Global investment banks have a clear chain of command: Analysts report into associates who report into vice presidents, directors and managing directors. But this organizational structure results in discrete teams or “silos” of experts that don’t speak with each other.
For example, you can spend your career as a Metals & Mining banker, and never speak with an asset-backed securities trader, although you work in the same building and share the same cafeteria. While these experts may be excellent in their niche, their silos can inhibit collaboration across the company and hide larger problems from detection.
In her enlightening book The Silo Effect, Gillian Tett, U.S. managing director of the Financial Times, shows how these silos present real challenges to banks. For example, in March 2007, regulators met with UBS, which, at that time, had some three thousand personnel charged with detecting business risks. The regulators asked whether the American housing crisis would negatively affect UBS. “The answer that day was an emphatic no…six months later, however, it became clear that this verdict was disastrously wrong,” explains Tett. How could UBS have gotten it so wrong?
“UBS had collectively fooled themselves,” she writes. The bank, like its competitors, was and remains a collection of fiefdoms with discrete teams that work independently. Information may flow up and down the management stack, but rarely left and right, and therefore the large systemic problems of potential trading losses went undetected. “Most people who worked in the UBS global network did not even know the CDO desk existed at all,” she writes.
Tett advances an idea to help bust through silos at banks: publish research co-authored by equity and debt analysts. She mentions how Merrill Lynch started to do just this in 2005, writing a “Dequity” report that merged insights from both divisions.
The research product was indeed popular among investors with multi-asset allocation strategies. But the initiative eventually flagged: “The different analysts were so specialized in their areas of knowledge, that it was time-consuming for them to communicate, and to translate their concepts and methods,” she writes. Tett surmises that the pay structure at banks, which is organized in silos, also inhibited collaboration.
With billions of dollars rushing into ETFs and passively managed funds, asset managers (and the bankers that cover them) have to think more broadly about investment vehicles. So why not bring back the debt-equity research model back in spades? And set up pay structures that reward this type of collaboration? It would help banks cover clients more holistically, and at the same, have their employees collaborate in meaningful ways. Some banks already publish “roll up” reports that merge insights from both divisions, but that’s different from merging divisions or creating functional teams that work across groups to spot partnership opportunities and serve clients.
Realizing the problem of silos, several banks now emphasize career mobility opportunities for their employees. By moving from one division to another, employees can bring fresh thinking to teams that are set in their ways.
JPMorgan Chase has also tried to bust through silos with its Investor Client Management (ICM) Group, in which bankers try to cover clients holistically, agnostic to which division gets paid. Say a client pays JPMorgan handsomely in commodities, but it wants to do more business in foreign exchange (FX) products. The JPMorgan ICM banker can come to the rescue, ensuring the client gets good service from the FX division. Using this approach, the bank sees across discrete silos and can spot gaps in covering clients.
While banks are making strides, they are still labyrinthine organizations of discrete silos. It’s imperative that employees work proactively to spot and bust these silos so that all parts of the business are fully understood. For starters, Tett’s book which brims with silo-busting ideas, unearthed with her anthropological perspective, should be compulsory reading for all bank executives.
[This article was also published in TheStreet]
This article is commentary by an independent contributor. At the time of publication, the author held positions in JPM.
Kabir Sehgal is the author of New York Times bestseller Coined: The Rich Life of Money And How Its History Has Shaped Us. He is also a Grammy winning producer. Follow him on Facebook and Twitter.