The future of…

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The agile investment bank

Dec 2002

Introduction

Today's commercial world is a very hostile evolutionary environment, where no-one but the very fittest is guaranteed to survive. Every week we see previously strong companies going bankrupt. Even large finance houses are suffering because of promises they made years ago without sufficient foresight. Many large investors were caught up in dot-com hype and lost their shirts. Clearly, economic, social and technological turbulence have increased the value of speed of reaction, flexibility and customer vision, but have reduced the value of experience. It is a simple fact of life that being good at doing something yesterday makes us prejudiced when we try to figure out the best way of doing it tomorrow, when the rules have all changed. Experience has become a liability. Companies must plan for tomorrow, not yesterday.

Investment banks have to get it doubly right to survive and flourish. They must not only make their own companies agile and competitive, but also work out which other companies and sectors will do well. They therefore need to understand all the contributory issues better than anyone else.

Of course, the dot-com bubble was based on companies who thought they had the right combination of agility and customer vision. Many were badly thought out and died quickly. A few of them got it right, and have survived, but only just. The networked environment has been held back by a wide range of factors, so the market was simply not ready when the first dot-com boom happened. There were too few net users, on too slow connections, using too primitive software, connecting to poorly developed sites, backed up by primitively constructed distribution engines, all with too little security and a lack of confidence. It is a miracle of management that any of them survived.

But the environment is improving fast. Broadband is now selling quickly, so customers will have enough speed, and will be 'always on'. Interfaces are better and security has improved dramatically. With a little patience, we can fully expect that the networked market will pick up. As a futurist, I monitor technology changes all the time, and it is very clear that we should expect very good times in the IT industry to start around 2006. Improvement may certainly happen earlier than that, but 2006 will see a dramatic acceleration of the market. I call it the 2006 technology explosion. Before you get too excited, remember that history shows that we usually learn little from history. As I write this, we are just about to see bursting of the house price bubble. We obviously learned nothing from the 1980s bubble. Some people will be nervous about another technology bubble, but most will happily join in, convince that they will get out just in time this time round. Not everyone can win, but basic human greed will ensure that this next boom and bust will be at least as big as the dot-coms.

The 2006 Technology explosion

We are currently deep in a recession, but hopefully the worst is over. Looking at a lot of individual technology trends today, it is hard not to come to the conclusion that good times lie ahead.. In just the same way as interaction between computing technology and telecommunications technology has brought us the internet, extrapolating other technology developments suggests that around 2006, we will again see technology interaction lead to a rapid acceleration of new opportunities and markets - the 2006 technology explosion. The key developments are as follows:

· Firstly, the IT recession should be over by then. Companies that bought new kit to defend against the millennium bug will be buying routinely again.

· A wide range of sophisticated mobile terminals will exist. People will be connected 24/7, everywhere.

· Better and cheaper displays will make many potential applications more attractive.

· We will have seen an order of magnitude rise in data storage density, computer memory and processing speed.

· Portable storage media such as memory cards, CDs, DVDs etc will have much higher capacity too. People will have access to their data everywhere.

· The semantic web should be on stream by 2005, with automated knowledge extraction tools starting to appear in 2006.

· Natural, language processing will be more developed by then, enabling people to more easily tell computers what they want.

· Broadband access should be fairly widespread, increasing the potential market for the next generation of dotcoms, and making them much more likely to succeed.

· Tags and other electronic devices should be starting to spread rapidly into every area of the everyday world, making a smart environment.

· Many government processes will be integrated and on-line.

· Biotechnology and nanotechnology will progress rapidly and start converging with information technology.

2006 will be the start of this explosion, which will be visible as a much steeper exponential curve in technology development thereafter, across many fields. Some companies will die before we reach the good times, but the survivors can look forward to unprecedented opportunity. For a while anyway. This boom will probably last only a few years before it suffers from the likely anti-technology backlash just before 2010. Get in, get rich, get out!

Agility

Although there will be a strong recovery, and the economy will become much healthier, the future market will be every bit as fiercely competitive as today's, probably more so. In a world where an entrepreneur can bring a new idea to market overnight, using off-the-shelf standardised business tools and virtual enterprise technology, there is no room for the sluggish. Apart from a few protected niches such as craft industries and museums, traditional companies will only survive by ceasing to be traditional. Every company will be agile, because any that aren't will quickly be removed from the marketplace.

To achieve this agility, companies will have to make full use of enterprise tools and virtual company structuring. Most large companies today have large departments full of staff doing much the same jobs as in any other large company. Finance, personnel, even marketing, are easy fodder for outsourcing provided that there are communications tools to enable high quality interworking at a distance. A large company can very quickly be stripped down to a small core of staff who are absolutely essential to the competitive advantage of the company, backed up by myriads of 'commodity class' staff who do all the routine work. These commodity staff are similar quality to those in any large company, so companies might as well outsource them. By retaining only the smallest core of key staff, companies can therefore react instantly to market change, reacting with agility to the needs of their customer base. Commodity staff are simply an avoidable dead weight that holds a company back by sheer inertia, and will guarantee losing the race to more nimble competitors. By using the best enterprise tools and a virtual company structure, companies can act together as teams with very dynamic structures appropriate to the immediate market conditions. Each of the players has a guaranteed role in each market, but their relationships must be able to change swiftly. Investment banks are key players, but need to be ready able to swap to other teams at any time.

Downsizing and outsourcing needs to be achieved very carefully. Companies must firstly understand well exactly where their competitive advantage lies. Secondly, they must understand which type of alliance is best for outsourcing each kind of none-core function. Their whole virtual company must work as a team. Just because a function is outsourced does not mean it can be ignored. Allies in the team must behave with the same dedication and responsiveness as if they are part of the same company as their allies. Having achieved this teamwork attitude, corporate infrastructure must be put in place to ensure that the allies can work successfully as a single team. This is where enterprise tools become all-important. People cannot do a good job if they are equipped poorly. Companies that provide the tools and infrastructure are just as important to the team success as those who provide the staff. High quality IT providers are therefore another key player in every successful team.

Today, there is too much focus on using IT for centralised control. The result is irresistible temptation for managers to micro-manage their staff, which reduces productivity and effectiveness. Smart use of IT uses a light touch. Converting from paper to electronic systems should be seen as an opportunity to get rid of administration systems that don't directly add to the company profits, or which reduce local costs at increased company costs. If they don't increase net company profit and aren't a legal requirement, drop them. This administration reduction automatically makes system wide interworking simpler and more agile. The whole economy would benefit if standard business tools are used as far as possible throughout business - not just within individual companies. Of course, different sectors and company types will always need some customisation, but clever use of network tools can implement differences in ways that allow maximum compatibility and interworking.

Investment

The agile bank will be a key player in the future, other banks will vanish from the market. It is rapidly becoming clear what the rest of the decade will look like in investment terms. Basic infrastructure, transport, construction and energy will change slowly in terms of technology, and will see quite steady growth, so the biggest change in these sectors will be rapid reorganisation of the ownership of the sectors. Agility is important for survival even here, simply because technology allows companies to take each other over more easily, and makes cost saving easier, thereby increasing the incentive to take over companies that don't seem to be able to manage themselves. There are some potential rich pickings, especially in regions where major government investments are being made. Agile companies will be able to make the most competitive tenders for such work

The biggest gains though are from the rapid technology change in several sectors, resulting in rapid growth. The IT and biotech sectors are at the forefront of this, followed towards the end of the decade by the materials sector. A wide range of new equipment will become available over the next few years, and offer opportunities for new applications and services based on them. As IT permeates into every corner of our lives, we can expect some of the old monopolies to disappear. Software and hardware will become much more distributed and fragmented, working increasingly on a self-organising basis on a wide range of simple devices rather than by centralised monolithic software on centralised PCs. Big winners will be disk drive, display, battery and chip manufacturers. Communications money will move from bandwidth to value added service delivery. Diverse operating systems will have to interwork with each other to survive, but common data standards and the semantic web will enable this easy integration. And of course, with the final realisation of a proper platform, dot-coms that are actually based on good business plans and real markets will flourish. Those IT companies that survive through to the 2006 explosion will have proved their agility credentials and are likely to thrive thereafter. Sadly, ongoing pressure in the markets before that will ensure that many still have time to fail. Better to let a few weaker companies die first and then invest in the survivors.