This is one of the questions I used to get asked most when I was an Investment Banker. Why don’t Investment Banks hire more people? It seems like a fairly basic question. Investment Banks are incredibly profitable, work their staff to the bone and pay them incredibly high wages. Wouldn’t it make more sense therefore to have them work fewer hours, pay them slightly less and have a more sustainable business model?
This isn’t a crazy question and in fact some Investment Banks, especially smaller boutique M&A advisory firms use this tactic to keep their costs down and to retain staff, however as a rule of thumb this is not a model that most Investment Banks work under.
I think there are a few core reasons Investment Banks don’t hire more people and I’m going to outline them below. Most of the reasons actually have to do with efficiency. Investment Banks often do hire too many people but the nature of the work doesn’t lend itself to a ‘normal work load’.
Some of the reasons Investment Banks don’t hire more people include:
- Small deal teams are more efficient
- The more you do a certain task the better and faster you become at it
- The work flow is actually far more cyclical than most people imagine…the crap tends to hit the fan when multiple deals go live at once
- Most deals have a large amount of downtime…and you need something to fill that time
- The model is not built around retention
Small deal teams are much more efficient
It is generally true to say that the smaller you keep your team in any given endeavour the more efficient you will be. Larger teams require far more co-ordination than smaller teams (which requires time and resources to co-ordinate) and individuals are less informed about the process as their role in the process (which reduces efficiency).
In an investment banking deal team, unless the deal is a monster, it is pretty rare to have more than one analyst, one associate, a VP, a director and a Managing Director involved in the deal. Often a deal team will have far less. The roles are clearly defined and everyone knows exactly what they need to do. There is no replication of work at the different levels and among individuals and there are no unnecessary meetings to divide the work load.
The more you do a certain task the better and faster you become at it
When you work in investment banking you become a machine. A processing machine, an excel guru and you have an ability to pick up detail and errors that you never thought was possible. Have you ever wondered how this happened? The answer is quite simple: repetition
The more you do a certain task the better and faster you become at it. A first year analyst will often take 3x as long to do a given task as a second or third year analyst. Investment Banks know this and use this. Having double the resources doesn’t actually mean you get double the work done or people work half as long. There are efficiency gains to be had from specialization and experience.
The work flow is incredibly cyclical
One thing most people don’t realize about investment banking is how cyclical the work flow actually is. I went 18 months without doing my first deal. This didn’t mean I was cooling my heels for 18 months…I was pitching like crazy for most of that time as well as working on deals that never completed. The work that I did over this time did not bring in any fees for the bank however the bank still had to cover my (very high) wage.
This is something that is actually pretty hard to see if you are just looking at the junior analyst pool. They always look busy because they are always utilized 100%. However it is actually pretty hard to justify hiring more staff if you’re not getting paid for the work the current staff are doing anyway.
The horror stories about investment banking and most of the bad days you hear about actually occur when a couple of deals go off at once. You can’t share the work around because you are the one with the specialist skill in that area (see the point above) and as a result you get slammed for a period of time.
Most deals have a large amount of downtime
It is actually pretty rare to only be working on one project as an Investment Banker because there is simply not enough to do on that one project to keep you busy at all times. Yes some projects have an incredibly short time frame and they take all of your time within that time-frame however most have long periods where you’re not doing a great deal. You may be waiting for responses from the client or from lawyers or you may just be waiting for someone else within your bank to mark up documents which you sent to them a few days ago.
In your spare time which may be an hour a day or it could be a whole week where nothing is happening on a deal you have more than enough capacity to fit in a few more pitches or another live deal.
Wouldn’t you rather have someone else doing that additional work? Occasionally yes but more often than not you wouldn’t. Investment Banks are notorious for over-hiring and over-firing their staff. The bank I worked at did both during the time I was there. When they over-hired and I had downtime I had nothing to do. I was twiddling my thumbs the whole day only for something related to my deal to come through at 6pm right as I was packing up.
The hiring model is not built around retention
Most of the reasons I have given above are pretty logical reasons for Investment Banks not to hire more people. This reason is not logical however is pervasive in the industry.
Investment Banks operate a churn and burn model for their junior staff (primarily the analysts however junior associates are not spared). They want the maximum efficiency they can get out of you knowing that they are not trying to have you stay in the long term.
If you can get maximum efficiency out of small deal teams and experienced staff then you can see why they wouldn’t want to hire more staff.
The junior bankers are not completely innocent in this merry-go-round either. Junior bankers join knowing and seeking the experience and skills that come from this sort of model as well as the resume build that an Investment Banking job provides to them. Junior bankers don’t want more staff…it means they have less chance of getting on better deals.
This is a culture issue which benefits those who don’t want a career in Investment Banking and who don’t care about their junior staff.
If you’re the type of person who wants a career in banking though, the message is clear…avoid the junior levels of banking. Join as an associate or lateral into a higher position OR alternatively work at a boutique bank that doesn’t play by the same rules. The bulge bracket firms are never going to change…so if you’re going to go to one of them you need to know the culture and rules that you’re going to be playing by.
The Investment Banking model looks crazy and inefficient when you look at it from the outside…and in many ways it is…but there is a method to the madness and it all has to do with payoffs. The Investment Bank gets the highest payoff from having less staff…and the staff don’t want it any other way.