Connecting employees to create value in investment banks
Leaders used to have few options for changing their companies, except focusing on financial performance and walking the halls. That’s no longer true.
Vijay D’Silva and Osman N. Nalbantoglu
Web exclusive, August 2007
Record profits. Ever-larger deals. Relentless expansion into new geographies. In many ways we live in a golden age of investment banking and securities trading. Yet many institutions find the going tough as clients demand—and increasingly expect—integrated services,
including (among other things) advice, the raising of capital, and risk-management solutions. In this environment, banks often struggle to leverage the potential of their talented and highly compensated professionals. Many banks blame their size and complexity, the pace of work, and, above all, “silo thinking” for this problem. Opportunities to build on the success of a particular product in one territory are therefore often overlooked elsewhere, while sales teams serving specific clients largely ignore the possibility of cross-selling products from other groups.
Fortunately, help is at hand in the form of network-mapping tools that identify and encourage value-creating connections across organizations. Companies in a variety of sectors, from biotechnology to construction, have been using these well-established techniques to track and replicate high-performing networks, to help employees emulate the collaborative behavior of other colleagues, and to serve customers more effectively. But investment banks have only recently started to learn the power of that approach.
Banks should carefully tailor their use of such ideas to the industry’s context and circumstances. Collaboration is as hard as it is desirable in all knowledge-intensive businesses—and investment banking is a knowledge industry par excellence. Yet the rewards for looking beyond the organizational chart to unlock value can be considerable.
The need for silos
The first step is to recognize that silos are here to stay—and not necessarily bad. Three key
factors have reinforced the building of silos in leading financial institutions.
First, the increasing complexity of products demands greater specialization. Unlike the bankers of old, few of today’s practitioners can single-handedly understand, let alone solve,
the whole range of a client’s problems. Banks compete on the depth of their intellectual capital, and in most markets today that calls for people with deep, specific skills and relationships.
Second, these institutions are now so large and complex that people working for them just don’t know one another. The number of employees at even the more specialized institutions, let alone the large universal banks, has often grown three- to fivefold over the past 15 years. The silos themselves, routinely organized by geography or subproduct, have thus become huge and complex. Even senior managers sometimes lack a full understanding of what the franchise can do. At most investment banks, the annual managing directors’ conference, far
from helping to create a shared understanding, often entails a series of predictable presentations and cocktail receptions. Typically, it has little lasting impact in building genuinely deep professional networks across the organization.
Third, a relentless focus on the accountability and short-term earnings of business units has “sealed” the silos, crowding out time for cooperation among them. Investment banking has the most individual performance-based compensation structure among professional organizations: remuneration reflects, first, individual results and only secondarily the results of groups and the whole company. (In this, the industry has more in common with a pure sales function than with the partnerships most banks evolved from.) While this structure may discourage collaboration, it has attracted and rewarded extremely talented and individually motivated professionals.
While many banks credit their strong product-focused groups with great accountability and excellence in delivery, few would deny that they miss opportunities: even in today’s consolidating industry, few enjoy 100 percent of their clients’ wallets. Consider the potential linkages between M&A and financing, corporate equity-options programs and risk management, sales of privately held companies (or IPOs) and wealth management, pension fund immunization and asset management, debt issuance and treasury services.
Within geographies, the linkages become even more compelling. Firms with a foothold in some emerging markets, for example, have severely handicapped themselves by failing to leverage that presence more fully across a number of products or businesses. Other firms understand that the opportunities from greater integration can be substantial.
Banks have responded with a range of organizational answers, often switching between global product lines and geographic P&Ls, as well as using a range of hybrid structures typically intended to deepen client relationships (for instance, with geographic coverage), to answer the competitive threat of thinner margins (say, by combining debt and equity capital markets), or to assert better control (for example, by consolidating support functions). But as soon as a bank patches one problem, other fissures surface, and each new structure, in turn, is often a veneer: reporting relationships change at senior levels, but not much else does.
Most banks recognize that the answer doesn’t lie in “solid-line” relationships, and many have
consequently introduced myriad “dotted lines” to compensate for a lack of linkages. The risk, finance, technology, and operations functions, for example, typically have both solid and dotted lines to the business and functional heads. These relationships partially address the silo problem, but definitions of what dotted-line relationships actually mean are often inconsistent, and it is not always clear whether a dotted-line subordinate is truly a member of a solid-line team.
In many banks with overlapping clients, geographies, product solutions, and capabilities, strong and effective formal and informal networks will be the solution. The question is how to identify, measure, and enhance them.
The power of networking
Even the most hardened skeptics acknowledge that effective collaboration and networks have an economic value: at one bank, 80 percent of the managing directors surveyed agreed that they do. In another analysis, additional networking corresponded to higher performance ratings for bankers (Exhibit 1).
Instead of trying to blow up silos, however, organizations should build well-functioning networks that bridge them effectively. In our experience, more networking isn’t always better—hence the inability of broad forums to add value by themselves. Indeed, one firm we know raised its productivity 25 percent by eliminating interactions that didn’t add value. Banks
must keep the focus on economic benefits and the role of networks in creating them in selected areas.
To address this need, banks must understand three underlying barriers. First, information doesn’t travel effectively between groups: “I did not know we could do that” is a familiar refrain. Second, groups routinely compete with one another for clients, sometimes in front of them: “The securitization team and the lending team were trying to explain to us why we should do
one and not the other” is a comment we have heard. Third, opportunities requiring collaboration across business units (or silos) often seem impossible; we frequently hear remarks such as, “We’ve given up trying to work with these high-net-worth guys. They simply don’t trust us.”
An effective organizational approach, which calls for banks to look in the mirror and simultaneously undergo a medical checkup, consists of these two elements:
Quantitative methods. Networks among individuals can be mapped with a survey-driven or e-mail analysis, which is critical to establish the facts. Using the results of this network mapping,
senior managers can learn which groups and individuals network effectively and why. The exercise, while often confirming anecdotal evidence, can also yield surprises—for example,
by identifying people who are better at managing up than across or “orphans” who seem to have no networks at all.
Interviews and free-form comments. By delving several layers inside the organization, interviews and free-form comments help to identify the specific opportunities and barriers in more detail. Qualitative input works most effectively when combined with quantitative methods. Highly talented professionals have deep convictions about the problems they face, as well as the potential solutions: in a survey we saw, one in three managing directors took the time to add detailed comments. This kind of process, which allows for confidential commentary, can give senior leaders powerful and colorful feedback best synthesized and prioritized using a phrase and text analysis.
Linking the findings to economic opportunities is critical. Our experience of investment-banking settings suggests that linkages between distribution (product coverage) and products are often essential to improve performance. One organization, for example, was very successful at delivering a local product in each of the company’s native geographies but failed to capture business elsewhere (Exhibit 2). In yet another, the inability to cross-sell products in local markets was particularly disheartening; in some, the local product groups barely knew one another. Exercises revealed the existence of “unmerged” groups after a merger: employees who were not connected with many colleagues and were therefore vulnerable to offers from competing institutions, as well as entire subgroups that had much higher attrition rates than initial estimates suggested.
Most investment-banking management information systems would fail to capture these insights. Hence, the value of mapping techniques that provide a much deeper, more nuanced and explicit understanding of how companies really work on an interpersonal level.
When companies undertake such an exercise, the findings sometimes confirm management’s
intuition and act as powerful fact-based triggers to bring skeptics on board to help take action. But these exercises can also identify issues that previously lurked below the surface, unknown to management. One institution analyzed the attitudes of different levels of
employees, for instance, and discovered fundamental disagreements among the CEO, senior managers, and junior professionals on several key issues, such as the understanding and interpretation of the bank’s strategic direction and the balance between the priorities of
divisions and business units, on the one hand, and of groups within them, on the other.
Keeping the focus
Addressing such issues to bridge silos requires a systematic approach. Banks should focus on a handful of initiatives they can monitor closely at a senior level. These initiatives fall into three categories: the top team’s alignment, organization-wide initiatives, and cross-cutting
Efforts to align the top team should cover whatever is really important and at risk. Forcing reluctant star traders to participate in organization-wide networks, for instance, can destroy enormous value if it dents the traders’ morale. Some senior teams align naturally around such principles; others require a facilitator to reconcile any differences.
Organization-wide initiatives include efforts to change mind-sets and build capabilities (through metrics, behavior, and role modeling), people initiatives (incentives, promotion criteria, and training), and knowledge initiatives (for example asking, “What do we know and who knows it?”). Such efforts, typically required over the long term to complement the levers of change, create the right environment and set the stage for a lasting impact. One global investment bank, for example, has put a good deal of money and energy into a knowledge-management system that enables managers from different functions and product groups to access expertise and build on existing knowledge rather than reinventing the wheel. Another institution we know integrated its new orientation program for managing directors so that the heads of different business units established strong and personal connections with one another and began to think of themselves as leaders of the organization as a whole. Other banks, taking a leaf from the GE playbook, rotate their top managers around the organization.
Efforts to mobilize the organization to collaborate should also involve a manageable number of cross-cutting themes (say, three to five) with a real economic upside. These would typically involve a number of groups that may not have worked together previously but have been called upon to accomplish a specific change—for example, increasing cross-border sales of
derivatives, creating new risk-managed products for the elderly, targeting pension funds, developing high-net-worth clients, or penetrating the middle market. To be effective, these groups typically need a structure, including staff support, a budget, financial metrics, and an organizing process. Several banks we know have developed teams to identify, across business units, clients that really matter and to concentrate on taking relationships to the next level. Keeping the economic goal paramount is essential: lengthy management meetings and endless “get to know you” offsite festivities bring diminishing returns and are no substitute for cross-cutting themes based on capturing new customer or geographic segments.
Finding ways to build networks while preserving the benefits of silos is exciting if executives focus on areas of tangible benefit rather than simply “talking the talk” at the next managing directors’ conference. In many ways, this is a process of getting the whole organization to do what the best do naturally.
In the past, leaders had few options for changing their institutions except focusing on financial performance and walking the halls. By explicitly identifying networks and quantifying what, at best, has been an area for intuitive knowledge, the approach we outline should help institutions begin the transformation and allow the larger ones to capture the benefits of scale and talent more successfully.
About the Authors Vijay D’Silva is a director and Osman Nalbantoglu is a principal in McKinsey’s New York office.