In the second of a three-part series on future-proofing your business, Tony Stephens and Steve Tucker discuss how to protect a planning firm from future shocks. Simon Hoyle reports
There are many definitions of what “future-proofing” means. According to one management text, it is “the process of trying
to anticipate future developments so that action can be taken to minimise possible negative con- sequences, and to seize opportunities”.
While that might sound simple, translating it into a business plan is less so. Tony Stephens, a director of Business Health, says there are “two kinds of things in the world: there’s things we can control and things that we can’t”.
“So we’ve got to look at the things that we can control,” he says.
“Future-proofing is all about doing the right thing. Even in the last 10 years, where legislation has come in, where the people that have been the best prepared have been the people that have been implementing the things prior to when they had to do it – because it’s good business practice.”
Steve Tucker, chief executive of MLC, says a business has to react to challenges as they arise, but must also be proactive in shaping its own future.
“I think that proactive thinking, around what do we want it to look like, and therefore how do we get organised to get that outcome, is now really starting to come through,” Tucker says.
“And you see that with the way IFSA and the FPA and others are putting forward solutions rather than reacting to change. So that’s really important.
“From an individual practice point of view, you’ll go nuts trying to anticipate all the torpedoes. One thing we do know is that markets do what they’ve just done fairly regularly, although that was a pretty dramatic one, right. But we do know that they come and they go. And I think what we’ve got to do as individual business owners, or as big business owners in our case, is try and understand the trends.
“And we spend a lot of time as financial planners and advisers trying to understand market trends. I think we need to spend more time trying to understand consumer trends. And it’s hard for advisers; there’s a huge amount of day-to-day work to be done, there’s planning, there’s running the business and then there’s talking with clients.”
Stephens says the first step in future-proofing a business is to develop a sound business plan. And that plan should be based on a clear understanding of what the firm’s clients want.
“One of the things that never ceases to amaze us is how little advisers understand what their clients really want, and how little they understand what their clients think of their own service,” he says.
“And, you know, still the great majority of advisers don’t ask their clients what they think. And so, in terms of trying to understand what clients want, and what are the things that they value, what are the things that they don’t, if we don’t ask our clients – our own individual clients – what they want, I’m not quite sure how we can plan for the future with any great certainty.”
Tucker says it doesn’t matter if a business is small, as in a one- or two-person financial planning firm, or large, like a financial institution, the basic approach has similarities.
“Bigger or smaller, the drivers are similar,” he says.
“We’re looking at similar measures of performance, like funds under management, and revenue and our expenses, and keeping our expenses controlled; [looking at] the strength of our balance sheet, and understanding risk and operational risk issues,” he says.
“And then we do a lot of work planning scenarios, and that’s quite an involved process. The idea of setting a business plan these days and saying, ‘Well, I’ll sign that off at the beginning of the year and if we don’t get it towards the end, then that’s not a good outcome’, is crazy, because the markets are so volatile and things change so quickly. So we tend to have a plan for good times, a plan for not so good times, and then a steady state view of the world.
“You know, there’s things we can control: we can control our structures, we can control our cost base, we can control our customer experience, we can control the complexity and the risk we’re taking in our business. We can’t control the market, we can anticipate that it will go up and down, and we need to diversify revenue sources, and soon.”
An institution has the luxury of resources that it can devote to the task of scenario planning. Stephens says small businesses need to work smartly to achieve the same results. And that means making a conscious decision to step back from the day-to-day pressures of running the business.
“The easy answer – and it’s easy sitting here with a white shirt, as a consultant to say this – is to make the time,” he says.
“Just make a time. Put it in your diary, cross it out, and spend some time … working on your business, as opposed to in your business.
“You can’t do it otherwise. You’ve got to create some time.
“One of the drivers that we’ve seen in any financial services market around the world is that those businesses that spend time having
a business plan and implementing that business plan make more money than those who don’t. So it’s not a cost of time, it’s an investment in time for future profitability, for future revenue. So if you think you can’t do it, just do it, make time. If you were sick and you couldn’t work for a day, the world’s not going to stop.”
Setting a plan is one thing. But the world changes, and a plan has to accommodate changing circumstances. Tucker says there’s a difference between a “business plan” and a “strategic plan”.
“I have lots of conversations with people that say, ‘I’d like to learn more about strategy’, or ‘How do you do strategy?’ and so on,” Tucker says.
“We do two things. We do a business plan and we do a strategic plan, and the business plan is dynamic, and so is the strategic plan. The business plan is about pretty much four things: How can we continually reduce our costs or become more efficient; how can we increase our revenues; how can we simplify our business; and how can we make it more efficient for our customers? That’s our business plan.
“The strategic plan is quite different. And the reality with strategy is, you’re really trying to work out how to get from A to B. The problem is by the time you get to B, it’s not there any more. So you’ve got to be quite dynamic about how you set your strategies.
“Look at what’s happened in just the last few months in the marketplace in our business, culminating in a pretty interesting play just in the last 24 hours [at the time of speaking] with AMP and AXA. Now, you know that those things are going to happen, but you need to have a strategic response to that. It might be to do nothing, but you’ve got to consider that.”
“Doing nothing doesn’t mean you’re not thinking about it. Doing nothing might mean that that happens to be something that you let go through to the keeper for that particular outcome. But what we try and do is think in three-year cycles, looking through the cycle in terms of markets, trying to build the business and strengthen it strategically.
“And we look at our competitors. I know financial planners are very competitive people, and they should always be looking at the competitors, what they can learn from them, what their competitors are better at doing, and how they’re going well, the whole benchmarking process and understanding. I’m a junkie for the results as they come out from all of our competitors. I like to see all the different drivers in the business, and make sure I understand exactly what’s going on with margins, with revenues, with costs, with client numbers, with retention, all those issues, which are key drivers, right?”
Stephens says precisely the same principles apply to small business – and there are services around that enable pretty accurate benchmarking of financial planning businesses.
“Oftentimes what we see is that it’s a very lonely business being a financial adviser, because you’re so busy doing the things with your client, you don’t know whether you’re doing a good job or not,” he says.
“Or you don’t know how you compare to your peers, you don’t know whether you’re doing a good job, or you don’t know whether you’re being efficient. And so to get some sort of a benchmark, just to see as a litmus test how am I going; and there could be good reasons why you’re doing better at some and not others. But to actually find out how you compare with other people, both on a qualitative perspective and a quantitative perspective, we would argue, is very, very important.
“If you’re paying your staff higher than the benchmark, is that a good thing or a bad thing? Well, the answer is, I don’t know, because if your profitability is high, if your staff retention’s high, if your culture’s high, but you’re paying above the board, it’s a great result.
“But if your staff morale is low, if you’re losing people hand over fist, if your profitability is low, it’s not a good result. So it’s also important not just to look at the actual financial benchmarks, but to look at the drivers, the qualitative drivers that drive those quantitative results, as well.”
Once the business owner has a handle on a business and strategic plan, and understands how the business is performing relative to peers, the next step is to use that knowledge to create a genuinely “future-proof ” business.
“We’ve talked about planning and the ability to actually implement a plan; the need to be flexible and to look at opportunities; know when to play defence or offence; controlling things you can control, structure, succession and development, management of your people and talent; understanding your cost base, your balance sheet; revenue drivers, the economics and margins around different types of clients,” Tucker says.
“All those things come together in combination to give you a robust plan, a robust way forward. And the test is then to reapply your scenarios to your plan and see whether or not that’s going to endure some of the big shocks that can come up. “In our process, it starts with scenarios; you know, we’ve got a view: we think, for example, the economy’s getting better, we think the market’s recovering nicely, we think that the need for advice is still strong. We think that Ripoll and Henry and Cooper added a huge amount of uncertainty.
“So you start with that position, and you then craft your plan around all the drivers and measures that you think you want to control over the next three years, and we do a three-year [plan]. And then go back to the scenario, and say, ‘Well, what if that scenario doesn’t play out? And what are the torpedoes?’
“And from an individual practice’s point of view, you can think of quite dreadful things that are going to happen, but you can also think of quite amazing things that could happen. How would I react if a business next door came up for sale that looked like good value? What if the market went up 50 per cent and therefore I couldn’t cope with the new business flow, and I started to reduce the quality of service I’m providing? You know, those sort of things.”
Future-proofing is not just about defending against disasters; it’s also about capitalising on opportunities.
“It’s not a very exciting future if you’re just sitting there, just trying to make sure that if something goes wrong, you’re going to survive,” Tucker says.
“We don’t want to survive, we want to thrive. And so, really for me it’s both sides of the coin. What would I do if things don’t go ac- cording to plan? That doesn’t necessarily mean they might be bad, they just might be different. The reality of any of us sitting in a room and trying to determine what it’s going to look like in 12 months’ time is that we will all be wrong. So future- proofing is about anticipation.”
Stephens says that in a general sense, something small businesses do not do very well is “think about not just what’s going to happen in the marketplace in the next three years, but where we want to be in the next three years”.
“What kind of business do we want to have? What kind of revenue do we want to have? How many staff do we want? What sort of clients do we want? And because we don’t think about those things, then when we’re looking at different scenario planning, and what may or may not happen, we haven’t got a reference to compare it to, to say, ‘Well, yeah, that’s a good idea, we should do that because that’s what I want’.
“It’s your prerogative to change your mind every quarter, or every year, if you want to. But I think unless we have a vision of the future as to what we want, as a business owner, it’s very difficult to make decisions along the way, to help us get to that three-year goal, if we don’t know what that three-year goal is.
“And I think a lot of people in business don’t spend enough time thinking about that three-year view: This is where I want to be, all things being equal. And then use that as a reference for a decision- making process, and the scenario testing.”
