Thinking Ahead: Financial Modeling Industry

Future Strategic Considerations

Strategic considerations at the forefront of the financial modeling industry in the next decade include:

1.  Web 2.0

2.  A dedicated marketplace

3.  Better modeling processes

4.  Stop screaming. Start listening

5.  Cognitive surplus – Friend, not foe

6.  People culture

1. Web 2.0

The future strategy of the financial modeling industry will be impacted by many factors – most notably Web 2.0 (or the modern internet). Among several mega trends facing the industry – Web 2.0 can help achieve each one:

1. Client Sophistication
2. Governance
3. Connectivity
4. Transparency
5. Modularization
6. Globalization
7. Commoditisation

Some well-established practitioners remain naturally uneasy at the unorthodox prospect of the internet attempting to “commodify” the art that is the financial modeling industry. Among the most popular reasons touted for why the Web 2.0 movement has not yet caught up with financial modeling industry en masse include: (1) an “elitist” perception of skilled financial modeling practitioners; and (2) the complexity involved with financial models. Yet Web 2.0 has a remarkable penchant for penetrating those industries with even highest fortresses.

The notion of leveraging the power of the internet to connect dispersed groups of people, places and resources together quickly and effectively – has radically transformed the supply chain ecosystems of many fragmented industries which would have been unthinkable even a decade ago. Communities such as software programming (Stackoverflow), engineering (GrabCad), intellectual problem solving (Innocentive), graphic design (99designs), sourcing local transport (Uber), sourcing flights (Expedia) and local accommodation (AirBnB) have been majorly transformed.

Many of these online platform businesses have some less-than-obvious similarities, such as:

1.  Discrete, transactional activities (e.g. stay hotel, return flight, order cab);

2. Time consuming search costs (e.g. online calling v hailing a taxi);

3. Self-expression importance (e.g. designing a logo for the local football team, accommodation in Rome consistent with my lifestyle/budget);

4. Customer acquisitions based on the tight networks and relational economics (e.g. industry experts attend the same design school, smoke at the same place, visit Hawaii because a relative did);

5. Objective criteria to help to compare and demystify user decision-making product/services (e.g. using objective criteria to choose the winner in a challenging intellectual competition);

6.  Targeted at quasi-homogenous services with moderate price elasticity (most have services/products between $50-2,000); and

7. Form part of broader process (e.g. design is a component of a website; a flight is a component of a holiday).

2. A Dedicated Marketplace

Finding a centralised mechanism to bring together financial models and financial modeling talent is critical to ensure that the world can access quality resources, information and knowledge both quickly and transparently.

Empirically, there is an arguable case that 60-80% of the world’s financial models are most commonly used (e.g. infrastructure, environmental, resources, mergers & acquisitions, supply chain, etc) and should be openly available to the world. An online financial modeling marketplace would help “democratise” such models by delivering to SMEs (e.g. advisers, accountants, private companies) a more efficient, lowered cost supply chain for those models build most commonly. It would further encourage the adoption of new products/services (e.g. business intelligence). Competitions among financial modellers would intensify and improve aggregate quality of financial modeling standards. Users could purchase 3-4 template models as a risk hedging exercise to ensure that their financial model has addressed the majority of what it needed (without engaging an expensive financial modeler). A marketplace could be an excellent forum to find someone to independently review a financial model with complimentary skill sets. A marketplace generates greater informational exchange for SMEs to better understanding their:

• Objectives and plans
• Performance
• Structure and organisation
• Senior management changes and the decision making track record of those leadership roles
• Strengths and weaknesses
• Marketing materials and campaigns
• Wins and losses

The purpose of a dedicated online financial modeling marketplace would not be to satisfy top-tier financial modelers.  Such top-tier market financial modeling talent would continue to command between US$3,000-$10,000 per day to build the more customised, higher complexity models. Their value proposition is entirely different. Their financial models are often relied upon to make multi-billion dollar decisions. Financial modellers of this calibre, put simply, are not commoditisable and would not be the core target of an online marketplace – in the same way exclusive hotels, expensive cars, pricey accessories are not the target of online accommodation, car sales and retailer platforms. High quality financial modelers will continue to charge a premium generally because they:

• Engage in authentic communication based on honesty, tradition and innovation.
• Deliver elegant, transparent, commercially-driven, responsive, client-focused solutions:
• Empower clients of anticipate uncertain outcomes and the impact that these can have on their lives.
• Perform more efficiently, effectively, reliably (i.e. time=money)

Top tier modelers have the ability to build and review complex models and earn economic rents which cannot be “rationalised” because the outcomes of their tasks are truly value-adding (c.f. manufacturing firms who can try to rationalise more complex, low-volume sales products). Eventually an online marketplace may offer top-tier financial modelers more effective marketing strategies, online brand management and access to global business development opportunities. Top-tier financial modelers are far more focused on responsiveness and “getting it right” rather than efficiency. An online marketplace with functional models is more more efficient and help mitigates risk, whereas bespoke, innovative financial models can be left to top-tier modelers.

3. Better Modeling Processes

High quality financial models will need to be available to the larger global community for substantial inroads to be made to global financial modeling standards. More modular models will also help eliminate non-value added steps and improve the quality of value added steps.

4. Stop Screaming. Start Listening

One of the major challenges with the strategic direction of the industry has been the command-like “push” mindset.  Financial modelers have spent literally billions of hours trying to persuade the global community to use some proprietary software or latest Excel modular modeling technique on the promise it could be the “next big thing”.  In stark contrast, the future of the industry is transitioning towards a “pull” mindset” – allow open global collaboration to access the “next big thing” more efficiently and make more informed decisions about which products or services suit their individual needs.  

5.  Cognitive Surplus – Friend, not Foe

Professionals are constantly looking for ways to stand out from a crowd, building greater recognition, individualism and generating new client opportunities. The financial modeling industry, among others, has struggled to embrace cognitive surplus – the idea of spare brainpower in the world’s collective mind is available and waiting to be harnessed.  Shirky has long propounded the evolutionary implications of ‘cognitive surplus’ which can be shared so freely, so instantaneously, reminding that:

“People don’t just do things for money. We do things because they are interesting” Dan Pink

In the coming decade, financial modelers will have unprecedented opportunities to leverage cognitive surplus through technology sitting on desks, pockets and purses.  A challenging philosophical question could become: once an employer has “clocked off” from his financial modeling job for the day, does this necessarily mean that the employer needs to stop financial modeling for the day? Another is why are financial modeling firms committed to working conventional hours – is there a way to gain efficiencies by leveraging the resources from around the world 24/7?

Online freelancer marketplaces – like Elance, Guru, VWorker – have begun to embrace the spirit of cognitive surplus. These “human cloud” marketplaces allow professional services, SMEs, investors, academics to harness the enormous creative capability of the “grass-roots, engine room” staff and global thinking. They have become an enabler of nimbleness, agility and resourcefulness.  Clients and financial modellers can seamlessly create “DIY teams” which configure their own team structures and incentives based on a deep understanding of a team’s complimentary capabilities and experience. One of the major challenges for freelancers remains the need to real-time project management.

6. People Culture

The financial modeling industry will likely transition away from many legacy practices and process as it moves towards:

• Rejecting traditional demographic labels and stereotypes. Financial modeling has traditionally been a male-dominated culture.  Age and gender of financial modellers will become less useful for clients and as a role definer, since different groups increasingly share attitudes and behaviours, whereas those of the same age/gender may increasingly display diverse attitudes and behaviours.
• Middle-management becoming co-ordinators of talent and incentives. Middle management will be critical to supply chain thinking, leveraging resources both inside and outside an organisation. Highly prized middle-manager will be less territorial, more network-focused and mentor-like.  They embrace disruptive technologies. Whereas Generation X once needed assistance with accessing opportunities, Generation Y/Z needs guidance with single-minded focus and channelling energy.
• Flatter organisational structures: Junior staff have become exceptionally resourceful and well connected.  Senior financial modeling experts will no longer need to be intimidated by more junior employee with more Linkedin connections or client relationships in “high places”;
• Nurture talent carefully: The failure to incentivise and manage financial modeling talent may result in talented staff opting for freelancing. Like most professional services, clients will typically follow individual modellers capabilities and strong relationships wherever they go.
• More decentralised teams: As the cost and capability of the freelancing community matures, the incentive to be vertically integrated diminishes (e.g. audit, tax, financial modeling, consulting, financial services). Greater efficiencies can be achieved from designing small, nimble, complimentary teams which can best meet the client needs.
• Changing client needs: Open innovation will likely begin to change what is being modelled.  The growth in the number of clients opting for strategic alliances and partnerships, rather than classical mergers and acquisitions transactions, will impact what financial modellers are modeling.

Further Research

The financial modeling industry may benefit from greater academic and industry research.  Some questions include:

• How can greater transparency and efficiency be introduced into the financial modeling review process?
• Which industries and communities can benefit the most from understanding the benefits of financial modeling?
• How can key stakeholders better understand the risks associated with poor subject knowledge and “bad” modeling?
• Do vertically integrated financial modelers produce greater quality financial models?
• What are the best methods for teaching financial modellers?
• Which knowledge collaboration systems help clients manage the financial modeling process?
• Can students be upskilled in financial modeling prior to entering the workforce?
• How can business intelligence better leverage the power of mainstream Microsoft Excel users?

Conclusion

This article has explored some strategy and supply chain challenges and opportunities for the financial modeling industry.  A dedicated online marketplace would be an excellent mechanism to better synchronise supply and demand for financial models and financial modellers. Collaborative global thinking workplace resourcing will likely help deliver greater transparency, quality, flexibility and efficiency to both clients and financial modellers alike.

John Persico, will soon be launching Vumero.com, an online marketplace for the world Excel and Financial Modeling freelancing community.