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An equation to rule them all

From the desk of John Arnesen

Consulting lead, Pierpoint Financial Consulting

I was tempted to write about the effects of the current, unprecedented situation on the securities finance market but decided that everyone is likely suffering from information-overloaded and given that not all of it is accurate, wading through it for useful news, does not need my two-cent worth. Instead, I thought I would write about something that struck me recently as useful and piqued my interest.

On Wednesday, February 27th, J.P Morgan held its Annual Financing and Collateral Conference in Canary Wharf and was yet another, informative, engaging and high-quality debate over relevant, contemporary issues. I found the last panel compelling. “Technology as an enabler-cutting edge application and the drive for efficiency”. Not only was the panel made up of companies that started life as Fintech’s and are now well established but early on in the panel discussion, the moderator, Ben Challice, Global Head of Trading Services at J.P Morgan projected a slide on the screen that is an equation known as the Beckhard-Harris Change Equation. It looks like this:

Beckhard-Harris Change Equation

My attention was drawn to the ‘R’ side of the equation as I could immediately think of several initiatives in my past that did not get past the ‘ > R’ hurdle and one that did.


The model is based on the idea that individuals tend to favour the status quo within an organisation whereas managers, with a wider view of the institution, will identify the need for change sooner than employees but will meet resistance from them. The change equation was developed to describe the potential success or failure of an initiative for change within an organisation, identifying and labelling the elements required for the change to be successful. Originally it was named “The formula for Change" by David Gleicher, a management consultant in the 1960s but was modernised in the 1980s and 1990s by the organisational theorists (now that is a cool business card) Richard Beckhard and Reuben Harris from which the equation derives its name.

The equation is straightforward enough and describes situations in which I am sure we have all faced and I wonder how many initiatives for change do not get further than the ‘D’ stage. Dissatisfaction can be felt by a large number of employees but the degree to which the current situation is bad or unproductive will have to be felt strongly enough to instigate a change to the status quo. After all, the business case for change based on improved productivity, greater revenue generation or perhaps improved services to clients will have to be carefully crafted with statistical evidence that will convince those holding the purse strings to commit both money and resources. If the gap between the projected change and the status quo is not ‘felt’ enough by the decision-makers, it will stumble at this point.

Some years ago, I happened to be sitting next to an old colleague at a dinner who described the effect on their business from engaging the full suite of products from Trading Apps. I was particularly interested in how quickly the expense of the project had been recouped via increased lending activity and revenue. Fast-forward a couple of years and I was in the position to invite Trading Apps to demonstrate their wares to a group of would-be users. After salivating over the key features and seeing my colleagues doing the same, I became convinced this would radically improve our trading activity. The next stop was my head office with management and I.T. present. A great presentation with lots of enthusiasm in the room and then, just as I believed it was clear that we had secured a collective ‘D x V’ stage, it came to a halt. Why? Having grasped why we were so keen to install the salient features of Trading Apps, our I.T department convinced my management that they could build something very similar and cheaper. All the counterarguments were ignored, as without evidence to the contrary, despite knowing that the claim, however well intentioned would never materialise, it was enough to convince those with the budget allocation responsibilities to pursue an internal solution. Needless to say, this never happened due to more pressing needs organically rising to the top of the I.T. development list, which is exactly what I suspected, would happen. In hindsight, I realise that my management should have been exposed to the ’D’ stage from the beginning and having hopefully caught the ‘V’ stage, be introduced to the solution via Trading Apps while simultaneously explaining how swamped I.T. would be with already established projects for the foreseeable future.

Setting the stage correctly is vital and will take time and effort but the key is to anticipate the objections that will undoubtedly be raised and have well-crafted counter-arguments to complete the equation.

Another example takes me back 20 years when working for one of the largest agent lenders. We were creaking under a lack of straight-through-processing (STP) as our lending systems were not connected to the custody system so every transaction had to be manually instructed on both sides of the Atlantic. As the volume in Europe was growing exponentially, the situation was untenable. However, there was not a dissenting voice anywhere in the business and the project, simply named the “STP Project,” had buy-in early on from the head of the business and his boss. This was important, as our needs in Europe were more complicated given differing settlement cycles, multiple sub-custodians and the need to have the custody platform I.T. staff engaged in making several changes to the core custody system. That in itself was no easy task and my paranoia throughout the entire project was that the European business requirements would consume a disproportionate amount of the budget when compared to revenue contribution by location and we would end up with a compromised product if the will to deliver all requirements waned. In fact, in Europe we did consume a lot of the project budget, created friction with developers that constantly asked ‘why do you need that?’, went over budget and generally consumed more attention and resource than anyone anticipated.

Yet during all of this, no one questioned the project or wanted to compromise or deviate from the required specifications. Towards the approaching ‘go-live’ date, my boss made a decision that surprised me. Even though the US lending business was more lucrative than the European and Asian business by a high multiple and would have benefited instantly by ‘go live’ first, he decided that the European activity was to be the first delivery. Once I had picked myself up off the floor, I asked for his reasoning. He said ‘if the U.S business goes first and we encounter problems, we will never get to you’ In other words, he had recognised all along that regardless of all the testing and preparation, there were so many moving parts to the European business that if we encountered a problem, at least the I.T resources were immediately available to correct them and would do so until Europe was stable and operating before turning attention to the US business.

I have never forgotten the wisdom in this and when I apply what happened to the equation, ‘D x V x F’ blew away ‘R’ during the entire project which is why it was so successful. Yes, there were some teething issues but they were quickly fixed.

The future for securities finance will rely heavily on new and developing technology. This could involve a paradigm shift in platforms and applications, so it is critical that in all the planning, effort and delivery, ‘R’ does not get a look in. Change is the future, so Beckhard-Harris is indeed an "Equation to rule them all".

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1 Comment

Great read John! The ‘STP’ section brought back some fond memories! 🙂

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