Three Part Harmony

Prelude
Do you ever watch a group of jazz musicians play and wonder how they can produce such amazing music out of what at times seems like organized chaos? The band leader has to compile a group who are all able to play together with subtle coordination. Each player has an opportunity to showcase their talents in turn as well as produce harmony to support each other. Without someone with an ear for how the composition should sound, a group of otherwise very talented musicians would end up producing noise, but maybe not music.

Even before the era of playlists, consumers figured out ways to make their own mixtapes. Then we compiled our own unique albums from our favorite songs by our favorite artists. Burned CDs for roadtrips or special occasions. Companies race to adapt to consumer demands and changes in technology. Some have developed their own finance arms which lend money to their clients to buy their own products. Others compiled an increasingly eclectic mix of products resulting in larger portfolio companies. As businesses grew vertically and horizontally, some created an environment which fostered competition amongst business units for resources and corporate political influence.

It seems inherent in human nature that when groups grow to a significant size they will create factions that are skeptical or combative with one another. While a measure of healthy competition can help inspire advancement and ensure optimal allocation of resources, an unhealthy level of competition can change harmony into calamity. Businesses must always keep an eye on the future to ensure they are investing, not only in the businesses that are doing well today, but in the businesses they will need to strengthen for the future.

How we conducted businesses in the past to keep up with the rapid changes of the latter half of the last century may not be the optimal way to compose a business today. Taking a fresh approach to organizational framework could optimize both business management and client experience.

The Big Business Crescendo

Anytime people bring together their talents, there is the risk that rather than producing something greater than themselves, their individual interests drown out the broader composition. As global enterprises grew in both size and number over the past century, these increasingly complex businesses became organized into distinct business units. These business units, like band sections, were divided further into products, a company’s instruments. Some of these companies added segments as a result of acquisitions while others created divisions as they grew organically. This resulted increasingly in businesses that were compilations rather than single compositions.

Companies have had to evolve quickly, especially over the past half century, to keep up with their competition. Figuring out ways to operate at scale across time zones without some of our modern technical conveniences made fragmentation essential. They began to deliver wider ranges of products. To support this breadth of growth, well-defined verticals allowed large businesses to be more nimble within each unit; however, new technology has made management and communication from an enterprise level more attainable without sacrificing adaptability. This enterprise, if organized effectively, can bring to market a more comprehensive solution to clients in a way that produces something greater than the sum of its parts.

Amplifying Talent

The synthesizer was invented in the 1950s to produce sounds that mimic multiple instruments (Encyclopedia Britannica). Corporations require fewer people to produce the same revenues across more products than 70 years ago as well (US Bureau of Labor Statistics). Decades of rapid technological changes made organizations have to adapt in realtime in order to survive. Now, many companies are taking a beat to compose themselves so that they are ready for what is to come. Today’s technology is increasing the productivity of some roles while, in some cases, eliminating other jobs all together. Some jobs that are, or soon will be, replicable by technology would have seemed impossible to not be done by a team of people as little as a decade ago. A major reason for strict business segmentation in the past was the need to manage large numbers of people effectively. Now fewer people can deliver a wider variety of services for the same or more revenue. From an operational perspective, the current level of rigid segmentation may not be necessary in the future as technology increases productivity and facilitates efficient communication. Furthermore, technology companies are working to deliver broader end-to-end solutions. These services are designed to support a wider variety of functions rather than simply providing individual products. More uniform underlying infrastructure leads to fewer issues resulting from fragmented infrastructure. It also saves cost by removing multiple layers of hierarchy that existed purely to harmonize data from varying sources. This enables more real time enterprise level decision making by senior leadership supported by more accurate data.   

Another phenomenon that occurs within large complex organizations is when one part of the company views another as a client rather than a colleague. Constantly negotiating with one another for the resources required rather than solving for their common goal can be an unfortunate byproduct of this dynamic. One of the essential paradigms of a provider-client relationship is that the client can take their business elsewhere. Oftentimes this is not possible when it is an internal dynamic. This monopolistic framework removes one of the key checks and balances essential to a balance working relationship. Also, one side may “win” because they did not give into the other’s demands; however, this “win” for one may turn out to be a loss for both if it hampers the organization’s overall success.

Being in Tune with Your Client

Like musical tastes, consumption patterns have changed across many sectors over time. We increasingly look to purchase solutions rather than products or single services. We used to have butchers, bakers, green grocers, dry goods stores, etc. then the grocery store put all the products in a single edifice. We are now gravitating towards meal kits with pre-portioned ingredients required for a specific meal delivered together in a single box. Just like we are looking for more efficient solutions than walking down individual aisles collecting products to construct a meal, we are looking for our business relationships to deliver solutions to meet our end goals more efficiently and with less waste. We not only see this in our food consumption, but also in our consumer technology. The mobile phone made communicating anywhere at all times more feasible (probably too feasible, but let’s save that for another day). Despite the name, our "phones” today are more often used as a browser, newspaper, mailbox, calendar, camera, or telegraph than a traditional telephone. These have become communication devices not just untethered telephones. We see how companies have evolved to meet consumer demands even faster than we are able to change the name of the products. As the world becomes more complex, companies need to be aligned to efficiently deliver solutions to their clients.

One of the most common discussions I have with large organizations and a phenomena I have lived in prior roles, is that customers often see a business more monolithically than the business sees itself. Sometimes compliance requirements necessitate strict division between business units limiting communication and coordination. However, putting those instances aside, too often companies have put their operational efficiency above their client experience. It is not that focusing on building the best products or most efficient business is a bad thing, but how many times have you had to call a business only to be transferred at least three times, repeating the same information more than once for the call to either drop or finally be connected with the person who was able to solve your need? Would you pay more or get the second best product if it meant it was easier to use or that issues were remedied more efficiently? This is not unique to financial services. Our industry is always by nature an exchange of trust for assets: a promise of repayment for access to capital; the prospect of a return for an investment; the safeguarding and exchanging of securities for a nominal fee; being entrusted with preserving and growing accumulated wealth for a client, also for fee; etc… A relationship with this level of trust means that analogue connections at the end of the day can never be completely replaced by technology (see previously published work on how Analogue is the new digital or connect with me directly for more on that).

A company playing in time is not just good for client experience or effective for growing revenue, it can also help mitigate risk. Fragmented client coverage and taxonomy has led to unexpected concentrations of risk that have undone major corporations. As often as overlapping risk may occur, gaps between realized and potential revenue are even more frequent. This occurs when businesses or products within a business have too narrow a focus. If an individual or team are empowered to see a client across their relationship they can better identify gaps and risks.

Ironically, the smallest and largest clients are often those with the most holistic coverage. The top decile clients often have a relationship manager or at least a small group of account captains that have a strong grasp of all or most of the client’s relationship across the entire organization. Smaller clients may do a limited amount of business across a wide cross section of products/services or they may be highly concentrated. A small highly specialized firm (e.g. a sector focused hedge fund) may only need to be covered by one or two specialized product desks. While a firm like a wealth management boutique requires efficient coverage for a variety of products/services. Firms likely have the largest addressable gaps with their second and third decile clients. These clients are often complex enough to straddle multiple products and business units; however, their current revenue does not put them in a category where they have access to someone empowered with an enterprise level remit. A gap not only presents an opportunity cost but, if not closed, also presents a weak point for a competitor to start taking additional share from other products/services. Sometimes a firm could be a significant client across several products/business units, but may not do as much business in one category as in several others. This can create dislocations in client experience with the client looking at their overall relationship with a company, but that company not always factoring in the larger elements of the relationship when dealing with the smaller elements covered by a different product team/business unit. Some clients are not in that top decile, but are growing and soon have the potential to become a first decile client. Identifying these growth clients or industry segments ahead of this growth and proactively enhancing coverage is more effective than being reactionary.

Composing a More Modern Matrix

“Flatter” organizations are not without divisions. While compressing layers of management and widening segments can be an improvement over steeper delineation, optimal segmentation looks more like a hub and spoke rather than parallel verticals supporting an executive pyramid on top. Executive management and enterprise functions comprise the center of a hub divided into business segments which align to products with business development and relationship management functions constituting the outer rings which is divided into solutions sets. Rather than forcing sales to be aligned to products and segments that make sense from a business operations perspective, this model allows coverage functions to be positioned across products/segments to ensure optimal alignment with the client’s needs. This results in a business that can operate efficiently internally while optimizing client experience externally. Client coverage functions may appear far from executive management at the center; however, these sales sections and relationship management units have dynamic matrix reporting to products/segments as well as their own representation at the executive level to ensure the unfiltered real time voice of the client is heard clearly in the boardroom. When decision are cascaded down a long management cliff a cohesive strategy can start to veer off in different directions and, at times, result in implementation that is aligned at cross purposes. Architecting a matrix where all parts are aligned to a central direction rather than parallel organizations which only coalesces at the executive level on top, means an organization has less of a chance of opportunity gaps, redundancy, or diametrically opposed mandates.

Coda
The emergence of conglomerates led to verticals because organizations needed a framework which could quickly adapt as the world transformed. New technology and changes in consumption patterns have turned the divisions which once empowered segments with the autonomy to adapt into obstacles for growth. There are two different steps leadership can take to solve for coverage gaps and operate an enterprise more cohesively. One, a company can have fewer, but wider segments with a shared taxonomy and cooperation across the remaining segments (a flatter organization).Two, broaden business development coverage and add high-level relationship managers empowered to act across segments to deliver comprehensive solution to clients. Better still, realign business around a strong center to conduct a unified vision, ensure that vision is articulated and adopted across the organization, and align a go-to-market strategy to demonstrate that value to clients. What sounds better than an ensemble properly tuned and sufficiently motivated to play in harmony?

Off to the Races

It feels like 2024 is off to a fast start right out the gate. Tis the season for goals, outlooks, and prognostications. Here are a few observations as we start the New Year. Though I do not hold myself up with my old boss and mentor Jason Trennert or the venerable late Byron Wien; I do believe we have some surprises in store. 

Certainty Before the Uncertainty

• I described much of last year as a lot of busyness for the same business. Everyone I spoke to from Dubai to Denver seemed to agree that everything in 2023 just took longer to get done. Deals stuck in endless back and forth, over-scheduling making things that should have taken a month to get done took a quarter and some things that should have come to fruition dyed on the vine. That all seemed to change in the fourth quarter as people sprinted to get more done before the clock struck twelve. More than that, leaders have already committed to more decisive plans for 2024 as part of their goals and resolutions for 2024. I expect firms to take action, from reductions in force to acquisitions, starting in the first quarter. There were some notable changes in senior leadership across the industry 2023. The results of which will manifest in actions that will be taken in 2024. The balance of positive vs negative decisions may come down to how much the Fed does or does not cut rates this year. The fact that it is a Presidential election year in the US also means that after a year where it took 12 months to get 6 months of tasks accomplished, we will likely see many try to get 12 months of goals accomplished in a 6 months sprint between February and July. Buckle Up. 

Analogue is the New Digital

• I have been saying this for years, but this year it will be especially true that trusted relationships and companies investing in their talent are the most important things. I have seen companies with incredible tools that go to waste because time was not invested in teaching their people how to use them. It is not only the employee facing tool where technology development is not enough. Too often client facing technology has not kept up with the horsepower of the tools the companies can offer. Both often come down to firms across the industry focused too much on their own org structure and product segmentation and not enough on how they got to market and are seen by their clients. This results in vast amounts of unrealized potential which requires a firm to be dynamic in their approach rather than building more products and redundant patches to internal systems. 

Muddy Data

• Since my Macro days at Strategas, one of my own leading indicators has been to ask cabbies and Uber drivers around the holidays how many shopping bags they were seeing and if there were lots of people going to/from Holiday parties. The latter went away completely during COVID and has not seemed to have ever fully recovered, but this year drivers said, despite a pick up in the number of tourists, there have not been as many shopping bags year over year. Between Hannukah and Christmas, there were some nights when things were eerily quiet. This contrasts with closer to Thanksgiving, when many drivers remarked at how busy traffic had gotten and ride activity was up. I was also surprised at how difficult it had become to get a reservation in Midtown for lunch again. All this points to some mixed numbers expected for 4Q which is likely to continue as we pass the turn into a choppy 1Q. 

M&A Activity in the Wealth and Fintech Industry

• The sudden collapse of First Republic sent many advisors spinning off to start their own firms, join RIAs who did not have a bank, or find another bank’s wealth department to join, while a good portion of the team stayed to become part of JP Morgan. Although there was a single headline M&A event there were essentially a series of acquisitions. These ranged from about $150M to $15+B in AUM which, under other circumstances, would have warranted headlines of their own. M&A activity in 2024 in the wealth space will be more active as borrowing rate moderate and markets put in choppy new highs. This eases acquirers' financing cost and boosts sellers’ valuations. Several independent firms have already surpassed the $100B in AUM threshold. They will now look to make strides to the next strata, $500 Billion in AUM, through large acquisitions or a merger of potential mergers equals. We will likely see more mergers in the fintech space as well given the emergence of new firms during the low rate environment who are now looking to provide more comprehensive solutions.

Real Estate Disappointments

• Everyone seems to have a strong view on real estate which means that no matter what happens to the commercial and residential markets this year some people are bound to be disappointed. Sellers have pulled properties off the market which failed to catch a bid, or at least one they would accept, and buyers are constrained by high rates and high prices making down payments harder to muster even if rates come down. The commercial market has been the sword of Damocles everyone has been expecting to drop which has yet to pierce the economy. Giving the rolling nature of commercial real estate debt, it may just be that the market has only had to digest tranches at a time rather than dealign with a singular event. There has also been more demand to have employees in office at least a few days a week. Just the other day, a friend who recently retired as Head of Equities at a SIFI Bank remarked that real estate needs to be looked at like utilities, which is managed to service peak demand even though much of the time it operates at below peak; this means, if people are in the office 40-60% of the time, but it is 80% of the people those days then capacity demanded is 80% not 40-60% of headcount. Therefore, hybrid work may not be as bad for commercial real estate as anticipated. I also noticed that some buildings, like NYC’s 200 Park Ave. which a few years ago looked like it had not had a major updated since they took the PanAm sign down, took advantage of the reduced use the past few years to undergo extensive renovations to help their renters entice their employees back to the office a few days a week. 

I am going to stay away from interest rates and the elections like I do religion and politics during holidays with relatives. There are better Federal reserve theologians than I and global politics may come down to how much the electorate are sick of their current politicians rather than how much they believe in the opposition’s ability to do any better. My fiancé, a dentist from Kentucky horse country, has wanted to better understand exactly what it is I do. She got more than she bargained for when I built a pivot table to help with wedding seat assignments and built a cashflow model for our household budget. She has also taught me a lot about horse racing. From what I have learned, this year could be much like a horse race. There will be lots of anxious pauses then sudden bursts of activity. Some odds on sure winers will lose and unexpected winners will emerge from behind. It is better to bet on the jockey not just the horse so invest in your people as well as your in. Most importantly, remember that even when forces beyond your control make things more difficult than you planned for, put on your blinders and run your race.

Observation from Switzerland

To say we have had an interesting start to 2023 would be an understatement. I just returned from a week in Switzerland where I had meetings in both Geneva and Zürich. This was the first time I had been back since the COVID pandemic and things seemed fairly unchanged. Prior to 2020, I would travel to Switzerland once or twice a year. In fact, climbing in the Alps was part of the inspiration for Alpine Strat’s name since mountaineering requires a combination trust (the partner with whom you are tied together, your gear, your technical ability, yourself in general) and ability to adapt to things that are completely out of your control. Nature, like macro events, does not care how prepared you thought you were.

In some ways it is unsurprising that a country with around a millennia history being at the cross roads of EMEA banking was not too noticeably impacted by the latest pandemic and banking disequilibrium when it survived the bubonic plagues and countless financial crises. It contrasted sharply with my experience in UK late last year where the economy and sentiment felt noticeably more tense than when I was last there  in late 2019. However, there did seem to be an air of anticipation in Switzerland about what the rest of this year has in store.

The Swiss sometimes refer to the divide between the Gallic and Germanic sides of the country as the Röschtigraben. There seems to be a competition heating up between the major financial centers on either side of the line, Zürich and Geneva these opportunities caused by the latest financial market disruptions. Representatives from both cities saw opportunities for growth in share from the other and/or a deeper entrenchment of the power that some segments already hold.

I remember when I was living in London in the Aughts, London was jokingly referred to as the “third largest city in France” given the large French population who lived and worked there (greatly benefitting the culinary industry and derivative departments). Post Brexit Paris has been benefitting from financial industry repatriation and this seems to have had a positive knock on effect for its French speaking compatriot Geneva. In Geneva, where artisanal Swiss toothpaste sells for 25CHF per tube, things seemed busy. This activity was not just driven by the financial sector, but the role the city plays in geopolitics. The finance firms in Geneva seem to be making strides to further assert themselves in the public markets and global wealth management especially amongst the Ultra High Net Worth (UHNW) segment.

Zürich felt equally busy. For years the Swiss have been ahead of much of the rest of the world when it came to embracing digital assets and seeing the opportunity beyond crypto currencies. As a corporate and individual banking center, the city is able to even the scales when economic dislocation presents opportunity for banking on one side to make up for any temporary weakness on the other. Zürich, as well as Zug, has also been hospitable climates for incubating firms in the digital asset and distributed ledger spaces. This helps to ensure the city does not rest on its laurels and continues to advance with new industry dynamics.

Many Swiss firms have invested heavily in their US businesses or in building a US presence over the past 5-10 years. After a global travel lull during years of barriers and quarantines, the long term trend of higher net worth individuals living more global lives seems to have reverted. Swiss firms are looking to better serve their global clients, both individuals and institutions. They have an opportunity to take advantage of higher U.S. rates, a stronger CHF, and opportunities to take care, given financial market and industry volatility. US firms have also been looking for partners in Europe to grow their business and better serve their global clients. In light of how fast dynamics have been shifting over the past month, it is no surprise that there were more questions over sentiment rather than statistics.

In general, sentiment in the US and Switzerland feel similar. Contacts around the world have been remarking that everything seems to be taking longer to get done over the past six months. I have been describing this feeling as there seems to be more busyness than business. Switzerland may not have been untouched by recent banking relativity; however, it still is well positioned to provide both stability and innovative opportunity.

As some of the recent volatility in the banking/investment management space has stabilized, at least for now, we are seeing signs that M&A activity poised to meaningfully pick up as an increasing number of firms have been asking for advice around growth by acquisition, wether to merge with a peer, or be consumed by a much larger institution be in a better position to scale a niche offering. This is the latest in a trend since before 2020 were firms have not just eager for incremental growth, but felt that they needed to breach the next major milestone, whether that was getting over a Billion, 25 Billion, 500 Billion, or a Trillion in assets, to maintain their competitive position. For those firms that were looking to retain a boutique scale, there has been a demand to consolidate their support infrastructure (trading counterparties, custodians, tech/TAMP providers, etc.) to fewer solutions providers who have that mega scale so that they are able to run a small business on ever more powerful infrastructure. We see both of these trends accelerating over the rest of 2023.