Tear down those walls
09 Dec 2020
It is becoming increasingly clear that thinking about data and operations through different lenses for front, middle, and back office is the old way of doing things. Gary Casagrande of Confluence discusses the right approach to a winning strategy
Image: Confluence
Investment management companies have had front, middle, and back-office groups for as long as anyone can remember. It’s a logical structure for the various functions, and deeply ingrained in the corporate culture of both asset management and service provider firms.
These groups aren’t going away anytime soon. What is changing, however, is how investment firms need to manage their data across their enterprises, and that means that the ways these three groups interact will have to change.
The organisational boundaries between front, middle, and back office have resulted in several operational realities. One of them is the fact that many of these firms’ systems and processes have been designed more to meet one group’s specific needs rather than the company’s overall operational requirements.
As recently as just a few years ago, unified, holistic systems that served the purposes of multiple groups weren’t believed to be possible and were viewed as unattainable ideals. As a result, systems that touched a firm’s all-important operational data were largely siloed, walled off by organisational boundaries. Over the past few years, that has changed. Now, several factors have combined to make the old, territorial approach to enterprise data management less viable every day – and new strategies more attractive and achievable. Below we examine some of the key elements driving this change. We also make the case for why firms, at least from the data management perspective, need to tear down organisational walls and take a cohesive approach to enterprise data management.
Over time, and especially as the functions evolved, extensive systems, workflows, and business processes were developed within these respective areas, but rarely bridged the gap between and across the buckets. In particular, data processing and management systems were developed independently, which was only natural; when it came to development and funding, groups put their own needs first.
The priorities were understandable: “If it’s coming out of my budget, I’m going to make sure it’ll do what my group needs, first and foremost.”
As margins grew thinner and budgets tightened for both asset managers and service providers, the sentiments only solidified further.
As for holistic, enterprise-wide data initiatives, they were ‘nice to haves’ but always felt too big, expensive, and complex to actually accomplish and, therefore, were included as second- or third-tier development priorities. In other words, company-wide initiatives aimed at creating more cost-effective handling of enterprise data were essentially non-existent.
Today, the growing strategic importance of efficient, effective and accessible enterprise data management capabilities is changing the operational calculus of investment management firms. Let’s take a closer look at enterprise data management (EDM), and how its evolution is playing out in the ultra-competitive investment management sector.
EDM defined
At one level, EDM is the collection of software applications, network infrastructure, business logic, rules and policies a company puts in place to manage the generation, refinement, and distribution of its operational data. To be successful, EDM initiatives must involve virtually all a company’s functional groups, front office to back.
At a higher level, EDM can be viewed as a scorecard. It gauges how well a firm can generate information and insights from its operational data, make that single source of actionable intelligence readily accessible enterprise wide, and do so cost-effectively.
Why EDM and why now?
The role data plays inside firms and in the broader investment management ecosystem is its third major change over the past two decades or so. The first big change was digitisation.
During the late 1990s and early 2000s, the focus was on providing better protection for investors. Regulators deemed that disclosures made by people and static, physical documents were insufficient for satisfying the new protection goals, so electronic reporting took hold. To support that, the industry had to alter its fundamental data handling and management regimes, shifting to digital data collection, processing and reporting.
The second major change to hit the financial data world came immediately after the global financial crisis of 2009. That’s when financial regulators, prompted in large part by the public outcry over the financial system’s meltdown, focused their efforts on reducing systemic risks, both in the capital markets and in the broader financial services ecosystem.
As a result, new regulations in the US and Europe such as the second Markets in Financial Instruments Directive, Form N-PORT, Annex IV, Form PF, and Form CPO-PQR were born. The industry responded by developing a new generation of data processing and management systems to meet the new requirements. But that’s where they generally stopped.
As for focus and effort, not much of either was yet being directed toward the idea of building true, end-to-end enterprise data management functionality.
Fast forward to today, and multiple factors are combining to fuel a third major rethinking about data across the industry.
The first driver is the ongoing trend toward digital transformation. Investment management firms have stretched and strained their legacy systems, taking them as far and keeping them deployed for as long as they possibly could.
But many of those old systems are now at the breaking point, and their owners and users realise it. Firms also see the mainstreaming of cloud-based architectures, container-based applications, and microservices – and the compelling business agility gains and financial benefits they promise.
Another driver is the ongoing need to control operating costs. That means both asset managers and service providers need to find ways to improve their enterprise data strategies, but do so in cost-effective ways.
Embracing EDM for competitive differentiation
So, more and more firms are embarking on their own digital transformations and re-architecting their IT environments accordingly. By migrating to cloud-based, all-digital operations, firms are gaining greater flexibility and scalability while lowering their operational costs. Since all those characteristics can be extended to enterprise data management initiatives, that’s exactly what leading asset managers and service provider firms are doing. Their leadership teams are saying “Well, we’re retooling everything else, we might as well get enterprise data management right, too.”
Significant advantages accrue to the firms that get there first, and for all the others, it becomes a competition to avoid being the laggard in their ecosystem of peer companies.
Conclusion
It is becoming increasingly clear that thinking about data and operations through different lenses for front, middle, and back office is the old way of doing things.
The new, winning strategy involves thinking about data as a single, strategic asset owned by the firm, not by an individual department. That asset needs to be managed in a holistic, unified, and cost-effective manner as it flows up from, through and to different parts of a company.
The right approach is to begin with the data, input/load it from multiple sources, adjust, normalise, and validate it once, and approve it once, thereby creating a ‘single source of data truth’.
Keep it secure, make it readily accessible to all groups that can leverage it for competitive advantages, and leverage a cloud-based architecture to encourage collaboration, drive increased business agility, and reduce operational costs.
When this becomes the reality, the organisational boundary lines that separate front, middle and back office groups will blur, and the old labels will lose their former significance. Data and the intelligence that is produced from it will service the whole continuum of groups and functions – from top to bottom and from one end of a firm to the other.
All this will result in a more positive and productive, digital-centric experience for the entire investment management industry. It’s about time!
These groups aren’t going away anytime soon. What is changing, however, is how investment firms need to manage their data across their enterprises, and that means that the ways these three groups interact will have to change.
The organisational boundaries between front, middle, and back office have resulted in several operational realities. One of them is the fact that many of these firms’ systems and processes have been designed more to meet one group’s specific needs rather than the company’s overall operational requirements.
As recently as just a few years ago, unified, holistic systems that served the purposes of multiple groups weren’t believed to be possible and were viewed as unattainable ideals. As a result, systems that touched a firm’s all-important operational data were largely siloed, walled off by organisational boundaries. Over the past few years, that has changed. Now, several factors have combined to make the old, territorial approach to enterprise data management less viable every day – and new strategies more attractive and achievable. Below we examine some of the key elements driving this change. We also make the case for why firms, at least from the data management perspective, need to tear down organisational walls and take a cohesive approach to enterprise data management.
Over time, and especially as the functions evolved, extensive systems, workflows, and business processes were developed within these respective areas, but rarely bridged the gap between and across the buckets. In particular, data processing and management systems were developed independently, which was only natural; when it came to development and funding, groups put their own needs first.
The priorities were understandable: “If it’s coming out of my budget, I’m going to make sure it’ll do what my group needs, first and foremost.”
As margins grew thinner and budgets tightened for both asset managers and service providers, the sentiments only solidified further.
As for holistic, enterprise-wide data initiatives, they were ‘nice to haves’ but always felt too big, expensive, and complex to actually accomplish and, therefore, were included as second- or third-tier development priorities. In other words, company-wide initiatives aimed at creating more cost-effective handling of enterprise data were essentially non-existent.
Today, the growing strategic importance of efficient, effective and accessible enterprise data management capabilities is changing the operational calculus of investment management firms. Let’s take a closer look at enterprise data management (EDM), and how its evolution is playing out in the ultra-competitive investment management sector.
EDM defined
At one level, EDM is the collection of software applications, network infrastructure, business logic, rules and policies a company puts in place to manage the generation, refinement, and distribution of its operational data. To be successful, EDM initiatives must involve virtually all a company’s functional groups, front office to back.
At a higher level, EDM can be viewed as a scorecard. It gauges how well a firm can generate information and insights from its operational data, make that single source of actionable intelligence readily accessible enterprise wide, and do so cost-effectively.
Why EDM and why now?
The role data plays inside firms and in the broader investment management ecosystem is its third major change over the past two decades or so. The first big change was digitisation.
During the late 1990s and early 2000s, the focus was on providing better protection for investors. Regulators deemed that disclosures made by people and static, physical documents were insufficient for satisfying the new protection goals, so electronic reporting took hold. To support that, the industry had to alter its fundamental data handling and management regimes, shifting to digital data collection, processing and reporting.
The second major change to hit the financial data world came immediately after the global financial crisis of 2009. That’s when financial regulators, prompted in large part by the public outcry over the financial system’s meltdown, focused their efforts on reducing systemic risks, both in the capital markets and in the broader financial services ecosystem.
As a result, new regulations in the US and Europe such as the second Markets in Financial Instruments Directive, Form N-PORT, Annex IV, Form PF, and Form CPO-PQR were born. The industry responded by developing a new generation of data processing and management systems to meet the new requirements. But that’s where they generally stopped.
As for focus and effort, not much of either was yet being directed toward the idea of building true, end-to-end enterprise data management functionality.
Fast forward to today, and multiple factors are combining to fuel a third major rethinking about data across the industry.
The first driver is the ongoing trend toward digital transformation. Investment management firms have stretched and strained their legacy systems, taking them as far and keeping them deployed for as long as they possibly could.
But many of those old systems are now at the breaking point, and their owners and users realise it. Firms also see the mainstreaming of cloud-based architectures, container-based applications, and microservices – and the compelling business agility gains and financial benefits they promise.
Another driver is the ongoing need to control operating costs. That means both asset managers and service providers need to find ways to improve their enterprise data strategies, but do so in cost-effective ways.
Embracing EDM for competitive differentiation
So, more and more firms are embarking on their own digital transformations and re-architecting their IT environments accordingly. By migrating to cloud-based, all-digital operations, firms are gaining greater flexibility and scalability while lowering their operational costs. Since all those characteristics can be extended to enterprise data management initiatives, that’s exactly what leading asset managers and service provider firms are doing. Their leadership teams are saying “Well, we’re retooling everything else, we might as well get enterprise data management right, too.”
Significant advantages accrue to the firms that get there first, and for all the others, it becomes a competition to avoid being the laggard in their ecosystem of peer companies.
Conclusion
It is becoming increasingly clear that thinking about data and operations through different lenses for front, middle, and back office is the old way of doing things.
The new, winning strategy involves thinking about data as a single, strategic asset owned by the firm, not by an individual department. That asset needs to be managed in a holistic, unified, and cost-effective manner as it flows up from, through and to different parts of a company.
The right approach is to begin with the data, input/load it from multiple sources, adjust, normalise, and validate it once, and approve it once, thereby creating a ‘single source of data truth’.
Keep it secure, make it readily accessible to all groups that can leverage it for competitive advantages, and leverage a cloud-based architecture to encourage collaboration, drive increased business agility, and reduce operational costs.
When this becomes the reality, the organisational boundary lines that separate front, middle and back office groups will blur, and the old labels will lose their former significance. Data and the intelligence that is produced from it will service the whole continuum of groups and functions – from top to bottom and from one end of a firm to the other.
All this will result in a more positive and productive, digital-centric experience for the entire investment management industry. It’s about time!
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