Navigating the age of uncertainty – a Luxembourg perspective

in Advisory, Corporate, 30.11.2020

The evolution of the Luxembourg economy over the past 25 years has been impressive. Luxembourg has refused to rest on its laurels and has grown from strength to strength on the European and world stage. However, as one of the most interconnected economies in the world today, it is hypersensitive to certain global changes and megatrends, which the current crisis is only heightening.

In this age of uncertainty, organizations in Luxembourg must make well-informed decisions to future-proof their business. But this requires stepping back and appraising the most significant drivers of social, technological, environmental, economic and political changes shaping the world.

The pace of these changes has been accelerating, fueled by shorter technology cycles. Their drivers sometimes converge, diverge, collide or overlap, spawning global megatrends. These, in turn, can have long-lasting effects or fade away. For example, as technology and banking trends collide, new players in Fintech and Regtech have emerged.

All these factors complicate Luxembourg organizations’ ability to make long-term strategic decisions. But which megatrends are set to affect Luxembourg specifically? And how can companies best tackle the challenges and reap the benefits of these trends?

Which global megatrends are most relevant to Luxembourg?

As one of the most interconnected economies in the world, Luxembourg is a laboratory for the post-globalization world we currently live in.

This is not only true for its large financial sector but also its diverse industrial and commercial ecosystem of international groups, such as ArcelorMittal, Ferrero, RTL, Aperam, SES,… Luxembourg’s public sector, SMEs and real estate are also sensitive to shifting global forces.

However, not all global drivers of changes and trends are equally relevant to Luxembourg’s economic players. For example, 3D printing increases the efficiency of production processes. However, compared to larger industrial hubs, this is less relevant to the Luxembourg landscape.

The following (non-exhaustive) list of global trends are generally the most relevant to Luxembourg players:

Technology: Artificial intelligence, process automation, blockchain, cloud, digitalization, cybersecurity, data platforms, 5G networks and the internet of things (IoT).

Regulatory: data privacy and GDPR, transparency, and increased EU regulations in the financial sector.

Social and political: ESG, sustainable finance, diversity, globalization versus economic nationalism, political fragmentation and Brexit, and leveling up versus concentration of wealth.

Human resources: attracting talents and NextGen and upskilling through distance learning.

Economic: industry consolidation, circular economy, return to local markets, and the rise of partnerships, digital currencies, shadow markets and non-traditional banking.

Strategy must top every firm’s board and management agenda

Even if a megatrend is poised to have a significant effect on Luxembourg’s ecosystem, it can be difficult for organizations to know when and how to take the plunge. Erring on the side of caution and waiting for trends to mature can lead to value destruction in the medium to long term. However, jumping on the bandwagon too early can be equally risky.

Since the ultimate decision-making center of many Luxembourg players is based abroad, local managers can be tempted by transformation projects leading to leaner, more cost-effective processes. But embracing change to stay competitive often begs bold decisions and strategic dialogue at the group level.

Effective strategic thinking now includes areas once handled at an operational level. For example, adopting new information technology can expose hidden cybersecurity risks and operating model gaps. Therefore, cybersecurity must be elevated to the board level’s strategic agenda.

With this myriad of different factors and knock-on effects to consider, management bodies are increasingly turning to advisory firms to assist them with these strategic decisions. With the pandemic boosting trends like digitalization and working remotely, advisory firms are raising the bar to help organizations make an informed choice — whether the economic decision is made in Luxembourg or elsewhere.

Transformation must be fully aligned with strategy

Transformation has become the lifeblood of most Luxembourg organizations to embrace innovation, remain competitive, and overcome challenges. Transformation is less about incremental change and more about achieving a pivotal shift — requiring a change in mindset.

In the service sector, enhancing the customer experience to improve customer retention is generally at the core of transformation processes.

In the banking and asset management sectors, regulations impacting operations continue to flow unabated. The current threshold for a private bank or management company to operate profitably is currently €10 billion and rising, prompting industry consolidation. The demand for increased transparency is also a global megatrend that directly impacts the Luxembourg financial sector, leading to increased scrutiny by regulators on anti-money laundering compliance and detailed reporting requirements.

An advisory firm with both local and global reach can help clients determine whether or not transformation is genuinely required, and to what extent. Transformation projects must be tailored to address multiple goals, including innovation, acceleration of growth, outsourcing of non-core activities or pivoting in the direction where the market is heading.

Alliances or outsourcing will become critical to many Luxembourg firms

Most organizations know they must embrace innovation, whether it’s to remain relevant or acquire a competitive edge. The accelerating pace of technology and the twists and turns of globalization continue to complicate the ways organizations can innovate. Frequently, a transformation project can result in the complexity of operations, if kept in-house, going well beyond the organization’s existing capabilities.

Many Big Tech firms have gained a competitive edge through exploiting Big Data for commercial applications. As their core value proposition is capitalizing on consumer trends, instead of developing banking capabilities in-house, these Big Techs have developed alliances with more traditional organizations to co-create value. These include partnerships between Apple Pay and Mastercard for contactless cards and Google and Citibank on smart checking accounts.

Beyond Big Tech, the financial sector’s appetite for partnerships with service providers is growing, typically around non-core solutions that are too complex or subscale to keep in-house.

Organizations in Luxembourg can also reap the benefits of building successful alliances, notably in the trend of organizations moving from traditional IT infrastructures to cloud-based environments.

Navigate the complexity with KPMG

In our strategy discussions with clients, we always seek to reconcile our deep knowledge of the Luxembourg market with global industry sector insights.

With the dizzying variety of megatrends, transformation options and partnerships available, Luxembourg players face a real dilemma of which strategy to follow and when to pull the trigger. KPMG is helping many organizations on these journeys. We regularly conduct strategic reviews of corporations and financial institutions working closely with controlling shareholders, and run acquisition or disposal processes as a result.

Our consulting practice is at the forefront in the design, planning and implementation of cloud-based strategies, helping organizations transform their IT infrastructures, comply with the regulatory agenda, and optimize their risk management.

Our “Managed Services” solutions serve our clients’ long-range needs in non-core areas, including delivering daily reports for asset managers and banks around risk, international tax, fund distribution, and AIFMD; accounting and financial reporting for private equity and real estate funds and corporations; and eArchiving, outsourced core systems, and withholding tax solutions through our regulated PSF entity.

And, in Luxembourg, we also have a long track record of executing M&A mandates across a range of sectors and regularly conduct strategic reviews of businesses on behalf of controlling shareholders.

Interested? Get in touch.