Amazing Amazon

It was twenty years ago today that Amazon listed on NASDAQ with an initial share price of $18. Last time I looked it was over $900. This means that founder Jeff Bezos is now worth about $80bn; positioning him as the second richest American and kicking at the heels of Bill Gates. But what is much more interesting than the wealth he has created is the business itself and the philosophy that drives it forward.

As we all know, Amazon was launched as an on-line book seller and the initial business plan suggested it would take four to five years to make a profit. In fact, it posted a profit in the last quarter in the fourth year; much to the relief of shareholders, many of whom had begun to doubt that the business would survive. But survive it did and now sells a huge range of products and also manufacturers its own hi-tech products such as Kindle, Fire Tablets, Fire TV, Echo and Alexa as well as low end basic products such as USB cables.

It also has Amazon Web Services; the world’s largest provider of cloud infrastructure with a market share that exceeds that of IBM and Microsoft combined. It also operates the websites of several large retailers including Mothercare and Marks & Spencer in the UK. And then there is the Amazon Go store. Opened in 2016 for Amazon employees in Seattle to test, it uses a variety of sensors and automatically charges a shopper’s Amazon account as they walk out of the store so there are no checkout queues. The store is planned to open to the public later this year.

In essence this is a business built on innovation. But how do they make this happen? What is the underlying philosophy? The recent Jeff Bezos letter to shareholders throws some light on this. He writes: “I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic.

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come. I’m interested in the question; how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organisation?  Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day1 defence: Customer obsession, a sceptical view of proxies, the eager adoption of external trends, and high-velocity decision-making”.

If Jeff Bezos is correct, this “starter pack” poses a real challenge to most life companies, asset managers and banks. Let’s start with customer obsession; (“unable to stop thinking about something” – Cambridge English Dictionary) In my experience of working for and with financial services institutions, I have never seen it. I have however seen many other obsessions, including obsession with market share, cost reduction, risk management, investment performance, sales figures, competitors, capital efficiency, internal politics and last but by no means least, the size of annual bonuses – for staff that is, not with-profit policyholders!

Why is this? To be fair, life companies and investment managers have customers that are actually clients of an intermediary. This complicates things. But what about culture? That is driven from the top. And if you look at the Board Committees in most of these institutions you will usually find the following: Audit, Governance, Nomination, Risk, Remuneration, Investment. No Customer Committee. And I have yet to see mention of customer included in the role of the Governance Committee. So not much evidence of customer obsession to be found.

What about a sceptical view of proxies; for example, market research which is a proxy for customers. Bezos says “A remarkable customer experience starts with heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.” I say, you won’t find it in many financial services institutions, nor will you find “the eager adoption of external trends” These organisations are by nature cautious and in some instances necessarily slow.

When it comes to “high velocity decision making” it has to be said that financial services institutions are pretty poor. Needless to say, looking after people’s money and financial future is a serious business but analysis paralysis coupled with a risk averse culture has created an industry which has seen precious little innovation, And, most of what we have seen has been driven by regulation.

So much for the financial institutions. What about financial advisers? In common with other professional firms such as lawyers and accountants they are obsessed with customers; or should I say clients. Why? Because they meet them every day. Interacting with clients is their business. And as for market research, financial advisers are the first people I talk to for genuine insight.

The eager adoption of external trends is quite mixed in the adviser space. There are eager early adopters of technology. But others who are sceptical. Hopefully, this is a product of their client feedback rather than some sort of internal bias. Because, like it or not, technology will have a very significant impact on the way financial advice is delivered over time. Finally, as far as high velocity decision making is concerned, relatively small owner managed businesses will always be winners in this area. So, it seems to me that when it comes to the Jeff Bezos formulae for staying relevant and successful, most financial advisers are well positioned.