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22 January 2013

No Firm Is Safe: TABB Group’s 2012 Consulting Work Reveals the New Normal

Based on TABB Group’s 2012 consulting work, one thing is clear across the capital markets ecosystem: Everyone needs to reassess, and sometimes severely alter, their course in order to thrive in this rapidly evolving business.

Last year was quite a good year for TABB Group Consulting by any measure. Revenue grew, we were invited to bid on more work, we won larger projects (both in depth and breadth), and the work was somewhat more diverse and challenging than in any year of our existence. As I analyze it, I recognize one important lesson learned about the state of the industry, which ties back to how much our capital markets industry has changed:

All areas of our industry are facing a crossroads at a magnitude that many of us have never seen, caused by the pace and extent of change in recent years and sentiment toward future business.

The clearest indicator illustrating that we have reached this inflection point is that TABB Consulting engaged in a considerable amount of private work that required evaluation of our clients’ broad strategic corporate direction and recommendations for a future course for their success. The large increase in this kind of work is most certainly a manifestation of how the persistent shift in our industry resulting from the post-2008 economic downturn and regulatory pressures has driven even firms that have had prior success in our industry to recognize the need to assess, and sometimes severely alter, their course in order to thrive in this same industry that is, in fact, not the same at all. It is a recognition that this represents a new order—rather than what some had hoped was a ‘market hiccup’—signaling a need to adjust the current business models that, while successful in the past, are now threatened.

What is most interesting is that we did this work for the many different kinds of firms in the capital markets, all of which were looking to solve the same problems driven by the same causes. From bulge-bracket banks and weakened agency brokers considering their fate in a low-volume and less-volatile market; established exchanges forced to operate in a newly regulated and more competitive global business; and diversified technology vendors whose customers have very different needs than they once did; to investment managers trying to manage their growing power base and independence; and private equity firms seeking the absolute precise time to invest in the companies that are poised for growth in this industry, TABB Group can reduce so many of our consulting engagements down to a common focus.

First, we engaged with large, diverse institutions whose core business models were being threatened by the way regulations such as Dodd-Frank and the Volcker Rule have changed their business relationships and revenue models and introduced a new and different set of competitors. Most are responding to the shift in power among the players, seeking strategies to reposition, as brokers and exchanges move into new spaces previously occupied by the other, while also competing with each other (and with traditional vendors) as technology solution providers.

This new segmentation is not reserved for the sell-side firms and exchanges; TABB’s private engagements also showed us how firms in our business are changing their strategies to focus on the new segmentation of the buy side. Many of us (old timers?) still use the term “buy side” as if it is one homogeneous group, with consistent behaviors and similar structures. In fact, as we all now know, the term “buy side” has now been elevated to a superset of institutions with somewhat diverse behaviors. Who today could accurately say that traditional investment managers behave in a manner consistent with hedge funds, or hedge funds with pension funds, or any of these with prop shops (to what segment do they belong, anyway)? This diversity causes those firms that have succeeded in the past with services focused on a singular buy side to now reassess their capabilities to target the not-so-subtle differences of each of those segments of the buy side.

Similarly, technology providers are facing challenges posed by the same series of events. These vendors have seen their revenues slowed not only by reduced spending by capital markets institutions, but also by the paradigm shift driving how that money is spent. With technology spending budgets that seem to be fixed permanently in a low-growth pattern, we have seen greater migration to turnkey and bundled solutions, and we have certainly become far more open to cloud and cloud-like solutions than we ever have been before.

These vendors must be just as attentive to macro-level drivers that are now catalyzing the great shift in our society and cultures as they are to the micro-level influences on capital markets. These are what we call “super-influencers” and, more than any other factor, they inspire significant shifts in industry spending across functionality and geography and business segment at a magnitude that we have not seen since the late 1990s.

So what is the most important lesson learned from our consulting work in 2012? This industry—which has often held to a belief that if we allow the current crisis to pass, things will revert to normal and we can get down to business as usual—is clearly adjusting to the new normal, even when it means looking inward to change its business direction.

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5 Comments to "No Firm Is Safe: TABB Group’s 2012 Consulting Work Reveals the New Normal":
  • Anon_avatar

    23 January 2013

    In order for the industry to rebound firms must once again embrace the commission-based model.  The rate of technological change in the '90s and early '00s allowed early adapters to do very well picking up low lying fruit.  Tech innovation enabled arbitrage trades to be seamlessly executed with lower risk. However, margins were slower to adapt and remained wide causing an imbalance in the risk-reward scale.  The resulting success of proprietary trading firms encouraged others to follow into a risk-taking based model.  In an effort to win market share, commissions were slashed and in some cases "payment for order flow" inverted the model all together.  As time went on, talented individuals would leave banks, bds and hedge funds to create more and more competition.  Eventually the competition caused the markets to become so effiicient, that there was not enough edge to sustain all of the players.  Reg NMS created a mometary exception as unsophisticated firms who did not keep up with innovation were rapidly bled out.  Since '07 they were either bled to death or caught up to the rest, thus the drop in volumes.  Now that the markets have reached parity, it is time to revert back to the commission based system in order for the industry to once again flurish - realistically, I dont expect this to happen in my lifetime...unfortunately, the chosen path will continue to be growth through attrition.

  • Missing

    23 January 2013

    The shift faced by this industry is, as McKinsey&Company point out, a "Triple Transformation".  

    Firms must simultaneously manage 1. Accelerated Economic  Efficiency  2. Business Model Transformation and 3. Cultural Transformation.   As far as business model transformation, it may be adapting the core model to contemporary technology and mechanisms, along with a focus and vision for how to win, will be adequate.  

    So, the biggest challenge may be Cultural Transformation where  value creation and innovation is nurtured and rewarded up and down the organization.  This will be crucial to sustain the chosen model. 

  • Missing

    23 January 2013

    Yes, however...

  • Comment_gary_johnston
    Gary Johnston

    24 January 2013

    Anonymous - who moved your cheese? The industry is over hyped, over staffed, over paid, under integrated and customers under served. The continued delusions of senior leadership is perhaps only mirrored in that other industry that doesn't produce anything tangible, religion. Greed and idleness are easy friends, reform takes big balls and in a World that rewards quarterly, vision is a rare commodity. The sooner the industry abandons its ivory towers the better. Time to embrace regulation, technology and competition. This "crisis" is cathartic. Bring it!

  • Missing

    24 January 2013


    [A bit Ironic]  the Industry can learn a lot from the Christian Science Monitor Case Study.

    I'm looking forward to hearing from the Head of Strategy at the SIIA Information Summit next week in NYC   His topic: How to Stay in the Forefront by Reinventing and Repurposing Your Business

    Learn about the choices and challenges the Christian Science Monitor had to make as they traveled to become not only the world’s first digital first news organization, but the first news organization to leverage their editorial assets to develop  “after market” content for business-to-business. 


    Donal Toole, Finance & Strategy Director, The Christian Science Monitor

    John Yemma, Editor, The Christian Science Monitor

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