It’s well known that the middle office at most investment management firms has periods of high and low production based on business cycles. At least one week out of every month key resources are ‘all hands on deck’ churning out performance numbers for internal and external review. Many firms struggle to find appropriate resources for performance return calculations and report production, as well as contend with antiquated processes that delay performance delivery. These issues can be costly and highly disruptive to the business. How can investment managers’ right size their middle office resources to scale for monthly reporting cycles and maintain business as usual?
The difficulty that many firms have with efficiently scaling to meet peak reporting periods is a direct result of historical underinvestment in the middle office. Because the middle office isn’t as aligned with revenue generating activity as the front office, it often receives less C-level attention and funding to invest in technology and resources. Traditionally, the middle office is the first place where resource cuts are made both on the business operations and technical infrastructure sides as investment management firms strive to improve margins by lowering operating costs.
Due to underinvestment, many operations teams cannot scale with business growth, struggle to account for new asset classes and fail to properly service clients.To compensate for system inefficiencies, many performance teams create a myriad of manual processes that produce data that is not easily consumed by other systems. The result is an increase in operational and reputational risk. In the end, too many resources spend too much time managing volumes of static data. The ability to quickly respond to regulatory bodies and demands from customers for transparency is severely strained.
Investment managers that have been able to painlessly grow recognise the strategic value of the middle office. While performance measurement teams may not directly generate revenue, the link that they have to the trading room and ability to provide feedback on investment decisions is inextricable. The analysis performance teams produce decomposes the sources of risk and return from investment decisions, enabling portfolio managers to have a solid understanding of investable cash and risk outliers, as well as identify potential new investment opportunities. A fluid middle office can streamline compliance with regulations, quickly appease client and regulatory demands for transparency and differentiate the business from competitors by supporting investment strategies.
Uncovering the value that the middle office brings to the investment decision making process often requires changes to a firm’s operating model. The most common ways that investment managers improve operations is through process automation and component outsourcing. Robust automation tools found in modern performance systems eliminate manual keying and manipulation of data which, in turn, reduces operational risk, costs and integration issues with the post trade workflow. Performance analysts can thus spend more time providing actionable insights as opposed to trying to make sense of static data. As business volume increases, the performance teams are able to maintain their service levels across the business and to external stakeholders while focusing on their value added responsibilities.
Outsourcing the performance measurement function provides the middle office with even greater flexibility to scale with changing business volumes and evolving investment strategies. Using a vendor to run middle office functions eliminates the roadblocks inherent in the performance measurement process. Performance analysts can focus less on transactional activities and instead spend time analysing key areas of return and risk, providing valuable feedback into the investment decision making process. As a result, portfolio managers can make better informed investment decisions and can flexibly change their strategies to diversify into new asset classes.
Outsourcing also lowers costs and operational risk. Fixed costs related to in-house technology and infrastructure are diminished and operating costs are more predictable, growing only when the business is performing well. From a risk perspective, many outsourcing vendors have invested in state of the art data centers and have audited processes that protect source data integrity. Overall, outsourcing provides investment managers with the ability to efficiently scale with growth and better service internal and external requirements for transparency.
The middle office is of strategic importance to investment managers. A failure to make key processes more scalable will result in a lack of insight into potential new investment opportunities, an inability to provide high levels of service to customers and the business, and failure to meet regulatory requirements. Aligning the middle office with business objectives requires consideration of whether your operating model is working. If your middle office resources cannot scale to meet business demand without disruption to service levels, it may be time to automate or outsource.
By David Reid, Senior Vice President, SS&C