21 February 2005

"Key to strategic change is common sense"  

By AMIN RAJAN

"The problems we face cannot be resolved at the same level of thinking as that which gave rise to them," observed Einstein after the second world war.

Much the same applies to the global fund management industry after the worst bear market in living memory.

If the industry is at an inflection point now - where future becomes different from the past - then strategic change is as much about mindset shifts as about bright business ideas.

For sure, two in every three fund managers around the world are implementing actions to expand the business by pruning it first, so as to drive out systemic inefficiencies, according to the latest research from Create and KPMG*.

However, as the last article argued, such actions have also generated numerous adverse unintended consequences, in line with the Heisenberg uncertainty principle which states that, once you disturb something, you often produce an unpredictable chain reaction.

As in the game of chess, each move opens up a range of possibilities. Success requires their opportunistic exploitation. In a majority of fund managers, this has yet to happen due to four reasons.

First, people in the front office - like knowledge workers in other industries - are highly individualistic and sceptical. They are trained to question the CEOs and CFOs of the companies in whom they invest. They are equally distrustful of their own bosses to the extent that teamwork is only there in name.

As one chief investment officer put it, "if you put our CEO in front of portfolio managers to assess his business acumen, he will be torn to shreds".

Second, most fund managers see strategy as a series of medium-term goals rather than a bumpy journey with clear short-term milestones. There are no clear mechanisms to monitor the outcomes because accountability for achieving them is often unclear, even in a vital area such as product innovation.

Nor is there a tradition of "failing forward": using the learning derived from early failure to go forward faster.

Experience in other industries shows that, after the inflection point, nothing succeeds like early failure.

Third, lack of clear short-term metrics and accountability has created a chasm between the top executives and their line managers in different parts of the business. Line managers are often unclear about what impact the new strategy will have on their part of the business, what is expected of them and what's in it for them.

This is compounded by the legacy of distrust on account of previous failed attempts. The logical outcome is a blame culture in which the safest thing to do is nothing.

Fourth, in implementing the necessary actions, few fund managers make a distinction between what has to be done: by line managers in their day job, by cross functional teams in their focused efforts and by top executives in the "war room".

This seeming lack of clarity in execution and accountability has exposed many fund managers to the "boiling frog" syndrome: the gradual warming of the comfortable water that finishes off the unsuspecting creature.

"Corporate politics is corrosive here. We have to learn to depersonalise difficult issues, overcome emotional disconnect and have ownership of actions," observed the CEO of a big UK house.

On the other hand, fund managers who have achieved successful strategic change have relied on an unusual degree of common sense.

To start with, their top executives have adopted a leadership style that is stronger on deeds than words; blending a light touch with intensive communication; displaying creative dissatisfaction with the status quo; challenging complacency; and giving open, honest, real-time feedback.

Beyond that, the top executives have also adopted a strategic framework that enjoins them to have a regular forum for key individuals at all management levels to debate new ideas, and subjects them to a reality check by tapping into the collective "memory" of the business (see graphic).

This analysis, in turn, is used to generate business goals for the near term, along with a clear list of actions; duly allowing for opportunism arising from upward feedback on the unfolding reality on the ground. Resources are then allocated for the core activities, performance metrics are set, individual accountabilities identified, incentives agreed, outcomes monitored and corrective actions taken, when necessary. Strategy is, thus, a journey: mobilising the collective expertise and handling untoward events en route.

The main thrust of this framework is consistent with the craft nature of the investment business; the disciplines needed to run it in good times and bad; and, above all, the personal and professional traits of star performers.

It favours consensus building at the early ideas-generation stage and a hard-nosed approach at the subsequent implementation stage, in the belief that the genius of a strategy is not in design but execution.

Most importantly, it also promotes behaviours that are self regulatory, yet entrepreneurial - the sort that are commonly found in partnership firms or independent boutiques that are admired worldwide. Without such behaviours, strategic change will remain a mirage.

Professor Rajan is the CEO of Create, a research consultancy specialising in strategic change in financial services

*Available from amin.rajan@create-research.co.uk.

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