At first glance, this is an odd marriage. Former regulators paired with data geeks? And at second glance, it looks odder still. Promontory was Gene Ludwig’s baby. It was run like the quintessential private consulting firm, with cards held closely to the chest – and now it’s being bought by a public company? The blogosphere is crackling with theories: Couldn’t Gene find a successor?
Promontory Financial Group was started in 2001 and positioned itself between banks and their regulators. Gene repeatedly insisted Promontory was not a lobby group, but instead was geared towards helping banks understand and implement both the letter and the spirit of new regulations. Indeed, Gene has been an advocate for radical transparency in banks, and a frequent critic of laggard banking efforts to own up to their compliance shortcomings. To that end he has hired former regulators, and not just street-level government employees but big guns like Julie Williams, former chief counsel at the OCC, or Mary Schapiro, former chairman of the U.S. Securities and Exchange Commission. Promontory became the go-to consulting firm for banks facing regulatory challenges, but with the onset of the 2007 crisis some of Promontory’s successes put it in hot water over clients like MF Global and Standard Chartered. Some this week are speculating that the blowback from these legal troubles, coupled with Promontory’s prominent involvement in the OCC’s and Fed’s failed Independent Foreclosure Review process, may have pushed a wounded Promontory into the arms of an unlikely suitor. We disagree; we’ve uncovered no indication in our research efforts this year that Promontory’s core “bank doctor” business has been damaged or compromised. Banks still turn to Promontory for expert compliance remediation help.
So why Big Blue?
Well, IBM brings an impressive amount of analytics horsepower to the table. Regulators are becoming increasingly data-savvy and are expecting advanced monitoring and reporting technologies and tools. An even bigger challenge is the need to make sense of mountains of unstructured data. IBM and Watson are at the forefront for new machine learning and AI technologies that can process all that unstructured data, though competitors are nipping at IBM’s heels. This new relationship with IBM – in which Promontory will continue as a wholly-owned private subsidiary of IBM – suddenly arms Promontory with powerful new data and analytics capabilities, and all under one of the most potent brands in this space.
So what’s in this for IBM?
For one, Promontory brings a hefty Rolodex of clients. IBM likely already has relationships with most, if not all those banks, but Promontory had access to very different people in those banks. But Promontory also brings deep, historical information about those clients to the deal, both through the experience of its some 600 consultants as well as through data the firm has collected over the years. IBM reportedly wants to add a Watson Financial Services unit to the company’s recently-created Industry Platforms Business – and IBM wants to use Watson to fold both the Promontory data and the collective experience of Promontory’s experts into this new product line focused on the banking regulatory space. Like Promontory, IBM suddenly gains capabilities and credibility with one of the foremost brands in this new space.
So maybe this isn’t such an odd pairing. Unexpectedly, data providers with regulatory-focused products like Bloomberg and Thomson Reuters should be concerned, as some commentators have noted, but this off-season wedding also puts firms like the Big Four, which have been developing machine learning and AI tools recently, on notice as well.
Still, there is an oil-and water element to this union. We’re imagining arguments over the proper attire to wear to client meetings. But like any marriage, this can work if both parties put in the effort. The cultural and administrative differences are formidable, and strategic goals need to be aligned. This could turn out to the oddball union that ends up redefining the regulatory advisory space – or it may fade into history with recriminatory books and a talent exodus. It’s up to both firms to make this work.