• Phil Holbrook

Why innovation is always important, especially for the buy-side in today’s climate

Updated: Nov 6, 2020

Have you ever wondered why it is so difficult for companies to stay competitive? History is riddled with fallen stars. Kodak, Nokia, and a litany of financial services firms post-financial crisis fell from great heights to near obscurity or demise. One might be tempted to believe competitors and risks sneak up on incumbents, but evidence suggests most companies are fully aware of threats and, either ignore them, or (more often) face significant barriers to innovating or managing risks effectively. There is perhaps no better example than Nokia’s response, or lack thereof, to the rise of the smart phone [1].

Innovation-minded managers have looked to develop processes to overcome these challenges, but to little avail. While systems like agile are proven execution methodologies, in the context of an organisation, the tangled web of legacy systems often prevents their implementation. For example:

  1. Silos persist with key stakeholders driven by their own ambition, limiting the autonomy and flexibility of their employees.

  2. Legacy technologies and processes have been implemented without holistic design, resulting in a complex array of closed systems, and little interoperability.

  3. Generally, the larger the organisation, the lower its risk tolerance, creating high compliance obligations and complex bureaucratic processes.

This can leave large organisations at a disadvantage to more agile competitors. Large-scale innovation has generally proven challenging for traditional organisations, leaving many to find alternative routes to maintain their competitive positioning.

A select few companies with strong leadership have instilled innovative practices more broadly, but leaders such as Satya Nadella at Microsoft, Jamie Dimon at JPMorgan, and Larry Fink at Blackrock are the exception, not the rule.

The investment industry is under increasing pressure from low-cost passive and alternative strategies. Operating margins are being compressed, shifting the focus further towards operational alpha, in the form of efficiency and cost reduction.

To exacerbate the problem, revenues are intrinsically linked to investment performance. The last two decades are littered with financial crises, which have reduced the market value of many pools of capital. In a return constrained environment, it’s getting more difficult to meet targets, leaving the industry in a precarious position.

Innovation is necessary, but in a traditional industry, change can be even more daunting than normal. Thankfully, a burgeoning fintech sector has developed to capitalise on these challenges, offering an opportunity to embrace change through external engagement.

It would be tempting to focus only on process efficiency and cost savings. But history suggests the industry must innovate on multiple fronts. This will be integral to future success, allowing the industry to better meet client needs while maintaining their investment edge. The winners will be those who embrace change, breaking down the barriers to innovation and driving the industry forward.

At Bond180, we help our buy-side clients take greater control over asset sourcing, helping them express their requirements with clarity and to filter market noise. We are passionate about helping our clients improve their investment edge by accessing more investment opportunities in private credit markets.

We also provide a suite of complimentary services, including data rationalisation, network connectivity, and integration support. We combine deep industry and technology expertise whilst offering the independence, agility, flexibility and enterprise standards needed to help you stay ahead of the curve.

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