We would all, I’m sure, agree that most decent aspiring Financial Services businesses have a dose of smart IT somewhere in the mix which improves their competitiveness. But I ask myself in this blog what IT strategy might give you a chance of creating significant growth in the commercial value of a company? What circumstances might foster a new game changer? How do we help ourselves “get really lucky”?
I turn to the landscape that I call the “inertia of legacy”. The long term investment cycles of large FS businesses often means they find it more difficult to update their business models at speed. This presents a huge opportunity for smaller nimble businesses that are able to adapt and evolve their models more quickly.
Let me start off by sharing something from a few years back. I was fortunate enough to meet the management team of Callcredit in their early days. Callcredit is now a sizeable credit referencing and consumer data business: it was only formed in 2000. The team expounded a vision of an industry slowed down by “legacy IT” and their vision was for an innovative, nimble company which was able to identify market opportunity and react to it quickly. This was achieved by building the business on a much more modern IT platform than its competitors. It was my first experience of the “inertia of legacy”. I didn’t call it that and I was a little sceptical but I was intrigued by the opportunity.
Fast forward to Livingbridge today. We have backed several Services companies that are driven by smart customer-facing IT at their core. On reflection, there are some common features about how they compete. Large established industry players are forced to bolt on IT to their existing services and whilst the IT is intended to offer customer features (and I’m sure it does), the architecture and design is clearly influenced by the legacy and capex direction of the established. For instance, a parcel delivery company builds a customer interface and however good it is, it is likely to be designed to direct volume to maximise the utilisation of its own supply chain, on its own terms. In contrast, I can think of three companies that we have backed where the management had strong customer domain knowledge in a field (logistics, car rental and print management) but they didn’t have a legacy business at all. Management had the freedom to ignore legacy thinking and re-engineer a disruptive business model which is embedded and symbiotic with the IT solution: it typically has only one focus – to deliver exceptional service to the most demanding customer in its field. Often these have led to IT solutions that allowed a customer to procure from many suppliers not just one, whilst aggregating the supply-side. The joy of being free from legacy!
Another recent investment example is CR7, a company in the field of card payment processing, linking merchants to Acquirers to facilitate card transactions. The CEO has deep experience of the area and had made some capital from a prior realisation. He has re-entered the market creating an entirely new payment processing IT platform (called Optomany) building in many innovative features he knows the market will want for the next generation. How rare an opportunity to start afresh with your IT team focused entirely on the future, able to use the newest software tools, and not having to maintain a legacy platform at the same time?
So back to Financial Services. This arena is full of heavily invested, old legacy systems, which were built on a belt and braces principle: the pace of change can be glacial. This is entirely understandable as IT solutions are complex and in highly regulated environments, they have to be bullet proof. Re-building a new platform when the old one is working “OK”? Too many FTSE CEOs have lost their jobs through failed IT implementation: it may just be easier to leave that tricky issue for the next management team. One day, an innovative team comes along, re-engineers the business model based on modern capabilities and builds that new platform, in a lower cost, scalable way: it grabs market share from established players, through serving customer needs much better.
Can this create significant value? Look at Callcredit as an example. From formation in 2000, it’s now in its third private equity ownership (I count its original owner Skipton Building Society as the first) and the last acquisition in 2014 was at a reported £480m. Not bad at all.
So should we be aware of the risk of “inertia of legacy” in our own businesses? However hard it is to reinvent, are we being genuinely creative in our future vision of the business model? Are we ruthless in appreciating that historical capital expenditure is a sunk cost? And are we seeking opportunities where others might be sluggish?
Contact: Andrew Garside, Livingbridge / July 2015
The ideas and conclusions in this column are the author’s own and do not necessarily reflect the views of Livingbridge. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any investment.
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