A fund management business faced collapse, after some years of successful and profitable growth. (These companies invest your cash in equities and bonds to grow your wealth, often through pensions or other investment products. They mostly sell those products through brokers or financial advisors).
Let the good times roll!
I already explained
- how business performance depends on the quality of resources that make it up – customers, staff, product range etc. – not just the scale of those resources (see here)
- how to build and sustain that quality (see here)
This investment company had made the mistake, while the economy was strong, of over-extending all of its resources:
It launched many new funds
… invested in a wider range of equities and bonds (its products)
… managed by an ever-growing number of analysts and fund managers
Those products were sold by an expanding sales-force
… to an ever larger numbers of brokers
… who signed up increasing numbers of investors
Sales grew strongly, bringing in a rising stream of investors’ wealth, and generating growing profits.
Then the going got tough.
We should all know that good times will likely end – and they sure did for this business. With a melt-down in the financial markets, the poor quality of all these assets came home.
Most of its funds’ values fell back … it didn’t know enough about the too-wide range of equities and bonds … the large teams of analysts and fund managers had too little experience … few in the large sales-force were able to keep winning new business … most of the brokers were too small and brought little new business … and it had accumulated many too-small investors.
The heavy costs of supporting all these low-quality assets far out-weighed the value they contributed and profits went into free-fall. The business was in real danger of termination!
What NOT to do!
Management reacted with the usual measures – cut spending budgets across the board, stop business class travel, cut contributions to staff pensions, cancel or defer IT projects … and so on.
Not only would these actions do nothing to fix the underlying problem, some would actually weaken the business still further. The IT plans, for example, would have made the business more effective and cut its operating costs!
“Prune” the plant!
Gardeners will be familiar with the benefits of pruning shrubs – removing dead or weak growth, so the plant’s strength gets focused on the stronger shoots.
In this case, that pruning meant closing down the low-quality portion of all of those poor resources.
The details of how exactly that was done are complicated, and took quite some time to achieve. However, the end-result was a business less than half of its previous scale, but healthy and just about profitable. And – crucially – it was capable of renewed growth, but this time taking more care!
The dangers in such cases are severe. Cut the wrong things, in the wrong order, or by the wrong degree and the whole system could collapse. (Staff are especially fragile – smart professionals such as you find in this type of business are highly mobile! The last thing you need is a rush for the exit by the key professionals you most need for the turn-round)
But HOW to model it? Any business is made up of some standard resources, linked in standard ways. The most compact view of this generic “architecture” is as follows. (The fund management case has some specific extra items, such as the broker-network).
How to build this model, adapted to different cases, is explained in our Core course on Dynamic Business Modeling.
What this figure does not show, however, is that the performance of the whole system depends on the quality of each resource – the revenue and profitability of the customer-base, the market reach and profitability of the product range, the skills and experience of the staff, the effectiveness and efficiency of the capacity (whether physical or IT-based). Our extension-class #5 explains how to model these changing resource “attributes” so policies can be set to ensure their quality is built and sustained.
So when building a business, we must ensure to add only good-quality items to each of these resources. And when a business is in trouble, we must rebuild that quality. In this case, the only way to do that fast enough and hard enough was to shed the poor-quality items from every resource.