I was recently criticised by one software supplier for describing them as small in our Professional Adviser technology column. I hadn’t done this to insult or demean them, in fact quite the opposite. In the context of the article I was trying to convey that they were nimble and that all their clients really mattered to them and received responsive attention and service. However, the comments did start me thinking.

The big companies have deep pockets and can, if they choose, weather difficult market conditions. They also have access to wider resource pools to help on big deliveries and have the ability to pour substantial R&D budgets into new solutions. The benefits are significant if large corporate projects with substantial amounts of bespoke development are being considered.

It would be a mistake however to think size brings with it certaintly of stability. The cost bases of larger companies are frequently a lot higher and when markets move against a company or product, then these companies may have less scope to reduce them and can quickly become vulnerable. It is particularly true when discussing a division of a larger company where the relative size compared to the overall organisation is very small. I once worked for AT&T, a huge global company, which had a reasonable presence in financial services in the UK (owning a third of The Exchange at the time). However, the relative size of the UK business compared to the US was so small that it closed the UK operations virtually overnight without batting an eyelid and leaving some clients poorly served.

Some of the smaller companies – if focused on a niche area, may actually have more domain knowledge than exists in much larger organisations and may be closer to the clients and more nimble in how they respond to market opportunities. In terms of financial longevity, some relatively small firms have a substantial user base and therefore will always be of value in the market and even if they hit hard times, a competitor may buy them to access the user base.

The bottom line is for product-based companies, I think size is not of over-riding importance, as long as a critical mass of clients is reached and as long as the company is in good financial health. If the companies product and service is compelling and the management team is sound, then success and longevity should follow. For service delivery organisations, size does become important and prospective clients would do well to check that the resources of development partners are not going to over stretched before they contract with them. So, back to the company that took offence at my comment about them being small, perhaps their repost should have been – ‘they don’t make diamonds as big as bricks’!

Where you sit in the Financial Services supply chain will affect your perspective of whether you have the same, similar or different issues when looking at some of the key challenges set out in last week’s blog.

For the many Providers, in an increasingly global market, they would probably like to exploit synergies in product manufacturing and operations. Whether they could design a set of product ‘chassis’ may be debatable but parochial regional interests can get in the way even if it were possible. Many see the aspiration of a common, consistent technology infrastructure as a ‘pipe dream’ but Providers are going to have to re-examine what is possible and acceptable. Developing, maintaining and servicing products on legacy technology is expensive and time consuming. To compete in the future speed to market is going to be critical, as is the ability to adapt to the different needs of consumers along with the capability to change products and services based on customer feedback, along with emerging trends and opportunities.

In the past, many products have been too complex and so taken more development effort, time, money and ongoing service than was necessary for many of the customers. However, with little or no ‘experiential’ data or feedback, providers continued in blissful ignorance. Indeed, it could be argued (as the FSA would do so) that Providers used commission to ensure that they achieved sales of poor products. Many IT systems are a constraint to innovation and speed to market and whilst there is always a concern about what technology alternative to choose, a failure to act and not do so with knowledge and speed, is a certain recipe for future failure. Providers have wanted to ‘own’ their IT operations and so many have IT departments that are bigger than technology companies. Some have ‘outsourced’ their operations, but this is disguising rather than solving the problem. The world has moved on and more and more businesses are looking to adopt a SaaS strategy.

With the effect changing remuneration from ‘Provider determined’ commission payment outlined in the RDR, Providers are going to have to look very hard at the operational costs of their business. Products will have to be price and feature competitive, as well as being able to offer a quality service. How they choose to distribute products will also be a key issue. There is real a danger that the ‘commoditisation’ of products could leave many unable to compete in an Adviser (IFA) only route. Do they aim to be in a niche and if so which one? Do they operate a tied/multi-tied model or work on a ‘direct to consumer’ model. Each of these has different product, remuneration servicing implications. There is little doubt that the next few years will see some significant consolidation and it is likely to the strategically strong innovators that survive.

When looking at the analogy of car manufacturing, do Providers aim to have an entry level model such as the Tata Nano for one market segment and separate ‘luxury’ marque such as the Jaguar for the better off? Taking this analogy back to how Ford created their product development and we could see an underlying chassis and certain ‘parts’ such as on the Mondeo being used with the jaguar X-Type brand. Common architecture and component re-use should be sought and exploited where possible. A ‘Wrap’ or ‘offset’ concept may also be worth exploring; it may be a degree of ‘snob value’ but if all those who say they are going to concentrate on the ‘Wealth Management’ space, it will be very crowded and very competitive! The mass market can still be served profitably, it will require a different approach to product development and distribution. A simple, low cost product that can be easily understood and bought, may not meet the ‘ideal’ of some untopians (including FSA personnel), but if it is possible to ‘upgrade’ or ‘trade-up’ – perhaps with advice, the objective of getting from A to B may well be better served by a ‘Tata Nano’ than not getting from A to B at all.

In next week’s final instalment, I shall wrap-up with some distributor views.

Whilst I am not in favour of protectionism, it is interesting that the ‘emerging economies’ attending the G20 are seeking help to protect their economies with international funding. Whilst this is a great idea in principle, it needs to be equitable. As noted in the USA by Warren Buffet, there have been weaker companies that have been given Government guarantees that have made them stronger than organisations that were AAA rated through their own sensible management! At the moment, it is much better to be a ‘financial cripple’ with a ‘government guarantee’ than a ‘Gibraltar Rock’ without one…this cannot be fair either locally or internationally! Outsourcing has been largely motivated by cheap labour and one of the things that companies should do is to look at the legacy processes that they did outsource and see if they can be made more efficient in home territory or in the new territory – perhaps, but not necessarily, this can be helped by more effective and efficient use of technology.