For buy-side firms, the need to manage operations with more efficiency has never been greater, for two key reasons.
For many years the industry as a whole has been witnessing fee compression, coupled with a focus on fee transparency among the regulators in a quest for value for money on behalf of end investors. This fee compression has been partly driven by the increasing number of passively managed funds. Dealing with the rising cost of data management has also become more difficult. For example, as firms grow, data vendors tend to view the new markets that asset managers enter as part of their global footprint in terms of data licences, irrespective of the revenues those new markets attract initially.
Secondly, the lack of clarity concerning some of the regulatory changes is absorbing much of the discretionary IT spend that could be invested in improving the business. Relatively minor issues such as the technical obligations on data feeds are diverting firms from their far more important corporate growth agendas. Part of the problem is that European regulators tend to be less prescriptive than their US counterparts, providing guidance in principle rather than hard and fast rules. In defence of the regulators, however, it must be said that although the volume of regulatory change is immense, it should never take a buy-side firm by surprise. Firms know their obligations years in advance and can prepare a plan involving people and any incremental cost in order to become compliant. The problem is that different implementation deadlines for multiple regulatory requirements cause many firms to build solutions in isolation, leading to inefficient workflows and duplicative processes.
Despite these two challenges buy-side firms still need to grow, but with very low interest rates and a burdensome regulatory environment it is hard to find the right asset classes that will provide that expansion. Alternatives can often deliver better returns, but these asset classes create their own unique operational and technological challenges – as does moving into new markets. Growth by acquisition also generates operational conundrums, with an acquired firm perhaps necessitating the integration of up to fifty new systems.
What, therefore, is the pathway to greater operational efficiency aligned with corporate growth for buy-side firms? Is system consolidation the answer and what are the enablers and barriers to process automation encountered on this journey?
For a growing number of asset managers, having a multitude of systems altering and consuming data makes the process of growth much more difficult. A single core platform makes it possible for firms to look for opportunities to evolve with the changes, rather than simply seeking to become compliant with minimal or no strategic benefit.
System consolidation can lead to a cleaner, more efficient and more integrated operating environment. It can make firms more nimble, ready to respond to client, regulatory and business demands. A core platform also focuses the mind when improving the operating model that the firm has in place, rather than trying to re-architect a multitude of systems. It also means the buy-side firm has to manage far fewer vendor relationships. Vendor dealings are a major cause of sleepless nights for asset managers, not because of the vendors themselves but the sheer number of these relationships, which can run into the hundreds. Managing these connections can be very time-consuming.
Indeed, a simple IT footprint can alleviate many operational burdens. One area is the control of the records that reside within the technology. Asset managers should manage their own Investment Book of Record and that should be a single version of the truth that is deployed in every jurisdiction in which a buy-side firm does business. One version of the truth will improve levels of automation and keep a lid on costs. Furthermore, having a very uncomplicated technology stack means that any measures a firm needs to take in terms of cyber security can be tightly ringfenced, therefore a firm’s vulnerability to a cyber-attack on its corporate network is significantly reduced.
Data, of course, plays a major role in enabling the mechanisation of business processes and errors in the data can often lead to automation breaking down. For example, if an asset manager has a fully functional IBOR and yet its STP rates are still declining, the cause is almost certainly the asset manager’s data. Similarly, data is also fundamental to the right decision-making. Wrong data on dividends and other corporate actions will prevent portfolio managers from making the call. They might not know the correct cash position and may under- or over-invest. Late execution of corporate actions can cost a buy-side firm heavily, therefore having clean, accurate and functional data is critical.
Implementing new data management processes is a major headache and most IT projects that founder are failed by an inability to retrieve the right data, rather than the planning of the project itself. Cleaning data is an expensive business and when transitioning data from incumbent systems into a new consolidated platform there is always a fear that the meaning of the data will be changed in some way. Whether driven by system consolidation or acquisition, bringing data from another platform onto a core middle office is far from easy. The data structures will vary, the types of data may be different and even the value of bringing over some of the legacy portfolios that are not being actively managed may be questionable.
Arguably, simplifying its technology stack means an asset manager can more readily plan for the long-term, rather than making multiple short-term decisions. The process of transition, however, is not always easy. One major challenge is helping the portfolio managers to understand the problems associated with maintaining the old operating model, especially where it hinders the creation of alpha. Recognising the operational or functional areas of a business that can essentially be commoditised is a key step in the migration to a consolidated platform, leaving only the most alpha-generating processes to be conducted by specialist systems outside of the core.
Moving to a consolidated platform needs to be a strategic decision taken at the top of an organisation, billed as a change programme for the entire firm and driven by the CEO or the COO. In this way it can overcome the issue of silos within the firm wanting to defend their position and retain the IT tools that they have, causing fragmentation. Individual departments cannot be allowed to pick and choose best-of-breed systems to operate on the periphery of a core platform.
The focus has to be on change management rather than simply systems change, with all existing processes subject to review. This usually means getting the best people into the ‘new world’ as soon as possible. Securing buy-in from the major influencers regarding the strategic initiative that has been described to them is another priority, explaining how the change will actually benefit them and improve their working day.
Of course, system consolidation programmes are very complex, expensive, multi-year projects. The product has to drive the process and people have to be prepared to adapt to the way the core system operates. The key is not to replicate current processes but rather focus on the business outcome that the firm desires, avoiding individual preferences. Old habits can dominate system configuration and that isn’t necessarily a good thing for the long-term.
An obvious yet sometimes overlooked factor in the system consolidation process is ensuring that whatever technology a firm chooses, it is deployed correctly. Delayed decision-making often leads to worse decision-making. Firms must decide on their technology footprint and then invest in their human capital, making sure that they have the right operational staff in place to ensure the system is fit-for-purpose. And when buy-side firms do have a good technical platform, they must make sure it is kept up-to-date. Refreshes of hardware and software are often delayed, and this is at the owner’s peril as the total cost of ownership will increase dramatically in terms of the firm’s growth aspirations and the need to stay compliant.
System consolidation can bring many benefits for buy-side firms, but it is not a panacea for every operational challenge, and it is certainly not ‘simples’.