Creativity comes into its own

That investment banks should now be hotbeds of creativity is not surprising. Peter Drucker, US creativity guru and professor at a school of management that takes his name at Claremont University in California, says firms often innovate when faced with one of three situations: an unexpected event, a change in an industry or market, and a need to develop new processes. Investment banks at the moment are experiencing all three conditions.

The events of September 11 provided a catastrophic impetus to creativity. At Merrill Lynch, for example, all research feeds went down, making it impossible to post research on Reuters or Bloomberg. To overcome this, the firm was forced to introduce a new proprietary research product overnight. Candace Browning, Merrill's head of US equities research, says that this has been so successful that it is to remain in place.

In a classic article in the 1985 Harvard Business Review, Drucker says that when an industry changes structure there are tremendous opportunities for innovation. The shift from pure investment banking to a universal banking model seems to be unleashing just those opportunities. Citigroup, a prime example of the universal banking model, says its investment banking operation managed to increase earnings in 2001, in contrast to its rivals.

Michael Klein, global co-head of investment banking at Citigroup, says: 'Our integrated approach enables us to deliver creative solutions to our clients consistently and efficiently. We believe that makes all the difference.'

Economic conditions have also been fanning the creative fires. Browning says that people tend to be more creative during a downturn: 'You need to do more, with less.' Browning says that this means focusing even more than usual on what is important to clients, and innovating to ensure that products are aligned to their needs.

The mantra that in a difficult market clients need creative solutions, is repeated across banks and divisions. Piya Dhawan, a director in credit derivatives at Deutsche Bank, says: 'There is no easy money to be made right now. We've shifted from a product-based approach to a problem-solving approach. It's a question of getting into the head of the client and really understanding what would be best to solve their needs.'

Providing bespoke solutions has become challenging clients are more demanding. Simon Piney, global head of equity capital markets at BNP Paribas, says: 'We are being made to work much harder. We're putting a lot more effort into finding workable solutions for clients. Although investors are not keen on innovation for its own sake, subtle innovation has become key to success.'

Piney says that volatile market conditions during the third quarter of 2001 made it necessary to adopt a novel approach to new offerings. A France Télécom €3.5bn ($3.1bn) convertible offering was launched at 7pm and closed by 8am the next morning, instead of taking place at a more normal time of day. 'Markets were so volatile that the more you could reduce the amount of time that you were exposed to them, the better,' says Piney.

In M&A, the lack of deals has encouraged some banks to look at innovative partnerships with strategy consultants. Joe Spinelli, head of global financial services at Bain & Co, says: 'Several investment banks have been keen to make presentations with us so that we can put a strategic spin on a proposed deal. This happened quite a lot during the downturn of the early 1990s, and it's happening again.'

Nor is it only market changes and September 11 that are stimulating innovation. Changing process needs are also playing a role. Amelia Fawcett, chief administrative officer for Europe at Morgan Stanley, says that market volatility and increasing trading volumes in some areas since September 11 mean that the bank has been looking creatively at methods of increasing operational flexibility, without increasing costs.

So great is the impetus towards creativity that it occasionally takes less than desirable forms. Some fixed-income bankers who are believed to have been fired from UBS Warburg last week for copying Morgan Stanley's research may well have thought they had stumbled upon a creative method of reducing their workload.

But for the most part, innovations in banking have adhered to Drucker's definition: 'Change that creates a new dimension of performance.' Maintaining that new dimension will require creative thinking even when more stable conditions return.