Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
9F Group – China
Prepared by Ning Jia and George Foster
Founded in 2006, 9F Group is a leading financial services company in China. The company provides high-touch, customized consulting services to Chinese banks. Over the years, the company has expanded its product and service offerings to two new areas: microfinancing and wealth management.
9F Group now has more than 10 branch offices in China with more than 800 full-time employees and more than 27,000 bank managers as registered members. Annual sales revenue has exceeded RMB 100 million. As of December 2012, 9F Group has provided consulting services for more than nine national banks (including the Agricultural Bank, Bank of China and China Minsheng Bank), 10 regional banks (including Huishang Bank, Bank of Dalian, Bank of Jiangsu and Baoshang Bank) and 262 city-level bank branch offices in the areas of retail banking and microfinance. 9F Group also built a unique “cloud consulting” platform, which enables real-time consulting for its bank clients. The top management of 9F Group all have extensive work experience in China’s financial and banking sector. 98% of the company’s employees have at least a Bachelor’s degree, and 20% are graduates from top-tier universities in China.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable growing company? How did it change over time?
Sun: “Prior to founding 9F, I worked as the general manager of Hong Kong Hi Sun Technology Limited’s financial service unit, which provides various consulting services to Chinese commercial banks. After leaving Hi Sun, I joined the wealth management centre of China Minsheng Bank, where I was responsible for the overall operation of the centre. Throughout years of work experience in China’s financial sector and particularly the wealth management area, what I have come to realize is that there is a significant information asymmetry problem between banks and their clients, and as a result, banks have been able to take advantage of their superior information and knowledge about various financial products to construct portfolios for clients that are biased towards high-commission products they sell. In other words, given the conflict of interest between banks and clients, it has been virtually impossible for banks to remain objective and independent when providing wealth management consultancy for their clients. Banks would put together product portfolios that maximize their gains while compromising the clients’ best interests. So in 2006, when China’s financial market was booming, I decided to establish a company that provided third-party, independent financial services to individual customers in the area of wealth management. The idea was that we would help clients shop around various financial products and help them construct and maintain an optimal portfolio, for which we would receive consulting fees in return. However, we soon realized that individual Chinese customers at the time were not used to the idea of paying for such consulting services so our business model did not work as well as we had hoped. So we continued to look for new opportunities. In 2007-2008, we invented and started to sell our F-Touch wealth diagnosis software that helped banks (especially wealth management centres) enhance the quality of their customer service and optimize resource allocation. This business worked well initially, but because different banks in China have different policies and a varied quality and structure of client databases, selling standard financial diagnostic tools was hard to scale. So we again were searching for new ideas and opportunities. During our interactions with the Agricultural Bank of China (ABC) when selling F-Touch software, ABC expressed demand for consulting services. At the time, ABC was going through a transformation in an effort to enhance its operating efficiency and service quality, and was looking for a consulting firm to help design and implement a package solution. We capitalized on this opportunity and the project was hugely successful. So we decided to change our business model to providing high-touch, customized consulting services to Chinese banks. Over time, we have also expanded our service offerings to include microfinancing and wealth management.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Sun: “As we were going through several rounds of trial and error and trying out different business models in the early days, as do most entrepreneurial companies, we were not exactly experiencing a smooth growth trajectory. In retrospect, the problem we encountered in the early days was that there was a significant misalignment between what we wanted to accomplish and the amount of resources available to us, and the marketing timing was not exactly in favour of our business idea. But luckily our early investor was very supportive and provided us with working capital and other resources that we needed. Our management team was also very persistent and did not give up, which is another major accelerator that helped 9F get to where we are today.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Sun: “Our company’s headquarters are located right at the heart of the business district of Beijing. Beijing is home to many top-tier universities including Peking University and Tsinghua University. To maintain sustainable growth, we pay very close attention to our talent pipeline, making sure we develop and maintain a steady stream of people to turn to when it’s time to hire. We build channels with major universities in Beijing and in other provinces to create a viable candidate pool and actively recruit via campus interviews, etc. Currently, 98% of our company’s employees have at least a Bachelor’s degree, and 20% are graduates from top-tier universities in China. We have a particularly good relationship with Peking University as most of our top management are alumni of this institute. Alumni culture is particularly important in that, despite our modest size, especially in the early days, we are still able to compete with Fortune 500 companies and have successfully recruited many top-performing students from Peking University because they share the same educational background, culture and values as our management team. We work with Peking University to organize academic seminars and forums on microfinancing and retail banking. This is not only a channel for us to identify potential clients, but also to enhance our brand value.
In addition, Beijing, as the capital of China, has traditionally had a large financial sector that drives much of the region’s economy. Most banks and other financial institutions have their headquarters set up here. Being physically close to our clients certainly facilitates business communication and lowers our marketing costs. More importantly, establishing relationships with bank managers at the headquarter level and landing business contracts with bank headquarters may open up doors to regional branch offices.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges?
Sun: “Compared with Shanghai and Shenzhen, building and growing a start-up company in Beijing is generally more challenging given the limited policy support (such as tax benefits, special treatment or favourable policies for small and medium-sized companies) and relatively low government administrative efficiency. In addition, private companies in China generally have less bargaining power when doing business with state-owned enterprises (SOEs). They have a natural advantage because of government backing and access to a wider pool of resources. Although the probability of not getting paid is low, the time to collect service fees can sometimes be much longer when dealing with SOEs. This puts pressure on our cash flows.”
Q5: Large companies can play an important role in the scaling up of early-stage companies with high growth aspirations. These roles can include being customers, suppliers, marketing partners, joint venture partners, and so on.
(a) Describe the key areas where interaction with larger companies helped promote your growth path.
Sun: “Most of our clients are large SOEs, i.e., Chinese banks. Our very first client was the Agricultural Bank of China (ABC). It was our lighthouse customer and landing that contract had a monumental impact on company growth because we were able to subsequently attract many more businesses by capitalizing on ABC’s brand. Large companies are typically very cautious in choosing small companies as their business partners because small companies typically lack credibility and a proven track record, and have high exposure to bankruptcy risk. Seeing ABC on our client list and knowing that we successfully completed the project for ABC significantly helped us to land contracts with other large banks, many of which are direct competitors of ABC and are of similar size. Another benefit of working with large clients is that it forces us to continuously improve our service quality and internal management in order to live up to higher customer expectation and standards.”
(b) Describe the challenges and potential problems that larger companies may have played in limiting the growth path of your company.
Sun: “Guanxi, which means relationships and network, is key to achieving business success in China. Unlike western countries which run on a free market economy, China’s business environment is still very much relationship-based. The ability to land large accounts often depends on your personal relationship or friendship with people holding key positions in the client company. Such a business model is highly risky in the sense that the sustainability of business relationships hinges critically on the sustainability of personal relationships, and if the people you have established a relationship with resign from their current positions or are replaced by new managers, you are likely to lose the entire contract. This is particularly problematic when the client is an SOE because major decisions are generally made at the top by the CEO or at least VP-level managers. That means you need to establish good relationships with top management. But when that person leaves, the new manager typically brings in new ideas and implements changes, in which case previously signed contracts may be terminated or not renewed.
In addition, large clients have greater bargaining power and more stringent requirements that limit our profit potential. In the early days of company development, we relied heavily on business with large banks, and they did accelerate our growth in many ways. But now we are gradually increasing our share of business with smaller clients and rebalancing the weight of large clients in our portfolio in order to diversify the customer concentration risk.”
Q6: Your current revenue growth to date had been predominantly focused on your own domestic market. What are the major reasons for this major revenue focus to date on domestic markets?
Sun: “Despite rapid development in recent years, China’s banking sector is still underdeveloped compared with banking in western markets. The China Banking Regulatory Commission (CBRC) has urged commercial banks to establish scientific capital management frameworks and effective corporate governance structures and operating mechanisms, as well as to accelerate transformation of the development pattern from being scale-driven to capital-constrained, and to continue to enhance internal controls and managerial expertise by optimizing policies, procedures, risk measurement, data collection and IT management. The CBRC also encourages innovation in products and services, especially high value-added products in fields such as trade finance, small and micro-enterprise financial services, rural financial services and wealth management. As Chinese banks are constantly expanding their product/service offerings and escalating their operational efficiency, there is significant demand for our consulting services. Our service is highly localized and tailored towards the special needs of Chinese banks in a transition economy and we have no intention of expanding into foreign markets in the foreseeable future.”
Q7: What would you view as the greatest challenges in growing a sizable revenue presence in markets beyond your own domestic country or region? In deciding when and where to seek growth in international markets, what characteristics of a country’s ecosystem would be most important in attracting you to invest significant resources in that non-domestic country or region?
Sun: “The greatest challenge is the lack of talent with global vision and experience. Almost all of our employees are local hires with extensive knowledge about China’s banking sector, but very little overseas experience. Consulting is a high-touch business in which customers must place trust in and partnership with the firm with which they work, and the firm must stay close to the clients to allow close collaboration. This would require us to build a local team in countries we tap into, which is challenging at this point in time given our limited management bandwidth and lack of talent with international experience.
The three most important characteristics of a country’s ecosystem in attracting our firm to enter are: market accessibility; the availability of high-quality talent; and favourable government policies.”
Q8: Building a company that aims to have sustainable high growth inevitably will have both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in your entrepreneurial journey.
Sun: “A high moment was when we landed the consulting contract with the Agricultural Bank of China (ABC). As I mentioned, ABC was our lighthouse customer and winning this project significantly enhanced our brand name. More importantly, this project was an ‘exemplar project’ that set the quality standards of our service and enabled us to standardize the process of our service. We were able to modularize the complicated consulting service process and replicate it quickly in our other bank consulting projects.
A low moment was the arrival of the global financial crisis when we had just started to enter the wealth management business. It had a significant adverse effect on our business and we had to lay off a sizable number of our workforce. Fortunately, we were able to rebound quickly after the crisis subsided.”