rely on an information advantage over clients. Clients are better informed than ever and are hence more discriminating. Awareness of the full spectrum of what can be offered (and at what price) leads to increased needs and more stringent demands but lower brand loyalty. To keep their clients, banks need to manage relationships with them better, for mutual advantage. Even if banks them- selves are not working hard to manage clients better, through analysis, segmentation, design and delivery of the proposition, and tracking performance, clients themselves are often focusing on how to manage their suppliers to their own advantage. In particular, leading-edge clients are concentrating their business with fewer stronger suppliers that seem likely to provide them with a cost, capital and competitive advantage for their own marketplace. THE CRM CHALLENGE Corporate investment banks differ from retail banks in that a few large clients have a big impact on the bank’s business performance. This means that CRM techniques will only help investment banks if they improve the bank’s ability to: 1. select and then manage the right client set (coverage); 2. determine which products and services should be sold to which client, profitably, and then help the bank implement this sales plan (profit planning and implementation); 3. reduce the cost of coverage, in particular by improving the productivity of sales profes- sionals covering those with small wallets, while maintaining quality of coverage (one day the wallets may be big!); 4. coordinate the multi-product, multi-country relationship in real time. Coverage is an area of great weakness for many investment banks. They rely on the instinct and energy of their sales and research people to determine which clients to focus upon and then to win business from them. This approach – which has worked for many years – is now unsustainable. The marketplace is changing. Margins are constantly being squeezed. Consolidation of the sector and better information have increased transparency of internal operations. Clients’ expectations about levels of service and cost-effectiveness are rising all the time. Investment banking is characterized by two very different types of relationships with clients, as follows: CRM in investment banking and financial markets I 211 • Share of mind relationships focus the bank on doing a few large high-impact transactions for the client. While these deals are often opportunistic, they require intense investment of time by key people in the bank so as to build strong and differentiated relationships with key decision makers. The aim is to build access and influence with the right clients within the client organization before the deal. • Share of wallet relationships involve very large-scale coordination of many people, each of whom is operating separately from the others. As banks have merged and clients have become larger (also because of mergers on their side of the market) the scope and complexity of these relationships have increased. The challenge for banks is to transform individual relationships into a broader institutional relationship. There are many variations on these two types of relationship, and each of the businesses – debt, equity, asset management and banking – have a different view of this. A central need for client management is to align objectives across products and functions. This is hard to do. Most firms find it hard to agree a process to make trade-offs between differing product, functional and geographic objectives. Of course, CRM is not the only requirement. Two of the main determinants of business success in investment banking are client satisfaction and product quality. We believe that these two variables account for well over 90 per cent of the differences in financial results over time. CRM plays a key role – but by itself only makes a marginal difference. When used to increase client satisfaction its effect is much greater. When used to make sure clients have access to the right products at the right time, its effect is greater still. However, the quality of people and the discipline with which they are managed and measured, the quality of products, the infrastructure of the bank – all these have much larger impact on financial performance. WHAT CLIENTS WANT FROM THEIR BANKS For CRM to work, banks must have a very clear view of what their clients want from them. Four of the most important needs of clients are: 1. cost reductions and efficiencies in services delivered; 2. better control and transparency resulting in accountability for delivering results; 3. greater convenience in having to deal with fewer banks; 4. banks knowing the needs of clients intimately, so that the latter are offered the right products, at the right time and the right price, with appropriate associated service. 212 I Sector situation CORE PROVIDERS As clients have merged and consolidated, they have come under increasing pressure from their shareholders to deliver higher returns. As a result, clients seek greater efficiencies from banks they regard as their ‘core providers’ of services. Clients want fewer banks that will help them achieve these new levels of performance while reducing their costs and risks. By concentrating their business with fewer banks, clients hope to achieve higher degrees of control over their banks, greater accountability for results and improved trans- parency in financial terms. They want to see new levels of bank commitment associated with this privileged core relationship position. Clients require a tight linkage between all the following variables: • long-term commitment and leading market position; • geographic and product spread; • ability to provide global coverage and delivery. Most clients classify banks on the basis of ability to deliver on certain criteria, in particular: 1) long-term ability to deliver results; 2) impact on the client’s performance. Clients are concerned that many banks may not survive today’s mergers and consolida- tions. Developing and sustaining solid working relationships requires an investment on the part of the client. Increasingly, clients are looking to make a strategic choice of core providers, rather than just making opportunistic and tactical decisions. They want to be supplied by banks for whom they are core clients and for whom their business is a core business. They expect a consistent, long-term commitment to market leadership. For example, clients involved in mergers or acquisitions need to extract value from these mergers or acquisitions by breaking down product and geographic boundaries, and this requires coordinated coverage from their core service providers. Global clients require consistent product delivery across geographies. The ability of the bank to execute a meaningful role in terms of geographic presence and product footprint is critical to being a core provider. Finally, in order for this to be effective the bank must provide the level of coverage and delivery infrastructure so as to make the whole process efficient, accountable and transparent to the client. More demanding expectations of core providers are forcing clients to take coverage issues more seriously. They are beginning to evaluate banks more critically, on the basis of their ability to provide them with this necessary increased level of commitment and coverage. Just as banks cover many of their strategic clients using client service teams as part of key account management programmes, many clients are creating team coverage models for relating to their banks more efficiently. Large clients are increasingly reorgan- izing themselves so as to achieve performance enhancements and lower costs. There is a direct correlation between their ability to achieve these performance benefits and their success in managing and integrating with their banks more efficiently. CRM in investment banking and financial markets I 213 At many clients today, all team members within the buying organization, regardless of location, require and expect the same high standard of service from internal resources as well as from their external providers. The new internal structures of many global clients involve matrix organizations with a number of people having more than one reporting line and a number of functions having global and local activities. If the 10 people at the bank covering a particular client are not organized and aligned so that they work jointly on the coverage of that client, then it will be apparent to the client. Clients want to know: • how client coverage officers are assigned to them; • how many clients they cover; • how often they are reassigned; • who will assure them of consistency of service. Client coverage discipline at banks has moved from being an internal efficiency consider- ation to being driven by their top-tier clients. As a result, many banks are entering a phase of change, in which their understanding, shared knowledge and focused communication will be significant factors in the share of wallet they win. Banks that can deliver these effi- ciencies will command relationship premiums that will differentiate them from their peers in terms of status as well as profitability. The relationship premium is based on the bank’s ability to provide connectivity, communication and client focus. A core provider’s primary objective is to help its client achieve its strategic goals. Once a bank becomes a core provider, it must define a strategy for maintaining its position as well as for gradually increasing its share of the strategic client’s wallet over time. As a core provider, a bank is ‘permissioned’ by the client to present its case for adding value across a range of products, geographies and needs. Clients are optimizers and they know what a bank is good at. Banks must build a ‘role’ for themselves that maximizes exploitation of their capabilities. The bank’s objective is to increase the level of ‘permissioning’ to the point where it has influence over the buying behaviour. As a core provider the client feels that the bank is adding value. It has been ‘permissioned’ to provide a service or product of which it is perceived to be an excellent provider. So, it is the bank’s challenge to position itself strate- gically in the mind of the client and maximize its share of the client’s wallet. As it increases its level of permissioning its relationship becomes more important to the client and its edge against its competitors grows. To maximize this benefit a bank must: • align product and coverage functions; • define overall objectives for the client; • measure performance against objectives; • continuously validate strategy with the client. 214 I Sector situation Clients want core providers that will help them achieve their strategic goals. They need to be convinced of that. The client’s perception of the deliverables and their benefits/value must be very clear. They want to be involved in shaping the deliverables. They want the provider to have formalized and definable objectives that will translate into mutually agreed deliverables. Below is an example request for information (RFI) from a global client. The information is intended to help the communication between the two parties to be more efficient as well as to convince the client of the bank’s degree of commitment. It would typi- cally be sent with an organization chart describing client roles and responsibilities by product and location so that the bank knows the key decision makers as well as those that may require their services or products. Sample checklist of an RFI from a global client to a bank Overview • Do you categorize your clients into tiers? Explain. • Is there a process by which you assign the importance of a client’s relationship? • Do you have any proprietary information that you can share with us periodically that could benefit our relationship? • How do you rate yourself versus your competitors? Strengths? Weaknesses? Coverage • Who is the main contact person on the relationship? List each member of the client service team by role and responsibility. • What access will we have to senior management? • What do you expect to achieve from a core relationship with our firm? • What business do you do with us by product, location (aggregates)? • Are you prepared to work with us on a research project on a success basis? • What is your rationale for assigning each member of the coverage team? • How often are members reassigned? • How do you compensate them? Commitment • What are your product or service areas of greatest commitment? List the individuals and relevant expertise. • Do you know our strategic goals? How can you demonstrate your commitment to our strategic goals? CRM in investment banking and financial markets I 215 Objectives • What are your critical account objectives for this year with us? • What is your estimated present share of wallet with us by product or service? • What would you like it to be by product or service? NON-CORE PROVIDERS Being a core provider is increasingly imposing levels of client commitment that may make the economic feasibility of the relationship less attractive. Increasingly, clients will be willing to remove providers from their top-tier lists if they are unable to meet these chal- lenges with more than the traditional lip-service. For those left out, this will mean that their relationships and role will increasingly come under pressure from top-tier providers who can provide a similar product or service. Clients expect from their non-core providers: 1) focus and excellence in a narrow product set; 2) superior execution, pricing and value. In order to remain competitive, non-core providers need to achieve the following: • lower cost of coverage than their competition; • very competitive pricing; • high share of wallet in a narrow product set; • opportunistic cross-selling from areas of product strength. THE TECHNOLOGY TRAP To support core-provider status, IT systems must support a client-centric approach to infor- mation. They need to allow the bank to create virtual client service teams providing their members with access to all relevant client information across products and geographies. To do this, they need to: • connect existing CRM systems and legacy systems efficiently so that all information around the client can be shared securely between client service team members; • allow client service team members to engage in CRM without leaving their e-mail systems; • be very cost-effective; achieving relationship premiums in current market conditions must be done without spending millions on CRM. 216 I Sector situation Many investment banks have already attempted to implement CRM. This usually involves either the IT division anticipating a requirement for a system and supplying what it thinks will be the answer, or the request to implement ‘CRM’ being made by the business with a broad idea as to what should be delivered but with little idea as to how to make it work once implemented. We regard both of these approaches as poor practice and likely to lead to failure – as has indeed been the case with most CRM initiatives in financial services markets of any kind. Putting the technology at the heart of CRM strategy is problematic for a number of reasons, listed below. Trying to solve CRM issues with technology CRM technology is complex to build. It requires different systems to work in harmony to deliver the right information at the right time to the right people. In addition to this, it needs to be user-friendly to people in a range of different roles with different levels of technical literacy. In the highly complex world of investment banking this requires a major change to IT architecture, which would take many person-years to complete. As a consequence, most organizations have chosen to buy an off-the-shelf CRM package and build the interfaces into it. There are a number of problems with this approach: • The package is not bespoke. The depth and breadth of the technology dazzles, but users’ real needs are often forgotten, because of obsession with the capabilities of the whole system. Users are expected to work with the technology provided rather than specify what they really need. The package is not seen as an enabler but as a basis for reorgan- izing the business. • There has been a tension in the implementation of CRM systems between helping indi- vidual bankers/sales people versus helping the bank become productive in cross- selling. In one case, the system was designed to ‘make sales people more productive’ with little focus on the coverage team. It is quite unlikely that sales people would enter data on their own accounts – they already know them well. This kind of data might only be of value to others on the coverage team. This trade-off between individual and insti- tution goes all the way through the design process. • Many packaged systems have no direct link to driving client satisfaction, share of mind or any other strategic sales variable. In addition to this, there are a number of other oper- ational problems for individual sales people, eg failure of the system to integrate with their e-mail and diary/scheduling package (eg Lotus Notes or Microsoft Outlook), lack of protection of confidentiality (simplistic approaches are common, in which fields can be viewed either just by the owner or by all), although these deficiencies are now being remedied. CRM in investment banking and financial markets I 217 • As Chapter 31 shows, CRM system implementation is most likely to be successful when the organizational capacity for change is taken into account. ‘Too much too soon’ causes confusion and distrust of the system, leading to problems with uptake. Many CRM solu- tions require a complete implementation for the system to be effective. This is generally too much for the organization to take and the expensive package ends up being a glorified contact management system, with few of the management information, client planning or client intelligence benefits. The politics of CRM There are several organizational issues associated with putting technology at the heart of a CRM solution. These issues arise partly from the unique nature of the sales environment of an investment bank, where primarily individuals rather than the company are responsible for delivery: • There is internal resistance to the solution because sales are bonus-driven and indi- viduals believe they own the relationship, so are reluctant to put (as they see it) their bonuses (which they see as derived from ownership of the relationship) at risk. The CRM system is perceived to threaten this relationship ownership. • Client-facing users suspect that the value of the system is mainly its ability to create management information rather than to increase efficiency and profitability. • CRM installations have not been selective enough in dissemination of information. So much data is pushed towards users that much valuable time is spent sifting through it in order to be able to use it. So, the ultimate challenge is to deliver a CRM solution that supports sales and account management, for example by providing the right information at the right time, so that it is seen as an essential business tool both for the client-facing staff and their management. The technology should be seen as an enabler, not the starting point for an organizational redesign. SEEING REAL RETURN ON CRM INVESTMENT Technology is clearly not the whole answer. There are several other requirements for success in managing clients, and these must be present before the CRM system is imple- mented (and ideally before it is specified). These include: • developing a global account management strategy; 218 I Sector situation [...].. .CRM in investment banking and financial markets I 219 • • • • streamlining the bank to meet the needs of the client; aligning a set of measures and related incentives to respond to client needs; institutionalizing the breadth of client knowledge; closing the loop: incorporating client feedback Developing a global account management strategy The main activities of investment banks include arranging... corporate clients, organizing rights issues, performing financial engineering, advising on or carrying out mergers and acquisitions and setting up initial public offerings The rewards and prestige to the banks of executing such assignments are very great, as are the costs and salaries of the individuals doing such business Knowing one’s clients and the markets that they operate in is absolutely essential... Client-focus is maintained through a global account team that leverages the different sources of client value available across the global network to meet client needs CRM in investment banking and financial markets I 221 Aligning a set of measures and related incentives to respond to client needs Measurement of people, processes, profitability, channels and clients’ attitudes must underpin vision and objectives... by-product of the daily workflow Existing CRM investments must be protected in individual units Client-management processes vary across different business units and hence may require different CRM solutions Closing the loop: incorporating client feedback For CRM initiatives to succeed, efforts must be rewarded (see Chapters 31 and 32 for more on this) Clearly, balance sheets and broker lists will show at one... partner delivering over $1m with much more to come) This model provides the basis for further analysis, industry planning, relationship planning, activity and scarce resource tracking, and finally for deal tracking and a single integrated pipeline Support processes – measures, feedback and technology The bank follows many of the best practices suggested in this chapter It runs a balanced business scorecard... offer a corporate client a large loan at favourable rates in anticipation of helping it with future bond issues or foreign exchange transactions Most investment banks are (and may always be) organized mainly by product rather than by market Delivering specialized information and product advice or creating new and more sophisticated financial instruments requires product focus from dedicated specialists... were standardized and well communicated • Re-education programme was undertaken as part of change management • Products were rationalized on the basis of what was important to global clients CRM in investment banking and financial markets I 223 Key account managers Highly experienced relationship managers were appointed to the role of key account manager These individuals now act as the focal point of... strengthened through innovative service models that deliver the optimal mix of products to each segment This involves assessing the overall profitability of each client to determine the appropriate service and delivery model This requires a bank-wide understanding of each client’s situation, to anticipate future trading and banking needs (with an understanding of inherent profitability and future value)... satisfaction (and the relationship between satisfaction, loyalty and profitability); • understand client commitment; • experience what clients experience; • develop benchmarks and understand the competitive environment better CASE STUDY: IMPLEMENTING AND MAINTAINING A GLOBAL CRM STRATEGY Several years ago, an investment bank realized the value of CRM and undertook a radical reorganization that would allow it... success and failure Feeding back success and failure enables refinement and redefinition of future plans and activity A balanced business scorecard biased towards client-based measures of relationship strength, momentum and innovation is the ideal tool to ensure that CRM is being effectively monitored It should focus on relationship returns over time, not just on revenue It also needs to measure and manage . benefits and their success in managing and integrating with their banks more efficiently. CRM in investment banking and financial markets I 213 At many clients today, all team members within the buying. 13 CRM in investment banking and financial markets Genevieve Findlay, Peter Mathias, Paris de L’Etraz and Merlin Stone INTRODUCTION In this chapter, we discuss just a few of the considerations involved. service and cost-effectiveness are rising all the time. Investment banking is characterized by two very different types of relationships with clients, as follows: CRM in investment banking and financial