SIMPLIFY FOR SPEED
I am pleased to report that your Company’s financial performance has scaled a new peak with a consolidated net profit of Rs.1,162 crores prior to minority adjustment. Over the last two decades, the Company has remained focussed on financial services while expanding its activities to encompass a wide gamut of services including wealth and asset management, loans and mortgages, securities and investment banking, and distribution of financial products. Your Company has emerged as one of the leading players in the financial services industry.
But what has brought us here may not take us there. Taking cognisance of present environment, opportunities and challenges, your Company’s strategy for the next decade is best captured in the theme of this annual report ‘simplify for speed’ As part of this strategy, your Company proposes to reorganise all its business verticals into three core entities, namely, IIFL Finance, IIFL Wealth and IIFL Securities. They will serve three different segments of customers namely borrowers, HNI investors and retail/ institutional investors.
Speed to survive
Your Company’s market value was close to Rs.22,500 crore as at year end; a growth of about 65 times in 13 years since the IPO. One could argue that, at this size, the typical approach would be to consolidate and conserve rather than sprint. However, we live in extraordinary times where disruptive innovations have become a norm rather than an exception. Revolutionary changes in digital technology will make ‘slow’ organisations easy targets for the innovative players- new or existing. The fintech revolution has altered traditional wisdom; it is not speed, but a lack of it, that can kill. At the same time, the growing economy will drive faster growth in demand for financial services products. An organisation that adapts with speed will be better placed to grow faster as well.
Increasingly complex world
Regulatory environment is getting stricter. Compliance is becoming more complicated by the day. Technology is changing faster than anybody’s imagination. The internet age ‘millennial’ consumer’s behaviour is defying all theories. Customer loyalty is turning fragile. Real time information and knowledge is ubiquitous and almost free. Marketing communication can be tailor made for each prospect. Data science and artificial intelligence are changing every aspect of business. Investors are backing inexperienced innovators over experienced incumbents, making the industry even more complex
Simplify to unlock speed
The more complex the world gets, the more is the power of simplicity, to unleash innovation and superior products. Customers prefer simple products and employees thrive on simple processes. Investors look for simple business models. But to make things simple has never been easy. We have to start with making the organisation structure simple, where key people have their rewards directly linked to their performance with concomitant responsibility for their acts and omissions. Simple organisations make it possible to have tailor made processes optimised for respective businesses as well.
Challenges arising from simplification
There are some complications that arise from the simplification of strategy. Let me discuss them as well.
Control - traditionally, conglomerates have thrived on complex ownership structures, allowing management control with much lower effective economic ownership. The convoluted structures have been abstruse for analysts, shareholders and regulators to analyse and understand. However, we believe that a simpler structure facilitates greater transparency, fosters superior governance and allows true democracy to mirror ownership and control. Institutional investors have choice of businesses to suit varying objectives of the funds they manage.
Size - is an edge and also a drag. All entities together have much greater size, an edge to absorb shocks or risks. A larger balance sheet wields more power. However, these advantages are outweighed by the fact that size, which is summation of parts driven by diverse forces, is a drag to speed. For instance, any new activity may require compliance and regulatory clearance of all businesses. Any shock in one business can slow down others too. Heightened risks in one business can shadow the other businesses.
Costs - are lower for many support functions when shared. However, these savings come at a hidden cost of trying to make one size or shape fit all. It may be worth the extra cost to let distinct businesses have flexibility to structure support functions, operations and technologies that best serve their respective business requirements and customers.
Reorganisation is just the beginning
Organisations like your Company, growing at a fast clip for over two decades, do tend to develop complex processes, systems, layers and control procedures. The reorganisation presents a unique opportunity. The reorganisation process will create three new organisations - simpler and nimbler than their predecessor conglomerate. They will serve distinct segments of customers, have separate management teams, varied growth trajectories and, distinct products and propositions requiring dissimilar culture and systems. The independent entities can take the simplification strategy forward to their products, processes, work flow, organisation structure, reward system and communication. Our goal is to gather speed to stay ahead of the industry.
If we get all approvals in time, you will own shares of three listed companies and will receive three annual reports next year. Our loyal shareholders would find this a bit of a compromise on the simplicity of owning one Company and reading one annual report, but I would say it’s a small price to pay for a group getting ready to shift gears. We have a thrilling ride ahead as each business can scale up many times.
IIFL Holdings Limited