Second-tier investment banks should focus on the “soft stuff” if they hope to compete with the bulge bracket firms.

Industry consultant Steven Davis delivered that advice at the UBS Warburg Global Financial Services Conference in New York Wednesday.

Davis reported some of the results of his research for a book that he’s writing about the current state of the investment banking business.

One of the central findings from his research is that Goldman Sachs is the investment bank that most other fear as a competitor, followed by CitiGroup and Morgan Stanley. As well, the executives he interviewed for his book singled out Goldman as the bank with the best operating model.

To compete, the smaller firms, including the Canadian banks’ forays into U.S. investment banking, will have to take on the formidable Goldman model. Davis advised that to survive, the smaller players need to focus on the “soft stuff” of organizational structure, leadership and compensation.

Goldman is envied, he said, because it has totally integrated itself and is totally cooperative across all out its business lines. Davis warned that any bank where one part worries about losing business to another part of the same bank is not fully integrated. Reinforcing this is the fact that the firm has one bonus pool for the whole firm, including all products and all relationship people. It has essentially recreated the partnership model across a public firm, he said.

Goldman also culls its staff, dropping the weakest 5% of its employees every year, regardless of business conditions. this helps it avoid the cycle of staffing up and then cutting aggressively in response to business cycles. The firm’s client focus and customer coverage is also exceptional, he noted.

This model presents a terrifying challenge for most mid-level players, Davis suggested. A big part of the problem is that even if you do everything right it takes a long time to win clients and see returns. The bigger the client the longer they stay with their current bankers, he said.