:: The Park Paradigm ::

Markets for the Digital Generation

Of course I believe this to be true. Indeed it is the first plank in the Park Paradigm. A core tenet of the Digital Markets business line I now run at DrKW. So I am completely at the mercy of confirmation bias when it comes to this subject, that said it is encouraging to see other voices echoing my thoughts on the subject.

Catching up on some reading over the long Easter weekend, allowed me to find a number of interesting items published in the last month or so, expounding on this theme. This could turn into a rather long post, so forwarned etc.

In last week’s Digital Business supplement, Ade McCormack of Auridian (a strategic IT consulting business as far as I can tell), wrote an interesting editorial, entitled “Thinking the unthinkable: CIO as a future CEO?” (To avoid confusion he is referring to the Chief Information Officer not ‘Investment’…) For once (!) it’s not behind a FT paywall, so I encourage you to read the whole thing, but here are a couple nuggets for the time challenged:

…The idea of the chief information officer even sitting on the board is unthinkable to many. So the CIO as the next CEO is some way off. For some it is just a conceptual leap too far.

But surely it is inevitable? Very few organisations function without IT. Business has evolved from agricultural through industrial to services, and looks set to gravitate towards customer experiences. Banking, for instance, is evolving from a banking-centric model – “you need to come to us when and where it suits us” – to a customer-centric model – “we are there for you, when and where you need us”. This needs IT.

In an increasingly customer-empowered market, all organisations will become customer-centric and their need for IT will increase. So if you care about customers, costs and share price, then IT will matter to your organisation…

…Over time, the executive headhunters will “test” for the digital gene when short-listing candidates to be chief executive. Once the boardroom is end-to-end digital, so to speak, then a new type of leadership will be required. Enter the digital leader. A role designed for business-centric CIOs. To rephrase an aphorism: “The post-geek hybrid business technologist will inherit the earth.”

I find it mysterious that in this day and age, when IT development and deployment lies at the heart of (most) successful service oriented businesses, that the corporate cultural norm of IT as somehow distinct from the business - the “we are not a software firm, we are a [insert sector here] firm” mantra - continues to predominate executive management thinking. However I can speculate as to why that might be the case. Inertia, fear and a healthy dose of ‘hadn’t really thought about it’. A cynic would say ‘turkeys don’t vote for Christmas.’ While I’m sure that angle is relevant in some cases, my optimistic view of the human condition would posit that more often than not, lack of change of attitude on this front is probably an error of omission rather than commission. If nobody in the room focuses attention on the issue, then the issue doesn’t exist.

I vaguely recollect (correct me if I’ve got this entirely wrong), a similar debate / movement emerging in the 1980s and early 1990s as to the importance of the finance role to executive management and of the viability/logic of the CFO to CEO career path. This is now a well trodden path and is seen as a natural (in some cases the most natural) way to the top, however this was by no means always the case. Previous received wisdom was that you needed a ‘product’ or ’sales’ person in the top job. Putting aside what on earth that exactly means, in the 1980s (perhaps spurred on by the Barbarians at the Gate?) mainstream management thinking shifted to endorse the idea that in some (or many) cases the CFO was the natural successor to the CEO as the importance of financial engineering and increasing complexity in managing multi-jurisdictional businesses grew alongside increasingly global product and capital markets. Does that mean we are now (at last) finally starting to approach some sort of analogous tipping point for the CIO to CEO paradigm?

Moving on from the ‘who’, and onto the ‘what’ or ‘why’… the increasingly frenetic strategic dance of the world’s financial exchanges has been ever present in the headlines over the past 12 months. The LSE has often been at the centre of many of the twists and turns, her star shining more brightly than a traditional view of her market position would suggest at first glance. While this is not news per se, Eugene Grygo wrote an eloquent editorial in Dealing with Technology a couple of weeks ago highlighting the importance of technology as a driver of value for the LSE:

…Of course, the LSE’s very history and key role in world markets would make it a very attractive acquisition target. But what the mainstream media fails to recognize is that the LSE has been persistent in its commitment to technology. In fact, the LSE is in the third year of a four-year technology roadmap, slated to be complete by the beginning of 2007. The high point is expected to be the launch of a new transaction system for its electronic order book, the Stock Exchange Electronic Trading Service (SETS). Along the way, the next-generation system has involved the use of technologies from Microsoft, IBM, Borland Software and Hewlett-Packard (HP)-just to name a few of the major IT suppliers.

Prior to the current technology roadmap, the LSE developed SETS in 1997 at a time when some of its suitors were more worried about internal politics and entrenched forces than forward-looking technology strategies. The LSE has also developed: SETSmm, a hybrid system of an order book supported by market making; SEAQ for real-time quote-driven trading for small-to-midsize U.K. companies; SEATS Plus for trading AIM stocks; Eurosets, a service for trading liquid Dutch equities; and the International Order Book for liquid overseas securities…

If you are in doubt over just how high the stakes are, following a recent spate of very high profile problems, the Tokyo Stock Exchange recently announced plans to spend JPY62 billion (c. $530mn) over the next 3 years on technology. Approximately half that is earmarked to develop their next-generation platform, with the remainder targeted on fixing their existing system and improving their back-up systems. In another concise editorial, Eugene Grygo at DWT makes the point that IT can no longer (if it ever could) be considered non-core or a commodity by securities firms:

While not exactly a revolution, we are witnessing something close to it. The trading markets are either turning to automation or taking it to the next level, and user firms are losing no time in staying ahead of the curve.

Like many major developments, though, this is good and bad news for securities firms. From my vantage point, IT executives and senior managers will be the initial beneficiaries because technology is back in the forefront of trading. No longer can firms claim that IT is a commodity that all players have in equal abundance and, therefore, not a competitive advantage. Thus, firms will need ever-sharper guardians of their IT empires. I might even suggest that the balance of power is swinging back to the technologists-at long last.

For the moment, the major downside is the still undefined, new role for the human traders. While there has been a lot of discussion about the fact that a new role is needed, I have yet to see much in the way of specifics beyond the need for them to become more tech-savvy. Some global firms may have begun the transition. My guess is that the new role of the trader will become more acute as soon as a year from now, and that forward-thinking firms have a master plan in place for when their traders will have to make the leap into their new futures. Or be given parachutes.

At the risk of being accused of ‘talking my own book’, I agree with Eugene’s assessment and indeed this realisation is at the core of why we created Digital Markets. As to his last question as to the future role of human traders? Without hiding behind the usual politically correct response of ‘there will always be a need for traders, sales, etc.’, and ignoring for a moment that ‘always’ is an awfully long time, I think that there is a very real chance that traders - as we now define the role - will indeed disappear over the next few years, to be replaced by people (who my guess is we will continue to call traders as the transition will be mostly incremental and continuous) who’s role and requisite skills will revolve around managing the machine and the ultimate outcomes, without so to speak ’sweating the details’. Will they need to understand markets? Yes of course. Will they need to understand how to drive the machine? Yes of course. Think of it this way: on one level, Magellan and Armstrong were both explorers (traders) and shared common skills and purpose. Yet on another level - sailor / astronaut - their skills were entirely different and incompatible.

If you want to be a trader tomorrow, learn how to fly the spaceship. At the very least you better know what a spaceship is!

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