Leadership and GovernanceLeadership and Governance

Innovation from Investment in Human Capital

- A Turning Point for Financial Services

Themes

Crisis in Governance• Excessive focus on shareholder value

• Weak leadership

Transformation• Focus on customer value

• Investment in human beings

Lessons from the UK

Two and possibly three generations of retail banking Governance is about stakeholders

– Customers, Shareholders, Staff, Regulators Type 1

– Pre competition (say pre 1990)

• Regulation by eyebrows

• Winners: employees, regulators,

• Losers: customers, shareholders

Type II banking in the UK

Driven by competition (HSBC etc…), and technology– Contested takeovers– Scale and Consolidation– Promiscuity and churn– Acquisition vs retention models– Poor structures for dealing with this– 40million mail shots

Winners• Shareholders• Customers (a little)

– Losers• Staff

What does a type II bank look like?

The Operating Model of a type II bank

Savings Mortgages Consumer loans

Branch

Call centre

Contact centre

Intermediaries

Moments of TruthService DeliveryCustomer Insight

The problems with type II banks

“Product pipelines” push sales– But consumers cannot be separated into transactions

Channels manage (cut) costs– But there are linkages between the two

• Eg driving service out of the branches• Driving sales in call centres

Type II not– A service proposition– A customer focussed proposition

What would a type III bank look like?

Leadership in Retail Banking

A Model of Leadership

Leadership

Management

Vision

Capability

Vision: Can you see it?

Managers think about doing– Reasoning from solutions back to problems

– The doing drives the thinking

– Task Cultures Much management activity is about persuasion

– Emotional

– Rhetoric

– Highly intuitive

Capability: Can you do it?

Robustness– Broadening your range of behaviours

– Personal growth in this Dialogue

– The ZOUD Maturity

– Discretionary CEO type behaviour

Customer Focussed InnovationCustomer Focussed Innovation

Focussing on the Customer

Who has been here before: loads of people

Industry relaunch Industry Decline

Cinemas 1980s – Megaplex First Leisure, RankFashion retail multiples: Hepworths, High Street Names Next/River Island Chelsea Girl

Grocery Retailers – Tesco* Fine Fare, Co-op, Sainsburys Hotels – Travelodge ThfPub venues – Wetherspoons Brent Walker, . . .

Financial Retailers Big 4 Banks TK Max & Others M&SBudget Airlines Swiss Air, BA, etc

1980s

1990s

2000s

Four Ways to Value Innovate

New ValueProposition

Raise

Eliminate Create

Reduce

Factors no longer requiredSpectrum focusing

Hygiene factorSpectrum lowering

New factors not yet thereSpectrum widening

Well beyond industry standardSpectrum raising

Value Curve of Formule 1 in the French Low Budget Hotel Industry

Eliminate Reduce RaiseHigh

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Key Success Factors

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Value Innovation: The Simultaneous Pursuit of Radically Superior Value and Low Cost

Valueinnovation

Costs

Buyer value

Cost savings from eliminating & reducing

Cost advantagesfrom high volume

Superior value by raising and creating

What factors should be eliminated that our industry takes for granted?

What factors should be reduced well below the industry standard?

What factors should be raided well above the industry standard?

What factors should be created that the industry has never offered?

But you need to continuously do it . . .Repeating Value Innovation

Leverage the Product, Service andDelivery platforms over time

Do this by continuously investing in knowledge – human capital

How has Compaq stayed on top of the Server industry?

By following its first value innovation . . .

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Expandability

Generalapplicationcompatibility

File & printcompatibility

Performance

Price

1989:Systempro

1992:ProSignia

Low High Low High Low HighRelative Level Relative Level Relative Level

Expandability

Generalapplicationcompatibility

File & printcompatibility

Performance

Price

Reliability

Configurability

Manageability

1992:ProSignia

Featureinnovations

1993:ProLiant 1000

Expandability

Generalapplicationcompatibility

File & printcompatibility

Performance

Price

Reliability

Configurability

Manageability

Storability

Serviceability

SecurityFeatureinnovations

1994:ProLiant 1000Rack mountable server

1993:ProLiant 1000

Transformation by Investing in People

Labour

Poaching and Under-investment in Training- No excuses

Supply of labour

Demand for labour after learning

Demand for labour before learning

Pay

w2

w1

Q*

Determinants of Business Performance:How Strategy Contributes to the Bottom Line

Assets Liabilities

Debt

Equity

Value Logic:: AGENCY - lower cost capital due to strong financial management

Value Logic: SCALE: Take out cost cross functional working

Value Logic: SCOPE: Add in revenue (eg cross selling)

PVEA

PVGO

Value Logic: LEARNING:Develop new businesses

Existing Big 4(5) Strategies

Cost savings:consolidation + scale – exit definite

Inertia not branding

Ruthless HR Models Retention

RecruitmentRewardType II HR modelFinancial incentives

Global Inequality

Three desiderata (UN)– Development

• Economic and Social

– including Life expectancy

– Peace

– Human Rights Africa does much worse on these measures than

other developing countries

Africa in particular

1820-1998 Africa share of world gdp declined, much of this since 1950

Africa from 1/3 European GDP to 1/13 Of the decline in extreme poverty 1980 –2000 (1.5bn

to 1.1bn <$1per day: none in Africa, all in China)

Participative Growth

Unaimed opulence (the market alone)– Brazil, Oman, South Africa all have much higher gdp

than China or Sri Lanka but do much worse on deprivation measures

Aimed non opulence– Health and education cheap in developing countries

– China’s improvement in life expectency all came before 1979 (no improvement since then)

What do you aim at?

Kerala (India) Life expectancy 70, Indian average 56/58– Kerala has very high levels of literacy and especially

female literacy Sri Lanka:

– Lower infant mortality than the US

– Higher adult literacy than the US Health and education only occurred in Europe as a

result of state intervention and only a century ago

Stylised facts are:

Resource rich, labour poor- capital intensive growth path- relative high cost labour

Small domestic markets & lumpy investments needed- public sector ownership thus normal

Rents - these are available in natural resources (imperfect global markets)- these are politicized (often ‘pleasantly’)

ownedtaxed

The Heart of Darkness

Resource prices downturn- PSBR rises (tax take falls)- tax burden intensifies- concentration of ownership in return- twin deficits, no FDI

Economic nationalism- new nation building- expensive

Colonial legacy

The Heart of Darkness