Financial Services – next recruitmentfest?

What value will be added by the next round of recruitment?

Every economic downturn the financial services industry sheds a large tranche of employees, pointing to the high proportion of total costs represented by personnel, and the need to reduce cost:income ratios.

Then the upturn comes, accompanied by a frenzy. But what value do these new recruits deliver?

It seems the a relaxation in cost and/or headcount controls is all that is required to stimulate departmental managers into searching for additional staff. Are there links between recruitment plans and top-line growth? Or between recruitment plans and cost reductions?

As an industry observer, rather than participant, it seems to me that there are no links (or if there are, that the firms’ collective ability to implement, and communicate the success of, the linked activities is abysmal).

I don’t see a link between the good times recruitment and the company performance. It seems more like a fattening of the bird in order that it does not die when it sheds some weight in the next downturn. I would love to be wrong, but am I?

And if I am not, the next upturn could push another group of firms into a position where they are unable to survive the cost cutting of the next downturn. Why?

Firstly, the regulatory regime has changed, making it more costly to do business in financial services. Regulatory compliance functions will require a greater headcount and investment in systems to perform the additional duties imposed by the legislation. The cost of capital will increase due to regulatory-induced minimum capital requirements. And for some of the more “exotic” products, there may be additional restrictions. Not to mention the fact that, in the short term, many sections of the financial services industry will resemble a zero sum game until customers lose their reluctance to try the newer products again.

Secondly, for western companies, ravaged over the last couple of years, there will be a requirement to compete against Asian companies that were barely troubled by the so-called “global” crisis. Western companies could be holding badly performing loan portfolios and shoring up weak balance sheets for several years. And desperate cost cutting to stay in business means that some have huge pent up demand for investment in new and replacement IT systems. Just standing still might be a major challenge.

Thirdly, for European firms in particular, the opening up of cross-border markets presents an additional opportunity/threat. Initiatives such as SEPA and the Euro currency union have cut some fat fees that are yet to be replaced. And many retail customers are wising up to the profits that banks are gaining from exchange rates on cross-border purchases.

So how could things be different?

Well, firstly, for all the innovation in some parts of the business, there is too much inertia and reluctance to change in the industry as a whole. Zero-based thinking is needed in order to question the way things are done, and whether they should even be done at all.

Sacred cows like “golden hellos” should be challenged – do new recruits ever deliver enough value to pay back these signing bonuses? Or is this just a cost of doing business that management has been reluctant to challenge?

Companies need to redefine their roles and maybe withdraw from certain businesses, or deliver those services via outsourcing or joint ventures. Do we really need a larger number of different mutual funds than there are stocks to fill them, just because every major player needs its own branded version? Do retail banks all need to offer life-/house-/contents- insurance when most people look to cheaper internet-based deals? Or a credit card?

Is it necessary to be a “global” bank? Foreign subsidiaries seem to experience more than their fair share of problems. But do they really deliver benefits? Are they really required to win global assignments? Can’t banks partner? Other industries seem to manage “coopetition,” why not banks? Would regulators look more favorably on banks that had less foreign exposure?

We need to think differently about our financial services giants or we’ll have another crisis as soon as the current generation of bankers and regulators have been replaced.

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