I’d always intended to carry on the retail analogy into this piece as I wanted to focus on a particular key strength of a successful retail business. Namely why should Financial Services Intermediaries measure themselves as effectively as other parts of the wider retail industry seem to?
Every business believes that it can improve itself and those that don’t will in all probability end up stagnating or being passed by as their market evolves. The intermediary’s focus will normally be based on bringing new income and profit into the business via the quantity and quality of sales turnover, with turnover being ‘king’ for many firms.
When the market is buoyant, achieving sales goals can be relatively straightforward and the measurement of what it costs to sell a product(s) goes out of the window as turnover is high and cashflow is not an issue. However when any of these are threatened, such as key personnel leaving or poor market conditions affecting the customer’s propensity to buy, the first things that become exposed are cashflow, the level of profitability and the inherent inefficiencies of the company.
The Retail Supermarkets have strong a measurement ethic in place and in these situations already know what activities make them money and can react to change quickly to maintain profit margins. They have a selection of tactics available to them such as dropping product lines, bringing in new ones, challenging suppliers to reduce their costs and also looking at how they can make best use of the available media to influence the potential buyer.
An intermediary can’t expect to mirror the majority of these actions to manage difficult circumstances as a retail supermarket can, but yet many of them aren’t even close to having the same understanding that retail supermarkets do about their processes. So why do many wait until the circumstances change before starting to investigate their processes?
What can the intermediary do?
Those with scale and the budget to match can certainly try to do some of the actions detailed above, but even those firms are faced with the basic question. How well do they know their customers and how well do they know their business? At a recent conference when I asked 300 or so intermediaries, ‘who would confidently say that they know what the detailed cost of managing their business is, process by process’ there were 6 hands raised into the air.
Retail Distribution Review & the drive to priced process
So the challenge to the intermediated market is, ‘why wait until this happens?’ The Retail Distribution Review is bringing with it the need to move to fees, so it is a natural thought to expect the regulator and the customer to ask the intermediary to justify their cost.
The instinct is to cut cost first, but there is a lesson from supermarket retailing we can take here, J.Pinney wrote in 2008, ‘Until the processes are well defined and quantified we cannot determine the costs. Each process should be reviewed quarterly and appropriate adjustments made based on changes in the season and evolution of the business. The adjustments to cost can then be identified’.
It’s no different for the Intermediary. Until you know how you work by process how do you know that cost cutting or change is relevant and will bring the benefits you need?
If the intermediary charges an arbitrary £150 per hour say, what is the level of profit driven by this income? If they don’t know what it costs to deliver, how can they know what to charge? Maybe they will need to charge less, or even more to cover costs.
The Retail Distribution Review is driving the need to understand the true nature of costs within a business. In my next blog I’ll look at how to start this process.