Wall Street Firms Are Not Ready For Globalization, Study Finds

Nine out of 10 capital markets executives say their firm is not ready for globalization and doesn't know how to get there.The study, released this morning by IBM and the Economist Intelligence Unit (EIU), asked respondents to assess their current proficiencies in global organization and operational practices (such as the ability to attract and retain global talent, global technology management and ability to build global alliances). Two-thirds rated their performance as poor to moderate. "They're very worried about the herd mentality - this feeling that you have to herd to China for growth or India for cost savings or you may be locked out of the market," says Wendy Feller, global financial services lead at IBM's Institute for Business Value. Many of the participants don't understand the sophistication of international markets, what products and services they should introduce into emerging markets and when and what their clients will be willing to pay for; they also feel constrained by organizational rigidity, she says. At the same time, markets are clearly globalizing. The EIU expects worldwide investments to double by 2015 to more than $300 trillion and to quintuple to $700 trillion by 2025. About 60% of this future growth is coming from emerging markets like China, India, Russia, Indonesia, Chile, South Korea and Mexico. For instance, Chinese investors today have about 17 percent of their savings in bank deposit accounts, while in 2025 more than 38% will be invested in securities, EIU says.

The study, "Get global. Get specialized. Or get out," found a disconnect between what corporate clients say they need and what Wall Street firms think they need. For instance, big global firms like GE and Coca Cola are increasing their global footprints - more than 60% of their companies will reside in more than 50 countries in the near future. Few firms match this reach. Across the factors that IBM and EIU have determined will drive value in a more global environment, including superior execution, global risk expertise, global footprint and quality of products, clients and their service providers were aligned on only three.

Executives interviewed for the survey had a lot of questions about whether or not they should be operating in emerging markets, as opposed to just providing their investors opportunity to invest globally. "If there are three million new middle class investors in India, should you be taking advantage of that opportunity?" Feller says. "There are tea leaves or indicators around products that are going increasingly global. In the foreign currency exchange and equities markets, organizations recognize that they need to start moving in a global manner and are starting to build global platforms."

To succeed globally, Feller says, firms will need to tap into best of breed assets, such as talent, shared service centers, and partners, anywhere around the globe. They will need to have superior risk management, collaboration, execution and low latency capabilities across the globe.

The Economist unit analyzed worldwide market opportunities based on factors such as Gross Domestic Product and sophistication -- itself the combined effect of ten factors including financial regulatory liberalization, the openness of the banking sector to new banks coming in and the range of products they could offer, access from outside investors, and monetary stability. One promising market is Dubai, which is creating more friendly regulatory and legal structures and forming immigration policies that attract talent, Feller says. "Dubai has said they want to create a top-notch financial center within 15 years. That's exceedingly fast when you consider the last market built very quickly was New York and that time goal was 30 years." One surveyed executive said his firm might use Dubai as a retention strategy for staff in India; in other words, it will transfer talented people from India to Dubai to enjoy the high standard of living and good salaries.

Culture turned out to be the number-one barrier to profiting from globalization, and having a global management team was the most important culture-related attribute that will help firms succeed, Feller says. "Financial markets organizations, despite their reliance and focus on human capital, may be severely underutilizing their hidden or intangible assets," she says. "We're talking about winning minds, hearts and souls -- leading organizations will break out of their ethnic, gender and geographic-centric management models to become more globally integrated. This will be a major cultural shift because when you look at today's financial organizations, around 70% are led by local headquarters' board of directors and senior leadership teams. We are optimistic that the industry will manage to do what it's always done so well in the past, which is to embrace change."

One question executives asked during the survey process was, "Who will be our friends and foes in the future?" "We're coming to an age where foes are becoming friends," Feller says. "Take Project Turquoise, where four Wall Street banks and three European banks who account for about half of the London Stock Exchange turnover are partnering to form their own alternative trading system to and attack the traditional exchanges for their high trading costs." Adding weight to her point, BNP Parinbas happened to announce today that it's joining Project Turquoise.

Another wise international alliance is State Street's technology center at China's Zhejiang University. "This has allowed State Street to align with the university to gain talent and tap into long-term revenue opportunities," Feller says. "It's interesting because China today is not a big market for asset management and custody services, but they're getting into the marketplace today to build strong relationships with government, regulators and universities. They were recently asked by China's securities regulatory commission to head a committee on launching the nation's first open-ended fund, so they're actually seeing a payoff."

Overall, the study concluded, Wall Street firms need to become extroverts and introverted organizations will be crushed. "We're talking about an industry where keeping information proprietary and profiting from this has been built into the DNA of organizations since their origin," Feller notes. More specifically, firms need to become extroverts toward their partners and clients. One example of client-facing extroversion is Lehman Brothers, which transplanted a star equity analyst from the research department to the sales and trading desk to deliver insights to clients. "One thing we keep hearing on the client side is they want more market insight and they're testing performance," Feller says.