Knowledge Center: Publication
Can a leader from a large financial services firm thrive at an industry disruptor? How about the other way around?8/22/2018 David Boehmer, Elyssa Pedote and Elliott Stixrud
In the past several years, senior executive talent has increasingly moved between large, traditional financial institutions and small, innovative upstarts in tech and fintech. Traditional institutions, facing disruption, have sought expertise and leadership to harness a wide array of innovative technologies and processes and, in some cases, complete transformations to next-generation business models. Nontraditional players, needing to scale and mature, have sought executives who can lead them through the successive stages of enterprise growth and guide expansion into additional services and markets within a highly regulated and complex environment.
On both sides, the rates of “tissue rejection,” mismatched skill sets, and executive turnover have been high—and so have the costs of such failure. Nevertheless, traditional firms and disruptors alike tell us that they are continuing to seek external talent to supply the leadership they urgently need. Because there is not yet a large pool of “crossover” executives who have succeeded in both worlds, firms must improve their ability to predict who is likely to succeed in their unique operating environment.
A recent study we undertook of CEOs and general managers (GMs) who have transitioned from a traditional firm to a disruptor, or vice versa, could help. First, we identified approximately 150 such CEOs and GMs. Then we applied a filter to gauge their relative success; our criteria included value creation, length of tenure, career progression, and talent development. Using three key dimensions of our firm’s proprietary assessment model—pivotal expertise and experiences, leadership capabilities, and agility—we built a data-driven set of initial hypotheses about the sources of their success. We tested those initial findings with top leaders who had gone through such a transition themselves and with active investors in segments where these kinds of talent transitions are occurring. We fine-tuned the results using our experience placing talent in both traditional institutions and the smaller innovative firms that are challenging them. Finally, we developed a scorecard for assessments of the experiences, leadership capabilities, and characteristics of agility that we believe are required for success, regardless of the direction in which the talent moves (see figure). Following are our findings.
In pivotal expertise and experience, the watchword is multiplicity
Commentators on leaders and thinkers often draw on the ancient Greek distinction between hedgehogs and foxes: the hedgehog brings a powerful singular focus to the world while the fox draws on a multiplicity of experiences. In successfully moving between traditional institutions and disruptors, the decided edge goes to the foxes—leaders with a wide variety of pivotal experiences. Specifically, leaders with a higher probability of success score well on the following experiences:
- Leading companies through multiple stages of growth. These stages include start-up, high growth, and maturity. Ideally, these leaders have guided growth in varied market conditions—up markets, downturns, and stagnation. In addition, their likelihood of success is boosted further if they have led an organization through an M&A transaction, an IPO, or another liquidity event.
As a number of the people with whom we tested our framework observed, it is easy to “ride a rocket” during optimal markets. But when a downturn hits, funding dries up, consumer behavior changes, or credit models don’t work, the question is whether the leader will be able to weather the storm. Has he or she hired people in an expanding market but also been able to prudently target efficiencies to save costs during rough times? On the transaction side, does he or she truly understand value creation? Does he or she know how to drive toward financial outcomes that investors seek, and—sometimes even more important—know when it’s time to double down or when it’s time to head for an exit?
- Working in multiple industry segments that differ substantially. The late 1990s and early 2000s saw the rise of the superbank, an increase in regulation and complexity, and more specialization within banks. As people moved into more senior roles, their responsibilities encompassed fewer products and functions. As a result, their experience and expertise were increasingly confined to narrower silos—equity trading, fixed-income portfolio management, payments operations, and so on. Fast-forward to today: the rate of disruption and change has accelerated and comes from many directions at once. Now the edge goes to those who have succeeded in environments where they have to manage effectively and make business and people decisions without deep expertise. These environments can also include running businesses in new and diverse geographic regions and cultures.
For example, one of the leaders with whom we tested our framework has in the course of his career headed major industry segments, including mortgage lending, consumer banking, credit cards, payments, and functional groups in North America and in Europe. His breadth of experiences prepared him to become the leader of a highly successful fintech with a combination of services and products that is both highly original and works within the framework of a traditional regulatory ecosystem. While most of his prior work was in big companies, his international experience forced him to be more hands-on, scrappier, and less dependent on the support operations of a large organization.
The likelihood of success in moving from a disruptor to a traditional institution further increases if that person has a track record of embracing the challenges and opportunities of regulation and a history of driving positive performance in that environment. As a partner in a leading private equity and investment advisory firm told us, “Disruption is a laudable ambition, but you have to be realistic about regulation—and the legacy tech that will slow it down.”
- Thriving in a variety of management structures. As GMs or managers with P&L responsibility, these leaders have worked effectively in several management structures—direct, indirect, matrixed, networked, flat, and so on. On the one hand, someone who has worked only in a start-up, with a straight line from decision to execution, will likely have a difficult time working in a large global organization where getting things done requires building consensus among stakeholders from different businesses, functions, and regions. On the other hand, someone who is accustomed to supervising managers and building consensus may appear to be slow moving and overly political in a more innovative and execution-driven environment. As one leader told us, “There is a fire and intensity to being a CEO in a high-growth firm, which is rarely seen in larger environments.”
Three leadership capabilities stand out
The executives we identified as having successfully transitioned between traditional institutions and nontraditional innovators excel at three critical leadership capabilities:
- Balancing strategy, process, and action. These leaders are as adept at leading execution and achieving results as they are at mapping out processes and conceptual strategies. Disruptive firms tend to succeed because they can move quickly and aren’t afraid to take risks, while large firms are able to build resilient and compliant organizations by ensuring that scalable processes are in place. Move too far in one direction and the firm can come to a standstill; move too far the other way and it can, as one investor put it, “crash against the ozone layer and fall back to Earth.”
- Building talent and teams. Leaders who rose to the top of our assessments are talent magnets—outstanding people want to work with them—and take care to develop and retain top talent. As the managing director of a global firm that invests in growth companies said, “Look at what percentage of senior executives worked for this leader in other companies or divisions. People vote with their feet, so great leaders need to empower those around them if a company is to grow.” Great leaders—whether as CEOs of large firms or as founders of disruptors—also attract outstanding people to serve on their boards.
- Innovating through creative leadership. Successful crossover leaders in our study find new ways to do things and new things to do. They have a track record of creativity, follow through on new ideas and models, and lead change through an optimistic vision of the possible. In large institutions, such leaders refuse to accept that something is impossible due to regulatory concerns, size, or complexity. Instead, they overcome those constraints in creative ways. In disruptor organizations, creative leaders are constantly reassessing what has been and what is, and they push others to rethink the possible. As one investor warned, “Many people are creative within the world they already know, but they are unable to disrupt that world beyond those boundaries.”
Agility requires courage, energy, and an ownership mind-set
Agility, the third critical dimension of our assessment model, is largely about flexibility, adaptability, and resilience. It points to the future—to the potential executives have for meeting new challenges. Leaders of change know not only how to fail fast but also how to anticipate setbacks, learn from them, and recover. Leaders who have been most successful in the transitions we studied tended to share the following elements of agility:
- Courage. Courageous leaders are willing to speak their minds, lead rather than follow, and take calculated risks. As an investor in high-growth companies said, “I always like to ask prospective hires about the biggest risk they’ve ever taken personally or professionally—which has proven to be a great indicator of adaptability.” The career moves executives have made, or haven’t made, are indicative of what they value and are willing to take risks for. So too are major projects or initiatives they undertook that weren’t obvious at the time and required the taking of a bold stand.
- Energy. Energetic leaders persist in the face of obstacles and resistance, with a marked ability to overcome professional and personal adversity. They tirelessly adapt to meet and master adverse conditions, bounce back from failure, and regard setbacks as temporary. There is a steady and unrelenting pace to everything they do. As a result, they inspire similar resilience in others. Many start-up founders agree that disruption is hard work. What looks like an amazing ride from the outside actually requires immense energy to overcome entrenched behaviors and incumbent players.
In traditional firms, crossover executives need persistence and energy to break through resistance to new ideas. The nature of that energy, however, is of a different sort—it is about influencing and navigating organizations and creating buy-in and followership horizontally, not just vertically.
- Ownership mind-set. This easily misunderstood aspect of agility is not about compensation. In large firms and disruptors alike, key executives typically have some version of stock options or other incentives designed to give them a direct stake in the success of the company. But a deep-seated ownership mind-set goes far beyond financial interests; it speaks to profound issues of personal identity.
The literature on the psychology of entrepreneurship as well as our experience with founder-CEOs confirm that, for certain people, the success of the enterprise is intimately bound up with who they are—their motivations, feelings of self-worth, and values. For these people, failure is not an option. They are prepared to turn on a dime—change course, learn new skills, and seek help—to ensure the enterprise with which they identify succeeds. That does not mean someone must have a background as an entrepreneur to have an ownership mind-set; we’ve also seen it among executives who have worked exclusively at large institutions their entire careers.
Lack of self-awareness appears to be the number-one derailer
We also looked at leaders who had not fared well in their attempt to cross over from a large institution to a disruptor, or vice versa. Not surprisingly, they were the antithesis of their more successful counterparts: they lacked a multiplicity of experiences, they couldn’t find the right balance between strategy and action, or they didn’t excel at talent management, creativity, or innovation. But one of the most remarkably consistent deficits among these executives lay in a lack of self-awareness. Instead of recognizing the need to stretch themselves in a new environment and working to evolve, they clung to what worked for them in the past. They failed to recognize just how different their situation was, and they neglected to take the necessary steps to learn new things or to hire teams to compensate for their weaknesses. In addition, a lack of self-awareness often came coupled with a perceived lack of authenticity, which hindered their ability to hire and inspire top talent.
The pool of crossover talent is growing
Traditional financial institutions possess enormous resources but face a rapidly changing landscape of competition, clients who increasingly favor digital and mobile financial services, and business models that urgently need refreshing. Disruptors see a massive market opportunity but often lack experience with scale, regulation, compliance, diverse markets and services, and managing and maintaining profitable growth. For both kinds of firms, crossover talent will be the key to getting it right. And when a firm does get it right, the rewards can be significant—not only monetarily but also in the opportunity to reshape the industry.
Both traditional institutions and disruptors have been hampered by the lack of a large pool of proven crossover talent that they can reliably draw from. Only recently have we begun to see consistent movement between the established world of large financial services firms and the nascent world of disruptors, resulting in a generation of crossover leaders being developed in front of our eyes. A decade from now, the pool of such talent will be much larger. Firms will be able to confidently identify exceptional members, and working in both worlds will become a highly desirable career path.
Until then, traditional institutions and disruptors alike can listen and learn from past successes and failures to make the best possible prospective judgments about who is most likely to lead their organizations on a path to growth, transformation, and impact.
About the authors
David Boehmer (firstname.lastname@example.org) is the global managing partner of Heidrick & Struggles’ Financial Services Practice; he is based in the San Francisco office.
Elyssa Pedote (email@example.com) is an associate in the San Francisco office and a member of the Financial Services Practice.
Elliott Stixrud (firstname.lastname@example.org) is senior director of methods development for Heidrick Labs, the research arm of Heidrick & Struggles; he is based in the Chicago office.