The last three challenges for Investment Banks is on taking full advantage of the wave of growth. Therefore banks must not only overcome the challenges of today, but also need to keep an eye on tomorrow. To read my previous blog posts about the challenges regarding “Regulations and restrictions” and “Building and maintaining a solid client base”, please visit my personal Blogpodium page.

8. Managing Talent in the New Compensation Paradigm
Investment bank compensation policies have come under intense scrutiny by media and government in recent years. In an attempt to align employee rewards and incentives with risk and shareholder interests, many banks are increasing their base salaries and emphasising deferred compensation through stock options. This approach may address immediate regulatory requirements, but will it serve organisations in the long run?

Attracting and retaining top talent in this new environment requires a personalised approach to human resource management that invests in individuals and offers rewarding career paths. Investment banks face additional challenges in attracting, retaining and motivating the most talented people. Investment banks’ operations in emerging markets are growing rapidly in size and importance and success relies on acquiring, retaining and motivating talent in those regions.

A further challenge across all regions is the need to cater for the different demands and expectations of a
new generation of employees now entering the workforce. Today’s graduates are less focused on pay and corporate reputation, and more concerned about business ethics, variety of work and work-life balance.

9. Maturing in Emerging Markets
Emerging economies continue to offer promising growth prospects, but in exploiting this growth opportunity, banks must be sensitive to two major competitive forces, one from their peers in developed markets, and the other from local banks that have grown their operations and today stand as powerful rivals in their own right. These difficulties are compounded by the significant barriers of entry for foreign players that still exist in some markets, such as quota restrictions that can make structuring and funding the new business difficult.

Variation in local financial services infrastructure, regulation, customs and preferences makes a “one-size-fits-all” approach ineffective. Each market presents unique business environment, shaped by local customs and preferences. A successful market entry or expansion strategy requires extensive due diligence, including robust cost-benefit analysis. Emerging economies can be rewarding investments, but banks must be prepared for operations to take longer and cost more than anticipated.

10. Achieving Sustainable Cost Reduction
In boom times, abundant liquidity and demand allowed investment banks to focus on growth and pay less attention to costs and efficiency. Today, unprecedented structural changes in the form of capital limits, deleveraging, regulatory reform and human capital constraints pose profound revenue challenges for these same organisations.

The clearest challenge facing investment banks is to abandon their history of knee-jerk responses to changes in profits. Banks need to plan for the medium term, consistently reviewing costs to ‘right size’ the business as a function of its true value, rather than of the latest quarterly results. Achieving this demands a shift to a more flexible operating model that can adapt to shifts in strategy and the business environment, rather than react to sudden change through slashing costs. This means taking a strategic approach to cost reduction, combining short-term cost fixes and quick wins with longer-term structural change.

In sum, banks must take a step back and reassess the clients they serve, the products they offer and the way they operate. Cost management is hereby a continuous endeavour that requires a “culture of cost consciousness” to support strategic and sustainable cost reduction.

Last words
During the last three weeks I have discussed the top 10 challenges investment banks are facing today. Although these may not apply to all with equal weight, each represents a major concern (and source of opportunity) for the industry going into 2012 and beyond. The basic fact remains that there are only three ways to make money in investment banking: take risks, grow revenues and control costs, but banks can and should keep each of these truisms in mind – albeit, inside a wrapper of customer centricity, operational flexibility and cost management.