Global survey:
size matters – large investment managers outperform their smaller counterparts
With financial markets showing strong signs of recovery and a more optimistic mood prevailing in the investment management industry, the 'Report on Global Investment Management Growth Survey 2010' by SimCorp StrategyLab shows that focus is shifting from risk management and cost control toward growth. Larger companies are in the best position to capitalise on this growth due to economies of scale, investment in infrastructure, global reach and a highly educated workforce.
by Dave Beveridge and Lars Falkenberg
Larger companies (defined as those with 1,000 employees or more) have weathered the recent crisis somewhat better than their smaller counterparts. In 2009, four in ten companies managed to grow their revenue by 3% or more. However, 60% of larger companies achieved this level of growth, while only 33% of smaller companies did so. A similar pattern applies to earnings (EBIT): twice as many larger companies grew their EBIT by 3% when compared to the smaller companies.
The past year has been quite hard on the respondents: more than half experienced negative or negligible (under 2%) growth in both revenue and earnings (EBIT). The outlook for the upcoming year is a bit more positive, with only about a third of respondents expecting to grow revenue/EBIT by less than 2%. A series of trends are apparent with respect to respondents’ growth plans going forward. Most (84%) of the businesses surveyed indicate that they have a growth strategy and that this strategy is reviewed at least once a year. More than half see growth as having increased strategic importance, and almost one in two see growth as a higher priority than either risk management or cost control. Almost all (87%) see IT infrastructure as important in supporting growth.
What are the characteristics of a successful high-growth investment management institution? While there are always exceptions to any rule, a clear tendency emerges with respect to the profile of a successful, high-growth investment management company. Such a company typically has over 1,000 employees, at least $1 billion in annual revenue and a clear emphasis on growth in revenue, earnings and assets under management , as well as a high concentration of MBAs or finance degrees.
Why is this the case? The survey results show that past revenue/EBIT growth is much better for companies with more than 1,000 employees than for smaller companies (see above). Similarly, companies with $1 billion or more in annual revenue are roughly twice as likely to have grown both
revenue and EBIT by 3% and up when compared to their counterparts with less annual revenue. Whether comparing by employee count or annual revenue, growth projections are decidedly more optimistic among the larger companies. A clear emphasis on growth also helps; those companies rating growth as strategically important and/or high priority have significantly better growth rates than companies in which growth is less prominent. The findings also demonstrate a clear correlation between a company’s past and future growth and how many MBAs/ masters of finance they have on staff: the more highly educated its staff, the more likely a company is to achieve high growth rates.
GLOBALISATION IS KEY AMONG BUSINESSES IN NORTH AMERICA AND ASIA
While size and growth focus undoubtedly matter, the impact of globalisation should not be overlooked. The survey shows that while only one in three European companies intends to open a new location or locations by 2011, the desire to do so in other parts of the world is at least twice as strong. This is reflected by the fact that North American/Asian respondents are more likely to see geographic expansion as a growth driver than European businesses are. As opportunities in domestic markets begin to dry up, there is an inexorable movement towards expansion beyond national/regional borders, particularly from North America and Asia into other geographical markets.
Figure 1. Primary objectives
As the investment management industry emerges from the financial crisis, increased emphasis is placed on enabling growth versus risk mitigation or cost control.
Figure 2. Factors for future growth
There are many factors for future growth, almost all of which are considered highly or very highly important by at least two-thirds of respondents.
COMPANIES THAT PUT EMPHASIS ON GROWTH ARE MOST LIKELY TO ACHIEVE IT
Despite the fact it may seem obvious, there is a causal connection between the prioritisation of growth and the growth rates a company expects to achieve. Companies placing the highest level of strategic importance on their growth efforts are also those companies likely to have both a growth strategy and a formal growth framework in place. These factors, combined with growth acceleration strategies such as new products or launching into new segments, show that these businesses are among the top performers in 2009 and expect to assume the same position again in 2010-2011. In fact, three times (36%) as many companies rating growth as very strategically important anticipate double-digit revenue growth than companies with less of a focus on growth (11%).
Figure 3. Expected annual revenue growth crossed with top corporate priority
Companies prioritising cost management over risk mitigation and growth are far less likely to achieve meaningful revenue growth rates going forward.
COST MANAGEMENT AS PRIMARY FOCUS IS ANALOGOUS TO LOW REVENUE AND EBIT GROWTH
In a sign that better times are ahead, 55% of the businesses surveyed indicated that growth has taken on more strategic importance in the current environment, with only 7% indicating the opposite. In fact, 47% of all businesses surveyed identified growth as their top priority going forward, relegating risk management and cost control to second and third place respectively. However, given the current economic environment of falling or flat GDP and financial markets in various stages of recovery, this tendency will lead to increased competition and incite corporate Darwinism. Simply put, the growth-focussed companies’ ambitions to increase the size and scope of their business above market growth rates will come at the expense of those companies less prepared to grow. Companies prioritising growth tended to have marginally higher growth rates (revenue and EBIT) in the most recent year compared to risk-focussed companies and much higher growth rates versus cost-focussed companies.
This legacy of results carries forward into the present, with growth-focussed companies expecting higher revenue and EBIT growth rates in the upcoming year and with the proportion of risk and cost-focussed businesses expecting future growth to more or less mirror the previous year’s results.
A WELL-EDUCATED WORKFORCE IS A GROWTH ENABLED WORKFORCE
Companies with a high proportion of MBA and finance degree holders are in a better position for growth, which may be why well over half of the respondents are looking to increase the number of MBAs employed by their organisation. The survey shows that those companies looking to expand geographically have the highest proportion of MBAs among their staff: over a third of these companies have at least 31% of their workforce holding an MBA. The implication is that advanced business acumen is needed if a company has aspirations of capturing share outside its traditional geographical markets.
Growth-driven companies employ a higher complement of MBA/finance degree holders than do their counterparts that are driven primarily by risk management and cost control. One in three growth-driven companies have at least 30% of staff holding an MBA, versus one in four of risk-driven companies and only one in twelve of cost-driven companies. It is very tempting to conclude that companies with a high concentration of staff with MBA and finance degrees have higher growth ambitions and are more focussed on business and value creation.
When this observation is coupled with the earlier findings that growth- and risk-centric companies were much more likely to achieve revenue growth than cost-driven companies, it can be stated that holistic business acumen – expressed as a percentage of MBAs in an organisation – is a key harbinger of growth. Put another way, curtailing investment and reducing spending is not the strategy to focus on if meaningful growth is to be achieved: more emphasis should be placed on business and value creation as opposed to cost management.
The revenue growth projections also support the contention that growth is more likely with a well-educated workforce. As an example, one in five respondents projecting at least 6% revenue growth have two-thirds of their staff holding MBAs. Only one respondent of 26 with 3%-5% projected growth can boast of a similar proportion, while not a single one of the respondents with low (less than 2%) revenue growth projection can claim to have as many as 61% of their staff with MBA degrees. The numbers are not radically different for those with a master’s degree in finance. It seems that while business and finance degrees may not be a panacea to ensure growth, a company’s ability to grow and gain market share is certainly enhanced by a higher presence of MBA and finance degree holders.
IT INFRASTRUCTURE IS KEY IN SUPPORTING GROWTH OBJECTIVES
Having an IT infrastructure capable of supporting a company’s growth efforts is essential. Only one respondent out of 100 believed that IT infrastructure was not at all important in supporting growth; 87% had the opposite view. The ‘importance of IT’ and ‘capability of IT to support growth strategy’ ratings across various parameters such as revenue, geography and growth strategy were fairly homogenous, although a couple of points do stand out.
In particular, the survey showed that risk-centric companies were significantly more pessimistic when it comes to assessing the capability of their IT infrastructure to support growth. This is likely a reflection of the increase in legislation and regulation – both real and anticipated – and its impact on a company’s ability to grow in the face of more stringent compliance requirements. Once again, size is a factor: smaller companies tend to have less confidence in their IT infrastructure than the larger companies do. Larger companies tend to have the resources to invest in their IT infrastructure and are therefore better positioned to exploit growth opportunities than smaller companies with less comprehensive infrastructure. Ostensibly this means that large companies can automate several processes that the smaller companies will have to do manually. The consequence is that the smaller companies will be spending time on error handling, administration and other routine activities rather than creating additional value for their business.
Where geographies are concerned, all regions believe that IT infrastructure is critical to realising their growth strategies. In general, European respondents are more sceptical than their North American and Asian counterparts when it comes to the capability of their current IT infrastructure to support growth.
Finally, the survey results indicate that the majority of respondents are satisfied to a high or very high degree with their investment management system. In general, companies placing the highest degree of strategic importance on growth tend to have lower satisfaction ratings for their investment management system than those respondents placing less emphasis on growth. This is a by-product of the fact that companies with aggressive growth strategies tend to have more demanding requirements for their investment management system.
GROWTH IS A BY-PRODUCT OF STRATEGY AS OPPOSED TO A STRATEGY IN AND OF ITSELF
There is general consensus that focus on growth is important: five out of six businesses have a growth strategy in place. Of these, 95% review their growth strategy at least once every second year. However, it is not exactly clear what this strategy is, given that less than 30% of businesses have a growth framework or methodology in place. This indicates that while many businesses have aspirations of growth, there are not that many that have concrete strategies in place to promote and manage growth.
In other words, the prevailing sentiment is that growth is the result of other well-executed strategies (e.g. geographic expansion, new products, merger and acquisition) as opposed to a strategy on its own.
Growth is to be achieved in a number of ways. The most common growth acceleration strategies mentioned are introduction of new products (65%) and new client segments (60%); at least a third of businesses surveyed also listed expansion into new regions (37%) and new industry segments (36%) as well. Three of four businesses surveyed target a broad array of investment management market segments; only 19% have a focussed strategy that is concentrated on a narrow segment or segments.
CLIENT RELATIONSHIP IS NOT A KEY FACTOR IN GROWTH PROSPECTS
Most (69%) businesses see their key differentiators in the area of product innovation versus low-cost leadership (22%). The innovators (88%) are much more likely to have a growth strategy than their low-cost counterparts (68%) and see growth factors such as client confidence, branding, attracting motivated staff and avoiding another economic slump as much more important. Despite these differences, the percentage growth in revenue, EBIT and assets under management (AUM) – both in the past year and expected for next year – are very similar in nature.
CONCLUSION AND ADDITIONAL REMARKS
Based on the results, it can be concluded that companies with higher annual revenues, a clear focus on growth and a significant proportion of MBAs/finance degrees on staff will continue to enjoy the above-average growth rates that they have experienced in the past.
To be blunt, there are valid reasons why some small- and medium-sized companies grow up to be large, multi-national conglomerates, not the least of which is a willingness to invest in growth, hire competent business-minded personnel and capitalise on value creation, as well as having the right focus at the right time.
Having said that, it is not always readily apparent how companies expect to grow, given that relatively few have any framework in place to achieve it. There are a plethora of initiatives to expand the business and capture share; it can be argued that growth in revenue, EBIT and AUM is the result of well-executed corporate strategies as opposed to a concerted effort to grow. In any case, the evidence is in place that those companies placing high strategic importance on growing their business as opposed to managing it are likely to grow at a greater rate than their counterparts whose focus is elsewhere (i.e. on risk and cost management).
The market is becoming increasingly predatory in a post-crisis environment where weak players fall by the wayside and the strong, growth-focussed companies capture the market share that the smaller, resource-poor companies are unable to defend. The bottom line is that large companies performed better than the smaller companies in 2009 and expect to do so again in the upcoming years, proving that size matters.
