By Dan McNamara, Chief Strategy Officer, MUFG Investor Services
The coronavirus pandemic has highlighted the need for businesses to continuously reevaluate their structure and offerings in order to be ready to handle the next crisis. Companies that built out their capabilities to work remotely before COVID-19 are happy they invested the time and money to make that possible, as are the firms that bolstered their data security. But these weren’t the only steps taken to protect companies during this unforeseen crisis.
Another way businesses can prepare for the next financial curve ball is through diversification. Having multiple lines of business makes a company less susceptible to disruptions than if it were reliant on just one, it also positions them better to create solutions for clients in response to industry trends or extraneous shocks. When one source of revenue is adversely impacted by an event such as the current pandemic, new competition, or changes in how business is conducted, companies need to be ready with a diverse product and services set. These are critical strategic decisions that go to the heart of a company’s purpose, and they should be made after assessing three important factors: the company’s current place in the market, its own capabilities, and which services will support the business’ broader goals.
Evaluate Your Market Position Before Diversifying
The best way for a company to understand how to diversify and expand its offerings is by examining its role in the value chain and where it currently adds value to clients. This is often the best indicator of where you can add further value in the future and understand your real “USP.”
Widescale market changes, such as those brought on by the pandemic, however traumatic they can be, also offer opportunities to adjust or grow a business by assuming a different or expanded role in supporting clients.
Having a diverse suite of products helps with this kind of adaptation. For example, at MUFG Investor Services we have seen a significant increase in demand for our lending and FX services and our middle office outsourcing or “BPO” products, due to the pandemic’s economic impact and as clients have realized the value in outsourcing non-core functions to a reliable partner.
By assessing where we could add value to clients in adjacent areas to our core admin product and properly building out these services beforehand, we were able to elevate that side of our business and meet client needs during this crisis.
Because of our work, we are now in a position to support our clients as they grapple with the changing economics of their own services. We are able to stay relevant and show our commitment through our diverse range of offerings.
Through the course of the crisis, we also expanded our securities lending and private debt administration programs by making key hires and employing industry leading technology.
While the expansion of this program was planned before the crisis began, the shift in the market made it clear which directions would be best for our company and for our clients.
Propper planning isn’t always about predicting the timing and nature of the next crisis; instead it is about evaluating your environment, the long term market trends and client needs, and preparing multiple avenues to support clients as their needs begin to change.
The fact that our strategy didn’t need to change in response to the crisis and that we were able to stay the course and continue to expand and diversify in our chosen areas resonated well with clients and our own staff. Our diversification was seen not as a reaction, but as part of our larger strategy, and many clients began dialogues around our newer offerings.
Understand Your Capability for Diversification
Diversifying your business, and in doing so planning for the future, is an ongoing effort.
In a perfect world, investments in new services and lines of business would happen in a constant or controlled environment. But as we have seen this year, we cannot predict the macro environment and there is rarely a “perfect moment” to invest.
Depending on how it is done, diversification can be both time consuming and costly, and it requires too much coordination to be left up to short-sighted research or temporary market movements. As such, you need to run your business in a way that allows for continuous investment and improvements.
We are fortunate at MUFG to have a parent company that believes in this philosophy, supporting investments that reflect our commitment to clients and operating with a unique time horizon that makes it easier to build long-term partnerships.
We have utilized the backing of our parent bank to bring capital to bear in order to acquire technology and build out industry-leading service offerings across multiple business lines. One such expansion was our acquisition of Point Nine Limited in 2019, which formed the foundation of a new entity within the bank: MUFG Investor Services FinTech Limited. This innovation hub allows us to speed up development of middle- and back-office solutions and bring our diversification strategies to market more quickly. It also highlights why making these changes during periods of stability allows for better coordination during a crisis. So, building a culture and a financial approach that provides for continued investment over time is critical – this is what creates the capability to diversify.
Align Diversification Strategies with Corporate Goals
If you want to diversify to better position your business for future shocks and to allow it to grow, you need to ensure your approach fits with your corporate goals.
MUFG Investor Services’ own diversified suite of services has been built around the goal of being a full-service partner for our clients. That means that everything we offer, from fund administration and fund financing, to business process outsourcing, FX, regulatory services and agency securities lending is there to provide comprehensive support across the middle and back office as well as meet treasury and banking needs. As such, diversification is key to achieving our corporate goals.
Not every company strives to be a full-service provider, and some businesses operate as specialists in particular product or service areas. But even those companies can diversify their offerings and support their clients in other ways.
When the coronavirus pandemic hit, MUFG Investor Services was ready because of the preparation and planning we did beforehand. While we could not foresee the outbreak and the economic turmoil that followed, we were able to plan around market changes by building a diversified set of offerings based on the needs of our customers. A great many companies could benefit from doing the same, especially before the next black swan comes along.