KPMG Financial Services Consulting – Defining a Market Strategy

To be more successful, businesses should manage more strategically. There is at least one business that took its own advice and did just that, with outstanding results. This brief article discusses the early steps in that business’s strategic management process, and provides a good example of how strategic management can dramatically improve a business’s performance.

During the years from 1993 to 2001, KPMG’s financial services consulting practice (FSC) in the United States grew at an unprecedented rate. Revenue for the practice grew during that period at a compound annual growth rate of just over 40%. Outside the US, this high rate of growth began a couple of years later than in the US, but once started the results were similar. From a starting point of less than $100 million in 1993, in 2001, after several years of significant growth, global revenue for FSC exceeded $1.2 billion.

There were many factors that contributed to this extraordinary growth. The purpose of this article is to discuss one of them, the market strategy that was defined for the practice. A strong case can be made that market strategy was the most important factor in the success of the practice, but regardless, it did at least represent the first step in moving the practice forward.

Market Strategy

The market strategy that was selected for FSC was “business management”. That market strategy proved to be an excellent choice for FSC, for a couple of major reasons:

  • The “business management” strategy clearly differentiated FSC from competitors. At the time, firms in the market that were consulting to financial services organizations could be categorized into three major types. There were systems integration and managed services firms that approached the market with their functional skills and large pools of resources. There were general strategy firms that approached the market with their consulting process and corporate level reputations. There were also dozens of niche firms that approached the market with their knowledge and experience in a limited array of services. No firms in the market offered services where depth of business knowledge was a requirement. FSC chose that path, and quickly became differentiated in the marketplace.
  • The “business management” strategy built on FSC’s core strengths. Traditionally, FSC hired consultants with at least three years of industry experience. This hands-on business experience became a good starting point for developing even more depth of business knowledge and understanding of best practices across an industry.

Natural Client

The natural clients for FSC’s “business management” strategy were the heads of the internal lines of business at the large financial services organizations. These were people who usually had Executive Vice President titles, or sometimes Vice Chairman titles, and who had full profit and loss responsibility for retail, corporate, capital markets, and other major businesses. Other firms were focused on the heads of technology, the Board of Directors, or at lower levels across the organization. Other firms did not identify strongly with the executives who had day-to-day responsibility for the P&L, and who were also the chief visionaries for their businesses in the market.

FSC’s market strategy appealed to line of business heads, and they controlled significant consulting budgets. The market strategy demanded in depth knowledge of the business. Functional knowledge was also important, but only within the context of the business knowledge. Most of the time, the issues faced by line of business heads could not be segmented into functional components. It was necessary to blend various functional skills, such as strategy, risk, finance, operations, and technology, into project teams, all with deep business knowledge.

Buying Factors

The line of business heads, who were FSC’s natural clients, had two buying factors that could not be compromised when selecting consulting firms:

  • There could be no learning of the business on the job. FSC not only embraced this buying factor, but tried to take it a step further. The goal was to assign professionals to projects that knew the business better than client personnel ever could. Therefore, best practices in the industry were introduced to clients in the normal course of consulting projects.
  • Consulting expenditures had to have bottom line payback. Once understood, this buying factor became a benefit to FSC. The heads of business lines were much more inclined to spend money on consulting projects when there was a quantified known payback. FSC had the knowledge and confidence to make commitments when necessary on paybacks.

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FSC enjoyed unprecedented growth during the 1990’s. One of the major factors contributing to that growth was FSC’s market strategy of “business management”. The market strategy appealed to the internal heads of lines of business, who became FSC’s natural clients. These natural clients had requirements for selecting consulting firms that demanded deep business knowledge and payback on consulting expenditures. The market strategy proved to be effective for FSC.

Taking the first step along the strategic management pathway required a tremendous amount of information gathering, analysis, insights, and hard work, but in the end, the results were worth the effort. FSC would not have been as successful during that period without, first, thinking strategically.

Business Process Outsourcing of Financial Services

There has been a drastic change in the way people do business in today’s world. Business strategies have been altered depending upon the demands of the changing economy. For example take the case of business process outsourcing industry. With the emergence of BPO, the perspective on the way things should be done have changed. Most of the enterprises are outsourcing their work as the ITES/BPO sector is booming in many countries. In this manner, the companies make sure that they remain competitive and money is spent lucratively.

Being one of the fastest growing nations in the world, India has become a BPO hub in the recent years. All the four metropolitan cities; Delhi, Chennai, Kolkata and Mumbai have become the BPO center for almost all MNCs in the world. The companies prefer India as the nation has an abundant and well trained people who are used as resources at a lower wage. Since the labor charges are high in developed countries, Indian BPOs have been in huge demand. Also the people in India are known for their ease in adapting foreign working style and culture. Moreover 24/7 support is enabled due to the unique geographical location and change in time zones.

The BPO in India have recognized the need for quality office services and thus the firms have spurred the growth of the industry. With an increasing demand in the outsourcing services, there are a lot of companies and services to choose from today. Most of the service providers are located in the cities in India like Bangalore, Chennai, Delhi, Pune etc.

Financial services and accounting have become an indispensable part of the Business process outsourcing as the banking industry is witnessing numerous changes. Some of the key factors that redefine the industry are globalization, regulatory requirements, competition and technology. Hence the companies pertaining to the financial services are forced to increase and retain their customer base. There is a demand for a transition from a product centric to a customer centric approach and they need to innovate in a crowded market. More and more companies are outsourcing the financial services to offshore locations.

The financial services basically covers asset management, financial management, accounting and financial analysis. Even though these processes play a vital role in the financial state of a business, they may not be the support pillar of a business like manufacturing and production. It would be money wastage for such a company to invest in hiring accountant professionals and spending on in-house accounting department. So many companies rely upon the BPO in India for managing their work.

The financial service segment is expected to clock the highest growth in the coming years as it incorporates value added domains like insurance claims processing, financial management and mortgage processing. All these indicate that the business process outsourcing has a long life in the market.

Current Topics in Financial Services Education

For those working in the finance industry, keeping up to date with current financial services education and current events are very important. Financial services training can help advisors learn about new areas of interest and keep up with the trends of the market. Relevant subjects such as health
care are important to keep abreast of. This overview will go over some recent updates.

HEALTH CARE
Health care is always a relevant topic for financial services training. Health care costs have risen at more than twice the pace of overall inflation since 1990, more than doubling their share of the economy during that period. Even adjusting for the size of its economy and population, the U.S. spends far more money on health care each year than any other country in the world. As of 2009, health care spending made up 15.3% of the U.S. economy compared to an average of 8.8% for developed countries.

Under current policies, government spending on health care is projected by the Congressional Budget Office to rise to more than 18% of GDP per year over the next 75 years; since WWII, the U.S. government has collected tax revenue to finance its entire budget that has equaled an average of 18% of GDP each year.

DJIA: OCTOBER 2008 TO OCTOBER 2009 As you may learn in a financial services education course, the DJIA is a large stock market index. It was created by Charles Dow in 1896.

From October 1st, 2008 through September 2009, the Dow dropped from its peak of over 14,000 down to 10,000 (October 2008) to its March 2009 low and then back up to 10,000 for the first time (October 14, 2009) since dropping to 10,000 at the beginning of October 2008. The DJIA hit a closing-day low point (6,547) on March 9th, 2009.

CORRELATION COEFFICIENTS
Another topic for financial services education is correlation coefficients. Correlation coefficients measure interdependence between two (or more) variables. In financial services training you may learn how to read these coefficients.

Over the long term, different asset categories tend to have predictable relationships (correlations). For example, U.S. Treasury prices usually move in the opposite direction of stocks because people buy Treasuries and sell stocks when they are worried about the economy and do the reverse as they get more optimistic. Over short periods of time, correlation coefficients can vary wildly.

For example, from the end of July 2009 to November 2009, the U.S. dollar index and S&P 500 were 60% inversely correlated (71% inverse correlation in October). However, between January 2007 and the end of July 2009, the correlation was just 2% (an almost perfect “random correlation”).

Over a recent 15-year period (1994-2008), the correlation between oil prices and the S&P 500 ranged from +20% to -20% (random correlation). At extremes, the correlation was +40% to -40%; in mid-June 2009, the correlation briefly hit +75%.

Health care, the Dow Jones Industrial Average (DJIA), and correlation coefficients are all topics of interest in financial services education. Financial services training may cover these topics in greater detail.