Episode 8: When transforming at speed and scale, listen to the customer

David Lancefield
Welcome to the 8th edition of ‘Transformation Talks.’ My name is David Lancefield and I am a partner in Strategy&. I am delighted to welcome, Xavier Rolet, Chief Executive of the asset manager, CQS, and the former CEO of the London Stock Exchange, also an angel investor in goAfrica.com and Peacell, and a former senior executive in a number of banks.

You are listed as one of the top 100 CEOs in the world according to the Harvard Business Review. The Financial Times said you have a bold risk-taking style, and you are a visionary deal maker, and indeed in an earlier part of your life, you were a second lieutenant and instructor in the French Airforce Academy.

It is refreshing that you also have such a rich and varied life outside business, not often the case for some CEOs. I read that with your wife you run an award winning family wine business, you are a beekeeper, and you are a participant in a number of Dakar rallies, and no doubt other things I haven’t even touched on.

Welcome Xavier.

Xavier Rolet
Thanks for having me. Such a gracious and generous introduction.

David
All accurate. Well, today we are going to focus obviously on transformation, particularly focusing on how you’ve grown organisations, in complex environments and at pace. So, the overall theme is scale and speed.

When you took over your role at the London Stock Exchange in particular, how clear was your vision in terms of where you wanted to take the organisation?

Xavier
Well, I think the vision was reasonably clear, but one of course needs to be flexible and adjust to the new realities of doing a job you’ve never done before. So, you have to allow for some margin of interpretation, error, but also adjust to the facts on the ground, and these are always driven by customers.

In the case of London Stock Exchange, I joined in the second quarter. By the beginning of the third quarter of 2009, we had a fully-fledged strategy, which I presented to investors, with the management team at that time.

The original strategy was set, and then if you look at the execution, it was pretty close to the early strategic vision or strategic intent. But there were some things of course that as we went, we changed, we modified and improved, and essentially this was based on customer feedback.

I fundamentally think, strategy, like innovation, is driven by customers. You have to account for where you are, when you land in an organisation, and take stock in terms of your competitive position. In this case, the competitive position, I would say was not very brilliant, it was very challenging. But it really is the customers that will tell you, basically, what they expect from you and from your organisation.

David
What is the most surprising thing that the customers told you at that time?

Xavier
Having been a customer before, I expected what I was going to hear. I wasn’t surprised. So the most surprising thing... I would have to scratch my head a little bit to come up with something that surprised me. I guess that was an advantage. Of course, there were other challenges.

Having never run an infrastructure company, I had to adjust to the cycles, which are much longer, and to the fundamental vision, which is not so much about selling short dated products to your customers, but providing infrastructure that’s going to serve their needs for a long, long time. That framework was different from the investment banking industry. But it did not surprise me to hear that the exchange industry, in general, and the company that I had the honour to lead in particular, had strayed from a close alignment with their customers’ needs and challenges.

Frankly, they weren’t delivering what the customers wanted, at the price they wanted. It was not just a price issue, but the service and the positioning had moved away from the expectations of a range of constituents, not just the banks, but also the asset managers.

David
So, there was quite a gap in terms of what the customers were looking for, the product, service and everything else, and you clearly had a very strong perspective.

Going back, I am interested in how you sold that strategy you talked about to the organisation and outside. In particular, given you were in some ways, an outsider, coming from a bank, how did that help or hinder you in selling that vision for the transformation of the Stock Exchange?

Xavier
Of course, in a way it helps. You’ve got a so-called, fresh pair of eyes, so people, by and large, will listen to what you say, and at least to figure out if you are on to something or not.

The flip side of course is not being an industry insider. Let’s say that what you are saying is being discounted by those who, ‘are in the know,’ and are often part of the establishment of that industry. And there are a range of associations, that formalise the establishment, which we actually hastened to leave and resign from, in order to be able to strike an independent course that was driven not by establishment thinking, as worthy as this may be or appear to be, but so we could follow a course that was driven by what customers, clients, present and future were telling us they wanted and needed for business success.

David
How important in that process was the cohesion of the team that you were building around you? Because some executives and chief executives tell me that sometimes when you are trying to genuinely transform and reflect what customers want, you can’t actually have the cohesion of the leadership team. How important was it to you at that stage?

Xavier
It is very, very important, and at that time, there were three aspects of the strategy.

One, that we were essentially a monoline company, with a single product. The trading primary issuance and secondary trading of UK equities. And we were losing our market share very, very fast. In fact, in the second quarter of 2009, we were losing about one percentage point of market share every week.

We were facing an immediate challenge of retooling, reengineering technological change, structural change. There was an operational challenge that needed to be addressed immediately, because we didn’t have the right technology, we didn’t have the right cost base, and unfortunately to your point, we didn’t have the management at the time.

There were 23 members of the executive committee, and two survived in the first three to four months. We had to make some fairly radical and immediate changes, not just because a new CEO arrives, and you have to make your mark. It was really because we were facing a survival challenge of essentially preserving our own existence, because we were losing our core market at a rapid rate.

In the third quarter of 2009, our market share was down below 40%, we were in the low 30s [percent]. There are a few exchanges, if you look at the US, for example, that has been able to recover substantially; once you drop to those levels of challenges, it is very difficult to get it back. So, we were facing a real challenge in terms of our own survival, being essentially a monoline business.

Then secondly, we had this alignment issue with our customer, not just us, but the industry in general, and we had to look at our structure. Were we going to preserve a silo? Which by the way wasn’t supported by capabilities - we didn’t have a clearing business, we didn’t have a settlement business, or range of businesses. We didn’t have a futures business. Things that other exchanges had, we simply didn’t have.

Thirdly, we were in an environment that was moving very fast. You can assess where you are in terms of your rate of innovation of client service, the quality of your management, your staff, your product. But there is an industry out there that’s not going to wait for you to get your act together. So we had to assess where we were, and the big positions in the industry were being rapidly taken, and we were essentially marginalised.

It is those three elements that determined the strategy that we, in the period from May until September, worked out, got approved, and then presented to shareholders in September 2009.

David
Given those three elements, and that presentation, what was the hardest bit of convincing the shareholders?

Xavier
If you specifically ask about shareholders, I mean, all of them were difficult. The only question I used to get at that time was “Where is your market share in UK equities?” and the answer was rarely a positive one.

We had to address their concerns with the survivability of our business model, and they were immediate, the pressure was intense. Many of the shareholders at the time, had basically entered the stock at a much, much higher price.

I would say that many of the institutional holders that were looking at the stock at that time, and that reflects a lot of the prices that were made. Not betraying any private discussions here, this essentially mirrored and echoed the public commentary in the British and the international press at that time. Where the comments were, ‘last nail in the coffin’, ‘roadkill’, I remember clearly, some of the comments that were used to describe the LSE.

Outlandish or not, investors basically expected a short-term cost cutting strategy, to give a little bit of boost to earnings per share, and most likely a trade sell to a better operator.

So, yes they were disappointed with our first early strategic moves.

David
Yeah, I can imagine.

That’s intense pressure for you. You were operating at pace, but at the same time the picture you had in your head, sounds as though it was clear in terms of the customer perspective.

How did you keep your mindset clear as to where you wanted to take the business in the short term and then in the long term, when you’ve got shareholders, you’ve got customers, you have employees, both privately and publicly saying a lot, to put it mildly. How do you keep that plan?

Xavier
That’s a good question, and the only way you can manage the situation is by keeping your clarity. And the only way you can actually keep your clarity, once you’ve formulated it, let's call it a vision too for lack of a better, more technical word, is to be very honest with everybody; with the employees, with the boards, with the customers, and with the shareholders.

By the way, I disagree, sometimes I hear analysis about, well if you are in exchange, you are either going to serve your shareholders, or you are going to serve your customers. I fundamentally disagree with that analysis. It’s the same equation. You can’t satisfy your shareholders if you are not going to satisfy your customers. That equation is central to any strategy.

So I was very, very honest. We have a business that is deeply challenged. Yes, we are going to go ahead with the operational improvement. You [the shareholders] really have nothing to lose.

We were going to take cost out, because our cost base was bloated, but it was not just about letting people go. Most of the people who were let go at that time were in the senior management. There was around a 15% staff reduction in the first six months. We needed to do that simply to survive. That wasn’t an issue. So, you have nothing to lose as an investor. We also needed to take a deep look at our technology, which was outsourced at that time to consultants, they were expensive. And the set up was essentially not one that was going to enable us to compete on the basis of the service and the cost that we offered. So we had to embark on a complete operational restructuring. We started acquiring technology companies. At that time it wasn’t well understood, and the company didn’t have much of a financial balance sheet or the ability to make large acquisitions, so we started small. We picked certain areas, where we were able to acquire very nimble, agile, state of the art technology that would help us reduce our cost. But at the same time we had to look at our competitive position.

To your question, how do you keep your resolve? It’s your customers ultimately that are going to sanction those transactions.

David
So, in a way, even though the immediate reaction was challenging in terms of the announcements, customers, the customer sentiment, and the involvement was positive and meaningful. You have scaled up London Stock Exchange from what I read, from £800m to £14 billion in terms of market cap in eight years. After the initial re-imagination, restructuring, and taking cost out of the organisation, what was the hardest part of that scaling up?

Xavier
The hardest part was that, whilst under pressure from all sides, from competition, regulators, and an ever changing regulatory framework globally, we were scaling our business globally, from a UK base to a global base. We can go into details later on, but we were having to do three things at the same time.

First, continue basically an operational redo. This wasn’t an optimisation, it was top to bottom, soup to nuts, complete upgrading and reorganisation of the business, with significant management hires. Essentially most of the executive committee was hired from outside, as well as the middle layers.

We were continuing an operational redo at base, which presented a measure of danger. Migration is probably one of the most dangerous things an exchange could do. When you migrate from one, even if it’s an old system, to something new, it’s not just rolling out software.

David
That migration for any, especially exchanges, but for any business, everyone really focuses on the new things, or sometimes the legacy. But it is the transition that’s hardest.

Xavier
Transition is incredibly dangerous. It is not just migrating to fancy low cost, highly innovative, agile, effective, well-designed technology. It’s how you roll it out into a network of hundreds, sometimes thousands, of small, mid-sized, large brokers, asset management organisations all over the world, who have different regulatory frameworks.

Migration is exceedingly dangerous and requires a lot of attention. But at the same time we also had to catch up. If we wanted to play in intellectual property, we have no assets there. When clearing we had virtually no assets. [We had] a small asset in Italy that was itself under pressure because of the Eurozone crisis. So the one asset we had, happened to be from a macroeconomic standpoint, possibly in one of the geographic locations that was under the heaviest pressure globally, being Italy. Which one could say has not totally escaped macroeconomic pressure owing to the heavy level of indebtedness. But that was already in the group, and we had to deal with it.

Dealing with that challenge, we also had at all times to be considering acquisitions. The pace at which, over eight and a half years, we processed 25 acquisitions, three sales, and two mergers. The two mergers failed, but all the other ones succeeded.

David
You’ve got the three elements, you’ve got the operational reset, you are creating new assets, you have a series of acquisitions at different stages, you have a relatively new exec committee…

Xavier
Very much so…

David
I see exec teams, who are quite happy on the acquisition spree, which sometimes led the rest of the day-to-day business drift away. Or actually are sometimes good at the integration, but actually focus on the here and now and then the pipeline stops. Doing all of those three is hard, really complex, how did you do it?

Xavier
We also had to re-organise the platforms that we acquired to prepare them for open access, and that’s the third part. And even within LSE there were a lot of people that either didn’t understand it, some stakeholders didn’t understand, or didn’t want to go through with it, or thought we were destroying value before we even acquired it. So that’s the third bit. It is the reengineering to match customers’ expectations.

But at the end of the day, a lot of the integrations were done through a lot of pressure, a lot of sweating, a lot of personal attention. When you are managing an organisation with that rate of growth, yes you discuss things, but at some point, the search for consensus has got to stop.

David
Is that the biggest trade-off?

Xavier
Absolutely, and I think there are organisations, if you look basically at the lifecycle, they are in need of probably more forceful leadership. There are companies who have become so large, and need a different kind of leadership, perhaps more consensus driven.

But I think if you are in an organisation that has lost its way, doesn’t have the vision, doesn’t have the people, and doesn’t have the background, which they [LSE] didn’t have, executing properly. We had to shut down four or five projects that had no chance of ever being successful. So, you have to do all these things and you’ve got to push. There is no alternative to leadership at that stage.

Now once the organisation has managed to establish its position, and in infrastructure the benefit you have is, if you make the right decisions and you execute them properly, revenues are very sticky, they don’t disappear overnight. Then you get into a level where I think something is even more important, perhaps. The leadership needs an eye on future innovation. You need to innovate in services and technology.

David
From your experience, what’s getting in the way of executives in the large organisations you refer to not leaping forward?

Xavier
It’s hard to speculate on what makes a board or an executive management board, innovative or not.

I don’t want to offend anybody, but I’ve rarely seen companies with the chief innovation officer being innovative. It is something that has to be in a fibre of a company. To me what drives innovation is proximity. And when I say proximity, it has got to be a really close relationship with your customers.

David
Much more than customer research or talking about customers, it’s got to be meaningful.

Xavier
It’s really partnering with your customers, understanding their deepest challenges, and they are not going to tell you what their deepest challenges are unless they really trust you and know you. So, it’s not a CEO to CEO meeting ‘now tell me where your challenges are’. You really have to get close, really understand the challenges they are facing and the opportunities they are looking at. That to me is what drives innovation and whether it’s a board or management board or nonexecutive board, whether it’s senior management, it is proximity to customers.

We launched a senior relationship management programme in the LSE, where every member of the executive committee, every single one of them, regardless of whether they were in data, in clearing, or a CFO, or heads of operation or technology, they were responsible for covering one very meaningful important customer. Addressing all their concerns, assuming responsibility for a relationship…

David
That’s quite a shift.

Xavier
It's very important.

David
Given the complex situations you’ve been in, having to roll your sleeves up right at the beginning, in London Stock Exchange, and previous roles in banks…

Xavier
It was a fantastic experience.

David
Yeah and clearly you have a CEO role now and you are an angel investor in a couple of organisations, let alone other things you do in life. These are complex, challenging, inspiring no doubt at times, situations you plunge yourself into, what sustains you as an individual?

Xavier
The pleasure of working with people. People use the word passion a little too much, there are many things one can be passionate about. I think it should start with family and other things, not business. But purpose is probably the correct word to use.

For me, when I look at a young businesses like goAfrica, I don’t want to pitch it. But when you look at Africa, one of the problems that Africa has is intra-African trade, infrastructure development. I do happen to know Africa reasonably well. I’ve been travelling there for the last 45 years of my life, and having grown up there when I was a little boy. Africa needs solutions, not just for individuals, but also for businesses, for municipalities.

So, we created this business, where using your cell phone, using an application, if you are a municipality, and you want to buy 40 pumps to create an irrigation programme, you can connect through the application with any of 13,000 Chinese manufactures, who will be delighted to answer your request for a quote, or request for a price, for bespoke or standard delivery. We’ve worked out the distribution, the logistics, which in Africa are very complicated. You can deliver cranes, pumps, anything, trucks, engines anywhere in Africa. And we’ve found out a solution in terms of the creation of electronic escrow, so that neither the provider, nor the customer, nor the buyer, are at credit risk or counterparty risk on the other side, we have an electronic escrow.

This is not fundamentally complicated other than the delivery side, but it meets a need, there is a purpose to this. It’s giving access to a range of municipalities, businesses and companies, who do have access to capital, to technology, that is going to be well priced and is going to help them basically move the dial forward in their particular area. So, there is a need there.

Whether the company succeeds or not, we will see. I am not involved any more than as an angel investor, I am not on the board, I am not part of management, but I think there is a purpose and that’s one of the things that motivates me.

David
I can sense that.

I have to say it has been an absolute privilege Xavier, speaking with you, and learning from you. Your sense of purpose shines through, your curiosity for solving big challenging problems, but also combining different skillsets in different moments. Growing an organisation, resetting an organisation at the same time, creating assets…But that customer closeness and understanding the customer lens on the London Stock Exchange and other organisations you’ve worked is a critical ingredient. I think, often they are not put in the centre of a transformation plan, there are often at little bit distance. They have to be symbiotic.

David
Absolute pleasure.

That was another additional Transformational Talks. Do subscribe to the series and if you like today’s podcast, be as good as to rate us favourably.

Thank you Xavier.

Xavier
Thank you, my pleasure.

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David Lancefield

Partner, Strategy&, PwC United Kingdom

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