“The Times They Are A-Changin,'” wrote Bob Dylan, who recently won the Nobel Prize for Literature. That a singer-songwriter achieved this honor is a big deal. So is what’s happening on the asset management scene now….
It’s a new wave. This reference is to a second set of initiatives by some leading firms to bend the cost curve. Wave two aims to deliver a one-two punch: Reducing costs and developing enhanced growth capabilities. The desired outcome: improved investment performance and client experience.
Whereas the first wave of cost reduction was reactive and focused on discretionary costs, the second needs to be proactive. Strategic in nature, this wave seeks to help create meaningful benefits across an enterprise.
The current low-profit environment is ripe for moves like these. Low interest rates and fierce competition abound. So does the shift to passive investing as well as increased regulations and complexity. These factors all put pressure on making profits. That said, there’s much reason to push forward to bend the cost curve… big time.
Catching the Second Wave
How are firms implementing wave two?
Can a firm’s operations, technology and budget support its framework to grow? That is the question. The challenge for asset managers is to explore their inner workings. Are these factors, in their current state, capable of meeting the requirements of the firm’s strategic plan in a scalable, nimble and cost effective way? If the answer points to “no,” a main option could be outsourcing. As a result, firms should be conducting outsourcing suitability assessments across all phases of the investment lifecycle.
Middle- and back-office outsourcing can address scalability issues. It also may provide a quick and efficient means to launch new investment strategies and products. And with the cost curve in mind, outsourcing has the potential to do all of this at a savings.
Robotics isn’t limited to science fiction anymore. Robotic process automation (RPA) is upon us and gaining. RPA lets organizations automate current tasks as if real people were doing them across applications and systems. Evolving from desktop automation over the past decade, RPA is now being deployed in the financial services industry.
Investment firms are using digital assistants to manage resources and staff for peak volumes. Other examples include anti-money laundering and resolution of unmatched trades. Robotics helps to drive efficiency, along with improvements in quality, scalability and resiliency. What’s more, it seeks to achieve these potential benefits in a cost-effective manner. In fact, when implemented at scale, RPA payback can take as little as three to six months.
Operating Model Changes
The operating model, namely the middle office, is in the clear line of sight for wave two. Targets include redundant and non-scalable tasks, e.g., security master set-up, corporate action processing, portfolio accounting. They often are performed to different standards, in multiple locations, on different systems and across multiple products at the same firm. Wave two seeks to optimize them.
Transforming the operating model to lower costs is a journey. Payback does not come quickly. Functions and approaches may date back several decades and, as such, need more than process improvement. Firms, however, must make changes, and the operating model is fertile ground. To do so in a meaningful manner requires arranging functions across business lines logically to support strategic growth.
The way forward begins with a current state assessment. Next up is a clean slate-approach to consider alternatives, e.g., offshoring and merging functions. A gap analysis focuses on talent and technology. All goes into mapping the new model.
Data centers and technology are prime targets for wave two. They offer opportunities to cut duplication and streamline. However, changes should align with business requirements. And they should do so across the enterprise─front, middle and back office.
Developing a technology master plan and blueprint starts things off. The typical approach is to:
- Validate current requirements and document additional core needs
- Conduct a gap analysis of similar systems
- Confirm critical requirements in a lab environment
- Record critical gaps and variances
- Summarize findings and draft a high-level business case
Some Pain, Much Gain
Despite earlier cost-cutting measures by firms, expenses have outpaced revenue. This second wave requires incremental, one-time costs. However, the initiatives bring about longer term potential benefits to the enterprise. And they truly bend the cost curve. Yes, the times they are a-changin’.
For more information read InsideOPs: Bending the cost curve for asset managers or contact me at email@example.com.