SUCCESSFUL BUSINESS CRITICAL RELATIONSHIPS Peter Grundy, The Partnership Peter Grundy The Partnership The Partnership work with clients helping them to achieve business goals by improving people's performance. As one of Bluerock's partner companies, we have asked them to write this article from their experiences in assisting clients to manage business to business relationships. Every senior corporate manager knows that your organisational landscape has changed dramatically in recent times. Gone is the sense that the organisation can meet every business and resource need. In its place is a plethora of business-critical relationships with outsourcers, joint venture parties, business partners and other alliance participants. Our definition of a business-critical relationship is "when two or more parties pool assets and know-how to achieve a goal which neither could attain on their own". At first sight, the benefits are clear to see: - The opportunity to build scalability - Low cost entry to new markets - Possibilities for brand stretch - Additional resources without increasing headcount - A faster go-to-market strategy - Economies of scale. The list goes on. Every client of Bluerock Consulting, and its partner company The Partnership which assigns us to work on strengthening their business-critical relationships is seeking, or has sought to achieve such business benefits. Their strategic needs fall into four categories: - To plan an alliance with a business-critical partner or partners - To review an existing company-to-company relationship - To rescue an alliance which is in trouble - To galvanise an alliance with greater business potential. Sadly our portfolio contains more 'rescue' assignments than any other category. What can we conclude? The statistics are revealing: - Business-critical relationships will constitute 40% of a company's corporate worth - 61% of alliances fail to achieve their objectives - 80% of Chief Executives think that alliances are "prime movers for growth" - Only 10% of such relationships have satisfactory performance measures - Next year the corporate value 'owned' by alliances will be measured in trillions of dollars. So business-critical relationships are critical for profitability and integral to corporate strategy for the foreseeable future, but the benefits they offer are by no means automatic and managing the alliance day-to-day is extremely difficult. Different organisations have different strategies, cultures, values and ways of managing which often come into conflict. Not surprisingly, one of the most common issues in such relationships is a lack of transparency and trust which gets in the way of real communication and causes misunderstandings, errors and re-work. In Case Study A overleaf, the organisational, cultural and management styles were dramatically limiting the relationship's potential. But thanks to some focused improvement action, it is good to know that real changes have taken place. More planning would certainly have helped many of the other relationships we have consulted on. Crucially, the type of planning needs to be more than the standard due diligence approach, as one organisation is not buying the other and cannot impose its will summarily. By the way, attempting to impose one's will is a classic killer of many relationships especially where there is a larger, more dominant party used to dictating to others. Case study A Our client outsourced the provision of IT to a major service provider. The relationship had its ups and downs and as the contract's renewal date loomed, each party considered their next steps. We were asked to review the relationship and identify areas for attention at a joint meeting of client and service provider staff. Amongst other findings, we commented on the following: - There was no joint value proposition. Nobody had sold the benefits of this collaboration to the user community and the various mixed work groups had no consistent way of guiding themselves, or each other, on adding real value. - The cultures were diametrically opposed. Activity and speed were highly-prized amongst the service providers' staff whereas frugality and careful consideration marked the client organisation's values. In practice, frustration between the parties grew as one was perceived to be continually pushed into decisions whilst the other grew tired of the requests to "slow down". - Personal relationships, both positive and difficult, were having a greater impact on the joint organisational effectiveness than most people recognised or were prepared to confront. - A raft of misunderstandings about joint planning and review processes were also highlighted. There is not room here for a detailed analysis of all the planning stages required before engaging in any discussions on the subject of an alliance. One of my colleagues recently advised a client to "ask questions, then stop, then ask more questions, then stop......" wisely cautioning against the momentum which can build up once there are expressions of interest in a discussion. Put simply, we feel that potential partners should start from the end of a relationship and work backwards, perhaps asking themselves such questions as: - In what timeframe or market conditions would we want to get out of this relationship? How could we do so? - What will happen to the people, brands, assets and intellectual property tied up in the combined organisation? - What will we do if things go wrong during the relationship? Who will arbitrate on grievances? - What about the communication and escalation processes? .........and so on. The relative importance of the subject to each business strategy needs to be mapped very carefully and the likely shift in power as the relationship progresses is worth some forward thinking. It is helpful to use some shorthand to help clients feel how their business-critical relationship may work out in practice - something that is difficult for them to visualise in the early stages. We ask them to look at some memorable categories and "try them on for size" - some of the most intuitive answers are surprisingly accurate. We ask them: - Is this a co-opted relationship in which one party is driving forward and bringing the other in when required? For example, company A sells a wide range of IT services, but introduces company B for the one or two it cannot offer. - Or could it be a complementer relationship in which one party's expertise is slotted into the offer which the other makes to the marketplace? Company A has strong market penetration in Northern Europe and wants to add Poland to its portfolio so teams up with company B which already has representation there. - Are there issues of competition in this relationship which need to be ironed out? Is this a disguised purchase rather than an alliance? To what extent do both parties share customers, products and suppliers? - Ideally, the two companies will be co-specialisers - individually strong and highly skilled in their own areas but able to achieve more than the sum of the parts by working together. If company A fried chips and company B cooked fish, that would be a great co-specialiser relationship! Even having undertaken a range of planning exercises, clients must still be prepared to work hard at crafting the business-critical relationships they need. Once the relationship is operating, regular reviews and good performance measurement systems are essential. In summary therefore, business-critical relationships are critical for profitability and integral to corporate strategy for the foreseeable future but the benefits they offer are by no means automatic and managing the alliance day-to-day is extremely difficult without independent expertise and resources. The Partnership can be contacted at: Greyhound House 23/24 George Street Richmond Surrey TW9 1HY Phone: 020 8948 4379 www.the-partnership.com FSA CP121 Depolarisation: The Challenges Tim West Background In 1988 'Polarisation' was initiated by the then regulator, the Securities and Investment Board which resulted in the distributors of regulated financial products being forced into one of two camps - tied to one company or wholly independent (IFA). In January 2002, after two years of research, the FSA published Consultation Paper 121, proposing radical changes to how the tied and independent sectors should operate, and introducing a third category - given the working title 'distributor firm'. Responses to CP121 were requested by 19th April 2002. It is envisaged that the FSA Board will reach final decisions in the summer, in light of the responses received. By that time, all companies who manufacture and/or distribute regulated financial products will need to be ready to operate under the new regime. The implications for firms are far-reaching, and the decisions made in the coming months of paramount strategic importance. In this context, Bluerock Consulting recently published a management paper as a guide for those organisations that will be affected by the outcomes of CP121. This article aims to outline the main points raised in this paper. Motivation for change The outcomes of the FSA's research on the current polarisation regime were as follows: - IFAs should be independent, acting in the customers' best interests, recommending appropriate, lower-charging products. The evidence for this is poor. - 'Competition' manifests itself through providers offering the best commission deals to IFAs, not through provision of the best products. There is evidence of providers 'buying business' from IFAs. - Even with good status disclosure, many customers continue to use the tied channel, while stating a preference for independent advice. - In practice, the choice of adviser is driven by trust, not status. People prefer the safety of an adviser tied to a well known brand (with limited product range and poor value for money) over a lesser known IFA. - The evidence is that most customers have limited access to independent advice (and for those who do, they don't shop around for advice). - Consumers don't understand the cost of advice, since currently it is often bundled in with product sales. In other words, the existing polarisation rules do not work the way that the architects had hoped! The proposed new world CP121 gives the distributors of regulated financial products three distinct options: 1. IFAs IFAs will continue to exist as they do today, but they will be remunerated through a fee paid by their clients, rather than a commission paid by the product provider. 2. 'Distributor Firm' These firms will advise (as a regulated entity) on a number of providers' products, remunerated on a commission basis but no longer allowed to promote themselves as 'independent'. 3. Tied Agents The tied channel will continue to exist as it does today, though with greater freedom to 'package'/white label products from other providers into its overall portfolio (as appointed representative). Naturally, this represents a major upheaval of the market for distributing retail financial products, and presents immediate strategic challenges to both distributors and product manufacturers of all shapes and sizes. Headlines for IFAs The FSA is very clear that it intends to keep the advice sector at the forefront, but with two major changes to their modus operandi: 1. Fees in lieu of commissions The proposals call for IFAs to be rewarded via a fee from their clients rather than a commission from the product providers. A 'defined payment' (one-off, regular retainer, hourly rate, or asset-based charge) is made by the client, irrespective of any business being transacted. Should the client decide (based upon the advice given) to buy a product, then the IFA must either: - rebate any commission payable into the customer's investment product; - offset any commission received against the fee payment due; or - pay any excess commission directly to the customer (where permitted) The IFA would not be permitted to keep any commission in excess of the agreed fee (except on account, to be offset against future fees payable). 2. External funding - 'influencers' Previously, if product providers invested in the equity of IFA firms, the 'better than best rule' was triggered. This will be abolished, and instead the IFA is required to disclose any such interests to the client. (It is envisaged that many IFAs will seek external funding of this sort to fund the change to a fee-based business). Challenges Facing IFAs IFAs clearly have to address a number of challenges going forward. A new operating model will impact cashflow and profitability. Should the IFA seek investment from a product provider, or other external funding? How do they intend to compete with the new distributor firms? What will the new customer profile look like - which clients will be willing to pay a fee, and how will they be charged? How should they market to new (potential) customers, and with what messages? Which customers will readily move from transactional to relationship-based usage - what value will consumers put on independent advice? And importantly, what will be the loyalty of the sales force, and how exactly will they be remunerated? So - should I become one of the new 'distributor firms'? The new 'distributor firms' represent a halfway house between tied agents and IFAs - effectively 'multi-tied'. However, the essential difference between being tied to one provider and being a Distributor Firm (multi-tied) is that a Distributor Firm will be directly authorised and regulated by the FSA. Like an IFA, the general duty to recommend the most suitable combination of provider and product still applies. There is no lower or upper limit to the number of firms that these distributors can recommend. However, since they are paid on a commission basis, they are still not allowed to state independence. This is the key difference between an IFA and a Distributor Firm. If you require any further information please contact: Helga Mepham [email protected] Bluerock Consulting Limited Alderman's House Alderman's walk London EC2M 3XR Tel: 020 7743 6780 bluerock-consulting.com Challenges Facing Distributor Firms Again, there are significant challenges to overcome. If an IFA converts to this status, how will it market its services to product providers, no longer as an independent? What will the new operating model look like, and how many product providers should be signed up? It will be difficult for firms to differentiate themselves in this crowded middle ground. Product providers will no doubt approach these firms, looking to gain distribution power - how will they respond? And of course, these firms will be on the lookout to recruit new people, with different skills and attitudes... Will things change much for Tied Advisers? For product providers that currently distribute their products via a 'tied' arrangement, the recent reforms will allow them to "adopt" other companies' products representative into their product portfolio, as an appointed representative. However, if a product provider that has tied advisers decides to enhance its offering in this way, it needs to regulate the advice given by the advisers - not only for its own manufactured products, but also for the third party products that it represents. The implication, therefore, is a significant compliance overhead for companies that decide to enhance their offerings in this way. Challenges Facing Tied Agents Once again, there are a full gamut of challenges and opportunities for senior management to deal with. How will they respond to renewed pressure from the market to provide choice (in a general trend towards open architecture)? There are potential changes to be made to technology and operations, sales tactics / promotions, regulation and staffing. Senior management have to decide how they will position the firm going forward - should they seek to merge, 'home-grow' or address new markets? And what about the product providers? In addition to the significant changes that will occur in the distribution business, equally there are challenges for the product manufacturers with their route to market about to fundamentally change. When considering whether you should invest in distributors (IFAs or the new Distribution Firms), there is a raft of issues to be considered: Investment criteria What financial risk do you intend to carry, and for what potential returns? Influence How might you influence the distributors to sell more of your product, especially the IFAs? How will you differentiate your product, if it was previously sold mainly on its commission structure? What is the competition doing to position their own products? For those firms who already account for a significant proportion of your sales, how will you ensure that they continue to pick your products, and that you remain high in their 'buy list'? Buying habits What proportion of your customers will be influenced by the market changes, and how will you change your product set to cope with this? Change to distributor? Will the changes finally provoke you to invest in your own (in-house) distribution? FSA CP121 Depolarisation: The Challenges In 1988 'Polarisation' was initiated by the then regulator, the Securities and Investment Board. As a result, the distributors of regulated financial products were forced into one of two camps - tied to one company, selling only its products, or wholly independent and advising across all companies and products in the market. In January 2002, after two years of research, the FSA published Consultation Paper 121, proposing radical changes to how the tied and independent sectors should operate, and introducing a third category - given the working title 'distributor firm', a hybrid status. Responses to CP121 were requested by 19th April 2002. It is envisaged that the FSA Board will reach final decisions in the Summer, in light of the responses received. By that time, all companies who manufacture and/or distribute regulated financial products will need to be ready to operate under the new regime. The implications for firms are far-reaching, and the decisions made in the coming months of paramount strategic importance. In this context, Bluerock Consulting recently published an independent briefing paper as a guide for those organisations that will be affected by the outcomes of CP121. This article aims to outline the main points raised in this paper. Motivation for change The outcomes of the FSA's research on the current polarisation regime were as follows: - IFAs should be independent, acting in the customers' best interests, recommending appropriate, lower-charging products. The evidence for this is poor. - 'Competition' manifests itself through providers offering the best commission deals to IFAs, not through provision of the best products. There is evidence of providers 'buying business' from IFAs. - Even with good status disclosure, many customers continue to use the tied channel, while stating a preference for independent advice. - In practice, the choice of adviser is driven by trust, not status. People prefer the safety of an adviser tied to a well known brand (with limited product range and poor value for money) over a lesser known IFA. - The evidence is that most customers have limited access to independent advice (and for those who do, they don't shop around for advice). - Consumers don't understand the cost of advice, since currently it is often bundled in with product sales. - Far too few customers are making adequate provision for retirement - there is a crying need for adequate, affordable advice. In other words, the existing polarisation rules do not work that way that the architects had hoped! The proposed new world CP121 gives the distributors of regulated financial products three distinct options, in terms of how they are positioned under depolarisation: 1. IFAs IFAs will continue to exist as they do today, but with important changes to how they are remunerated. They will be rewarded through a fee paid by their clients, rather than a commission paid by the product provider. 2. 'Distributor Firm' The FSA will introduce a new status, allowing firms to advise (as a regulated entity) on a number of providers' products, remunerated on a commission basis but no longer allowed to promote themselves as 'independent'. 3. Tied Agents The tied channel will continue to exist as it does today, though with greater freedom to 'package'/white label products from other providers into its overall portfolio (as appointed representative). Naturally, this represents a major upheaval of the market for distributing retail financial products, and presents immediate strategic challenges to both distributors and product manufacturers of all shapes and sizes. Headlines for IFAs The FSA is very clear that it intends to keep the advice sector at the forefront, but with two major changes to their modus operandi: 1. Fees in lieu of commissions The proposals call for IFAs to be rewarded via a fee from their clients rather than a commission from the product providers. A 'defined payment' (one-off, regular retainer, hourly rate, or asset-based charge) is made by the client, irrespective of any business being transacted. Should the client decide (based upon the advice given) to buy a product, then the IFA must either: - rebate any commission payable into the customer's investment product; - offset any commission received against the fee payment due; or - pay any excess commission directly to the customer (where permitted) The IFA would not be permitted to keep any commission in excess of the agreed fee (except on account, to be offset against future fees payable) 2. External funding - 'influencers' Previously, if product providers invested in the equity of IFA firms, the 'better than best rule' was triggered. This will be abolished, and instead the IFA is required to disclose any such interests to the client. (It is envisaged that many IFAs will seek external funding of this sort to fund the change to a fee-based business). IFAs clearly have to address a number of challenges going forward. A new operating model will impact cashflow and profitability. Should he IFA seek investment from a product provider, or other external funding? How do they intend to compete with the new distributor firms? What will the new customer profile look like - which clients will be willing to pay a fee, and how will they be charged? How should they market to new (potential) customers, and with what messages? Which customers will readily move from transactional to relationship-based usage - what value will consumers put on independent advice? And importantly, what will be the loyalty of the sales force, and how exactly will they be remunerated? So - should I become one of the new 'distributor firms'? The new 'distributor firms' represent a halfway house between tied agents and IFAs - effectively 'multi-tied'. However, the essential difference between being tied to one provider and being a Distributor Firm (multi-tied) is that a Distributor Firm will be directly authorised and regulated by the FSA. Therefore, for a distributor to move from being tied to one firm (where the compliance responsibility sits with the product provider), to being multi-tied brings a considerable compliance overhead and associated investment - for many, a move into the untried and unknown. Like an IFA, the general duty to recommend the most suitable combination of provider and product still applies. There is no lower or upper limit to the number of firms that these distributors can recommend. However, since they are paid on a commission basis, they are still not allowed to state independence. This is the essential difference between an IFA and a Distributor Firm. Again, there are significant challenges to be overcome. If an IFA converts to this status, how will it market its services to product providers, no longer as an independent? What will the new operating model look like, and how many product providers should be signed up? It will be difficult for firms to differentiate themselves in this crowded middle ground. Product providers will no doubt approach these firms, looking to gain distribution power - how will they respond? And of course, these firms will be on the lookout to recruit new people, with different skills and attitudes... Will things change much for Tied Advisers? For product providers that currently distribute their products via a 'tied' arrangement (perhaps using a direct sales force, branch network or other tied outlet), the recent reforms will allow them to "adopt" other companies' products into their product portfolio, as an appointed representative. However, if a product provider that has tied advisers decides to enhance its offering in this way, it needs to regulate the advice given by the advisers - not only for its own manufactured products, but also for the third party products that it represents. The tied advisers themselves, however, are not responsible per se for the advice issues, since they are not offering provider choice to the retail investor (i.e. there is no possibility for commission bias). The implication, therefore, is a significant compliance overhead for companies that decide to enhance their offerings in this way. Once again, there full gamut of challenges and opportunities for senior management to deal with. How will they respond to renewed pressure from the market to provide choice (in a general trend towards open architecture)? There are potential changes to be make to technology and operations, sales tactics / promotions, regulation, and staffing. Senior management have to decide how they will position the firm going forward - should they seek to merge, 'home-grow', address new markets? And what about the product providers? In addition to the significant changes that will occur in the distribution business, equally there are challenges for the product manufacturers. The route to market for product providers is about to fundamentally change. There is an anticipated 'rush for distribution power', and there have already been some high profile purchases of IFA networks. When considering whether you (or your competition) should invest in distributors (IFAs or the new Distribution Firms), there is a raft of issues to be considered: Investment criteria What financial risk do you intend to carry, and for what potential returns? Rather than invest in one outlet, why not decide to invest in marketing/tailoring your products to a number of firms? Influence How might you influence the distributors to sell more of your product, especially the IFAs? How will you differentiate your product, if it was previously sold mainly on its commission structure? What is the competition doing to position their own products? How innovative can you be in this? For those firms who already account for a significant proportion of your sales, how will you ensure that they continue to pick your products, and that you remain high in their 'buy list'? Buying habits What proportion of your customers (by product, social class, geography, etc) will be influenced by the market changes, and how will you change your product set to cope with this? For those with tied sales channels, how attractive will this set-up continue to be and how might you enhance your product set via appointed representatives? Change to distributor? Will the changes finally provoke you to invest in your own (in-house) distribution, or - more radically - to cease manufacture altogether in the longer term?