Platformit — Part Eight — Platform Network Chain
In part 8 of this journey, we will examine how the “Network Chain,” which was first introduced here and then got enriched here, can bring life into the investment banking industry.
In earlier parts, we examined how existing business models of investment banks are limiting banks to narrowly place their resources toward addressing a skinny slice of their investors’ needs. At the same time, we explored how industry-wide platform thinking might help to reposition the investment banking industry with an unprecedented competitive advantage. This advantage can mobilize the fragmented and limited internal resources, capabilities and expertise of the entire industry, as well as efficiently mobilize them and complement them with the richness of a wide-array of fragmented external resources, towards addressing a full range of investors’ needs.
However, to have a competitive advantage, you must have a healthy value chain. Unfortunately, as we discussed earlier, the value chains within the investment banking industry miserably failed to regain the trust of the shareholders, investors, and the regulator.
Having said that, we must realize that the antidote for such an industry cannot merely be attained by infusing more rigor regulatory interventions. (Colliding two small problems will only yield a bigger one ‘mergers & acquisitions’ and converting big problems into smaller ones ‘downgrading regulatory license’ are not the right way to resuscitate such an industry).
In this part, I would like to suggest a two-stage healing approach: first, a surgical operation (Value Chain optimization) and second, industry rehabilitation (Network Chain proliferation).
Stage One — Value Chain Optimization
I firmly believe that among the most influential business tools, Michael E. Porter’s Value Chain rank at the very top. However, if the entire industry’s value chains are anemic, it might be a waste of time to try to fix them. I struggled with such a dilemma for a very long time (professionally and theoretically) until recently, when I came across a valuable book by John Hagel, Net Worth.
Investment banks failed to allocate balanced attention (resources) to the value activities within the value chain. Furthermore, they failed in linking the activities to each other. This is not an opinionated stance; it is a verbal translation of shareholders’ and investors’ frustration, and a decade of poor financial results.
With the help of chapter nine of Net Worth, the surgical operation will start by reaggregating the value activities within the industry’s value chains into three distinct groups (transfer Porter’s value chain activities thinking, to Hagel’s three distinct businesses thinking), following which, a process of re-linking the optimized value chain with the network chain and within the distinct core business in a broader framework of the “industry-wide platform.”
This surgical operation will liberate investment banks to merely focus on what they are supposed to be good at, namely “investing.” At the same time, it will optimize the other distinct businesses (investors relationship and infrastructure management) within the industry-wide platform, which will shoulder the heavy lifting of the non-core businesses on behalf of participating banks.
The Support Activities within the value chain will be grouped and reconfigured as a distinct centralized business (Infrastructure Management Business). Then, with the help of the industry-wide platform-based business model, this distinct business will be modularized and optimized as a centralized service (Infrastructure as a Service) to meet the challenges of the economy of scale.
The Primary Activities (Marketing & Sales, and Service), which are the touch points with the consumers of value (investors), will be transformed from being distinct primary activities into a distinct business (Investor Relationship Business) to meet the challenges of the economy of scope. The process that govern the relationships between investment banks and investors can be modularized as a centralized service (Platform as a Service). Important note: Only the process will be modularized, not the relationship itself. In fact, the relationship must become more personalized and differentiated.
The core Primary Activities of the investment banks will be relinked and strengthened into distinct business (Investment Innovation Business) as the key differentiator. Investment banks’ value chains will be reconfigured to deliver one objective: generating lucrative investment opportunities.
Let us visualize a simple example of Infrastructure Management Business — KYC & CDD
An investor wants to diversify his investment portfolio among different investment banks. Due to the regulatory requirements, the investment banks must adhere to the Know Your Customer’s (“KYC”) requirements before establishing a relationship with the investor. Let us explore this under the two scenarios:
KYC as a distinct activity within a value chain
By just looking at the above illustration, you can immediately spot a deficiency in the process: to adhere to a single regulatory (KYC) requirement, for a single investor, with the same KYC documentation, every bank must conduct a lengthy KYC & CDD procedure (ineffective and inefficient duplication of assets deployment, time, efforts, costs, headcounts on an industry level) to reach the same objective.
KYC as a distinct business
With the help of the industry-wide platform business model, turning an activity into a distinct business means turning a full-fledged function into a service. This will have a significant impact on the performance of each bank, since they can redeploy available resources into the core activity.
The reduction in costs can be huge, and the saving can be redeployed more productively. Let us assume that the average annual cost for a small investment bank to conduct KYC & CDD is $1 million. This means that a similar amount will be duplicated for performing the same task (verifying the source of income) within the industry.
Converting KYC & CDD from an activity-based process into merely accessing KYC & CDD as a service by a distinct business can free enormous resources. (Imagine investment banks being able to stream investors’ KYCs ‘exactly! like streaming movies on Netflix’).
Even the regulator will be able to save tremendous time and effort. Instead of conducting on-site AML inspections on each investment bank, the regulator will be able to perform annual holistic inspection on the distinct business.
Now let us examine the above symbolic example from the demand-side viewpoint — investors.
For an investor to conduct a fruitful relationship with an investment bank, s/he must invest (apart from monetary investment) much of her/his time and effort, with three types of data sets (i.e., Performance Data, Regulatory Data, and Relational ‘interaction’ Data).
Within the same bank, if the units (activities) are not adequately linked (which is, unfortunately, the case), as an investor, you will be in contact with different personnel who talk different business languages, with different objectives.
Now imagine you are dealing with more than one bank. This is a true definition of a nightmare.
But with the shift in thinking from activity-based value chain approach to a distinct businesses-based platform approach, the investor will enjoy a streamlined channel for investing.
Stage Two — Network Chain Proliferation
A surgical procedure (Value Chain optimization) is only half the solution. You cannot expect to revive such an industry without a rehabilitation procedure.
Unlike the value chain, the Network Chain can portray a brighter image about the investment banking industry. Fortunately, the investment banks leveraged the Kingdom’s geographical position as a leading commercial crossroads along with the richness of its social and cultural fabric — taking full advantage of the Kingdom’s robust physical ecosystem and a vibrant physical network. As such, investment banks accumulated a wealth of stored value (rich data) about the entire GCC’s investor base.
The industry-wide platform-based business model will help investment banks to leverage their physical networks via a centralized Network Chain that can proliferate the convergence of different network effects.
The first step is to depart the data (stored value) of their investors’ base into the industry-wide platform by transferring the data from their outdated CRM systems into the centralized industry-wide platform.
The industry-wide platform will be enjoying the highest level of identity verification on both sides:
Producers of Value — Investment Banks are licensed and regulated by one of the most reputable regulatory bodies in the region.
Consumers of Value — Investors are subject to international best practices on AML requirements, which are in line with FATF requirements, as well as to strict legal and regulatory framework.
Since that both sides are ready, the platform can focus on orchestrating the appropriate Network Effects types. The Network Effects Map by James Currier is the right tool to navigate towards this endeavor.
In my previous post, I provided a glimpse on how we might upgrade a data network effect by introducing John Hagel’s Infomediary concept. So, once again, Net Worth stands as my broader framework in venturing in this stage. However, there is a minor modification: introducing a lighter version of the Infomediary concept — Infomediary as a profession “freelance Infomediary.” Yet, the freelance here differs greatly from freelance within the gig economies.
The first question is, from where we will find those infomediaries? And the second question is, how will the platform onboard them?
Let us start “from where?”
Unfortunately, such talented personnel are programmed to be integrated within the supply side of the economy. The majority are not capable of dealing with the demand side of the banking industry.
An industry-wide platform can help them to operate within a vibrant and secure environment and will enable them to deal with both sides of the economy.
How to onboard them?
Imagine yourself as a CPA professional. Instead of sending your CV to banks and waiting for their reply, you can be in full control over your professional progress. Via your smartphone, you can access such a productive environment (the industry-wide platform).
The above simple illustrations on the “where and how” were introduced merely to seed the idea. I trust your fertile imagination in envisioning how Infomediaries can build fruitful relationships with all the key players. The best advice that I can give you is to read Net Worth.
I will jump into a hypothetical example explaining how an Infomediary can exponentially expand an unseen opportunity from a simple social conversation between investors (Start the conversation from linkage reconfiguration #1).
The reconfiguration within the network chain’s features can spark and amplify multiple virtuous cycles within various network effects: a virtuous cycle of a relevant, up-to-date, personalized and curated data. The Infomediary will be empowered with a wealth of actionable information (yielding from the DATA+ Network Effects) that will enable him/her to zero-in between supply and demand (moving from knowledge transfer to knowledge creation).
The below illustration will help you to visualize how an Infomediary can enrich the intersection and convergence between different network effects. The unseen opportunities within such junctions can exponentially unlock new potentials.
With such wealth of data (generated from both value chains and network chain) within the industry-wide platform, the Infomediary will be able to help the ecosystem’s key players to understand the interactions’ behavior, which will lead to understanding the wealth behavior. Only then (upon understanding investors’ wealth behavior), the investment bank will be able to enrich the existing investment opportunities as well as empower the creation of new investment opportunities.
For example, investment banks can only sit with huge institutional investors to understand and leverage their balance sheets (wealth behavior) with the right investment opportunities. Such a deep understanding is not possible for smaller HNWI or Accredited investors. However, the infomediaries can bridge such a gap. Infomediaries can establish a stronger relationship with HNWI & Accredited investors to understand them on a deeper level, thus matching them with investment opportunities from a balance sheet’s viewpoint rather than a personal and preferential view.
An Infomediary also can collaborate with regulators in observing trends within the industry and beyond. It can even see patterns between multiple sectors and across industries.
Value creation can be amplified within such an industry when both the network chain and the value chain achieve a high level of integration with the end users. Value discovery rests within the linkages.
John Hagel taught me that we cannot be merely satisfied with product innovation, process innovation, or business model innovation, we need to innovate institutionally. Such broad thinking, encouraged me to attempt to push the frontier of the innovation’s boundary a bit more: we need to innovate on an industry level. “Industry Innovation,” means that the industry must challenge its core fundamentals and transform itself from merely being a (market and economic) boundary, to a full-fledged vibrant channel, that can link the interplay between adjacent value chains and network chains.
I’d like to give a special thanks to John Hagel, Michael E. Porter, and James Currier.
See you in part Nine…
Note: the above post is a context-specific (bringing life into investment banks within the Kingdom of Bahrain). Yet, the concepts and tools, along with their applications, can be applied in any context/geography.
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