What does "good" look like when gauging a firm's potential?
30 January 2015
Knowing the strength of your business is a key element of planning ahead – so what are the factors you need to consider? An experienced management consultant provides some ideas
In 2013, all the Big Five UK banks (Lloyds, RBS, Standard Chartered, Barclays and HSBC) returned to profit for the first time since early 2010. Everyone breathed a collective sigh of relief – but it was clear that there was still a long road to recovery ahead, and it was not apparent who was best placed to capitalise on economic recovery.
Cost-to-income ratios for the five outfits ranged from 50% to 65%. Return on equity varied dramatically from 2.5% to 13.5%. Meanwhile, the amount set aside for legal redress and fines for past misdemeanours – the principal difference between underlying and actual profits – ranged from £250 million to £2 billion.
Similarly, the European leasing market has shown a marked recovery in 2014, with year-on-year increases for the industry as a whole of 9% in new leasing volumes – plus 15% in pre-tax profits, an average profitability ratio of 30% and improvement in average cost-to-income ratio to 44%. However, there was a huge variation in performance across 17 of the market’s major players. Profitability ratio varied from a maximum of 67%, compared to the worst with -120%. The cost-to-income ratio ranged from 20% to 56%.
The problem for any CEO and management team is: where do you start with all these figures? Our experience, having worked with a range of leading financial services organisations over the past few years, is that numbers only go so far in indicating potential. They are important yardsticks – but of limited value when it comes to identifying the “headroom” for improvement.
Our preference is to look at underlying organisational capabilities – existing, and planned. Here, it’s important to have an independent view of “what good looks like”. We have found that there’s a range of capabilities that differentiate good performers from the less good: the former tend to have all the capabilities that are critical to their business model, the latter don’t – it’s as simple as that.
So what are they? Well, they broadly fall into four categories:
1. Strategy and policy
2. Business management
3. Operational and
Within general and commercial banking, our view is that there are four functions that must possess the critical capabilities: sales and marketing, risk, finance and operations. It would be possible to run through an overview of each of almost 50 capabilities that we’ve identified under those four functions, but in the end, the relative importance of each one hinges largely on the first pillar of strategy.
We think it’s more interesting to ask (and answer) the questions “Which capabilities do you need to execute your strategy successfully?” and “How do you know whether you already possess them?” The process of getting to the answers to those questions is not easy. But it can be systematic and reproducible. That is the critical journey to determine whether your business needs to add to, or develop, its set of capabilities – and helps establish a dashboard of internal measures that are more useful than published accounting metrics.
David Welch is a managing consultant at Challenge Consulting Ltd.
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