GS Elevator – From Point A to B with Many Stops
Introduction
Goldman Sachs is a public investment bank with a market capitalization of ~$78bn that has ~ 34,000 employees around the world. The company’s core business is focused on providing clients with advice on their capital markets and strategic decisions. While Goldman Sachs is a well-respected company within its industry a lot of inefficiencies exist within its operations, particularly within its investment banking division.
Business Model
The Goldman Sachs business model is predicated on getting paid fees for assisting clients with their strategic and financing decisions. The market for investment banking advice is very competitive so banks attempt to differentiate themselves based on relationships and transactional experience. While there is a range of “fee-opportunities” the largest transactions, with the highest profile clients, can typically have the largest P&L impact for the firm. In addition to the fees generated from these large transactions, the increased visibility serves as a form advertising which can attract future clients and top-tier employees. Increasing the volume and size of transactions is highly accretive and profitable to the firm. Goldman’s success has allowed it to remain at the top of the league tables every year and one of the more sought after finance jobs coming out of undergrad and business school.
Operating Model
As alluded to earlier, the business model for Goldman Sachs is predicated on providing superior client service and generating fees. In practice this means constantly staying in front of the client and being ready to provide anything the client needs as quickly as possible. Unfortunately due to the hierarchy at Goldman there are at times large disconnects between the members of the team who are presenting materials to the client and the members of the team who are producing the materials. A sample client team would consist of a Managing Director, a Vice President, an Associate, and Analyst, each of which are separated by 3 – 5 years of experience in the business. The Managing Director and Vice President share the responsibility of keeping in contact with the client and trying to get meetings on the calendar with the client to discuss whatever topics are most relevant. The Associate and Analyst are usually responsible for putting together the presentation that is used in the client meeting. The workflow is usually as follows: 1) the senior team alerts the junior team of a meeting a week in advance (despite knowing up to a month in advance) and ask them to put together preliminary views, 2) the analyst sketches a presentation and begins to work on the analysis, 2) the Associate reviews the presentation, makes edits, and then sends to the Vice President, 3) the Vice President reviews the presentation and analysis and makes changes to the work, 4) the junior team updates the analysis and presentation per the latest comments from the Vice President, 5) the updated presentation is provided to the Managing Director who proceeds to make changes, 6) the junior team updates the analysis and sends it to the senior team again, 7) final changes are made to the presentation and the senior team attends the meeting and reports back any follow-ups. There are two key issues with this operating model, 1) there is not enough early communication between the people attending the meeting and the people putting together the presentation and 2) there is a culture at the firm of being a self-starter and wanting to prove yourself which leads to junior people doing work without much guidance from senior members of the team.
Conclusion
The result of the flawed operating model is an increase in the amount of hours the junior team spends working on presentations and an increase in the amount of revisions provided by senior members of the team. Generally the work product for the client is not compromised which is what makes augmenting the operating model more challenging, however there are severe impacts on team morale which leads to employee attrition. Given that Goldman Sachs’ assets are its people this attrition and decreased morale can have a hugely negative impact on its business model. The firm has made great strides in recent years to indirectly improve its operational model by implementing working hour restrictions and mandatory weekends off which has forced senior members of the team to communicate more effectively and punctually with the junior team. While the firm’s operational model is currently at odds with its business model, given the existing compensation of the firm’s employees and the culture of the industry more broadly there likely won’t be many wholesale changes in the near term.
References:
[1] Goldman Sachs, Inc. 10-K filing (December 31, 2014)
[2] Goldman Sachs, Inc. 10-K filing (December 31, 2013)
[3] S&P Capital IQ, December 2015
[4] http://www.sec.gov/Archives/edgar/data/826083/000119312513134621/d505474dex99c24.htm
[5] www.valuewalk.com
[6] www.goldmansachs.com
[7] Google Finance
Great post! Thinking more broadly about Goldman’s business model and the increasing role of regulators in investment banking activities, how do you expect Goldman to pivot their operating strategy to remain competitive with new alternative lenders (e.g. GSO, Blackrock, Golub) and boutique advisory firms (e.g. Evercore, Centerbridge)? How do you expect Goldman’s new HR policies to offset the fundamental risks that investment banks now face?
Thanks for this! It seems Goldman’s (and other banks’) new HR policies are meant to make banking a more sustainable career path; however, they don’t seem to fix the root cause of the inefficiencies in a typical investment banking group. Do you think banks understand these inefficiencies and are making these changes are part of a broader strategy to correct them? Or is there a general lack of understanding of the issues with the operating model? Given that the percentage of MBA grads going to financial services is declining rapidly, I would think this would be top-of-mind for investment banks.
Very interesting post. It reminds me a lot of the consulting industry. I wonder if some of these problems aren’t universal to any professional services-based industry where the people interacting with clients are often not the ones producing the work. Culturally, at my consulting firm, partners would do their best to include junior team members in every client meeting. In fact, part of the appeal of consulting is that you’ll often sit at the table with CEOs as an analyst. Is this a cultural fix that could help reduce some of the inefficiencies? Is the work structured enough to allow it?
I thoroughly enjoyed reading this article. I strongly agree with your view on the operating model of GS and other bulge bracket banks. The operating model has a lot of human capital waste. The time demands on human capital at banks leads to a high attrition rate of junior bankers. What is your view on the operational model improvements that can make Goldman Sachs’ modulus operandi more sustainable?
REVISION: I thoroughly enjoyed reading this article. I strongly agree with your view on the operating model of GS and other bulge bracket banks. The operating model has a lot of human capital waste. The time demands on human capital at banks leads to a high attrition rate of junior bankers. What is your view on the operational model improvements that can make Goldman Sachs’ modus operandi more sustainable?