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.