Inventive step
12 June 2013
Geoff Hodge of Milestone Group examines the fundamental but often overlooked need for a dynamic operating model to transform business effectiveness and competitiveness in today’s fund servicing sector
Image: Shutterstock
A combination of margin pressure and product innovation is placing asset management and fund servicing businesses under varying degrees of stress. As a result, market participants across the globe are once again seeking new ways to improve efficiency and reduce costs. At the same time, they must contend with the continued slew of regulation precipitated by the financial crisis, as well as investor interrogation of processes and strategies.
Regulators now require increased transparency and enhanced reporting in a number of areas. This includes disclosure, risk management, investor equity, capital adequacy, investment compliance and product fitness for the client. These demands are putting direct pressure on operating model design for transparency, product ‘look through’ and reporting capabilities.
Industry participants are seeking the next breakthrough in operating model design. It must enable them to address the challenges posed by compliance and ensuring greater transparency while remaining competitive in a maturing and leaner market. The key is to recognise the need to migrate from the static operating model of the past to the dynamic operating model of the future.
Fragmented evolution
The highly competitive fund servicing market means that product innovation is now front and centre in the race to attract fund flows. Operating models must therefore be agile enough to deal with complex and changing product demands. They must engender an efficient and transparent organisation able to deliver competitive products and service levels to clients within acceptable operating risk parameters.
The challenge, however, is that operating models in the funds industry started life fairly simply. Largely a product of the way that labour markets evolved, there were investment operations to look after direct investments and the associated trade lifecycle, as well as asset servicing, treasury and accounting functions and so on. The focus was simply ‘getting the job done’, with margins wide enough to support a relatively labour-intensive approach to operational functions.
Back then, the application of technology was limited to a few ‘core’ platforms. Over time, it evolved to accommodate increased product and functional demands, which in turn saw the introduction of a range of additional surrounding processes and tasks. Likewise, although these were initially manual, they have been progressively replaced by spreadsheets and other tactical or function-specific solutions. This somewhat ad hoc and fragmented evolution has resulted in inflexible operating models that are a global phenomenon in the investment industry today.
Tactical solutions
While such operating models may have all of the functional capability to operate the business, they are not geared up to be transparent, efficient, or quick to market with new products—not to mention the overhead associated with achieving effective operational risk management. It is typically effort and time intensive to adapt models that have evolved in this way.
Instead, what firms need in the current environment is the flexibility that a dynamic operating model can deliver in terms of accommodating change without escalating costs. They must be easy to adapt in the face of unexpected events and demands, without the need for expensive and time consuming ‘transformation’. They also need to help organisations tap into new sources of efficiency, support new products and services, and respond to the demand for greater transparency—all of which must be delivered within short timeframes.
Such flexibility can release asset owners, managers, and administrators from the current generation of infrastructure, which was designed to service the business at a point in time, but ultimately has ‘locked in’ a high cost of dealing with change. Given the tendency of organisations to seek tactical solutions to immediate challenges, the industry has in recent years become obsessed with offshoring and outsourcing as opposed to being genuinely innovative and changing what is possible from an operational perspective.
Fund-centric approach
The ‘fund-centric operating model’ is a transformational approach to achieving dynamic and enhanced business performance, and is characterised by a shift towards recognising the flow of money through the product structure, and away from individual processes and functions. The approach is anchored by a single record of the fund product structure, and implies a reduced number of ‘moving parts’ in the business operations and technology architectures. It has an identifiable set of characteristics that differentiate it from models that are commonly used across the industry today:
Dynamic operating models anticipate change and shift focus to the flow of money and away from functional silos;
Performance metrics are a key tool in the design and operation of dynamic operating models;
Traditional static operating model design will not deliver desired operational performance; and
Dynamic models also solve common challenges relating to geographically distributed operations.
There is a compelling case that increased demand for real transformational change in fund servicing will only be met with a fresh and innovative approach to operating model design, both within and across corporate boundaries.
Operating models are no longer simply a choice of administration approach, but a key driver of execution capability that directly contributes to business agility and performance. The transformation, or pay off, for firms that embrace this type of dynamic operating model is a steady flow of benefits across their business in terms of efficiency, risk management, customer service, and the ability to deal with change without the level of associated costs that the industry has come to accept.
Regulators now require increased transparency and enhanced reporting in a number of areas. This includes disclosure, risk management, investor equity, capital adequacy, investment compliance and product fitness for the client. These demands are putting direct pressure on operating model design for transparency, product ‘look through’ and reporting capabilities.
Industry participants are seeking the next breakthrough in operating model design. It must enable them to address the challenges posed by compliance and ensuring greater transparency while remaining competitive in a maturing and leaner market. The key is to recognise the need to migrate from the static operating model of the past to the dynamic operating model of the future.
Fragmented evolution
The highly competitive fund servicing market means that product innovation is now front and centre in the race to attract fund flows. Operating models must therefore be agile enough to deal with complex and changing product demands. They must engender an efficient and transparent organisation able to deliver competitive products and service levels to clients within acceptable operating risk parameters.
The challenge, however, is that operating models in the funds industry started life fairly simply. Largely a product of the way that labour markets evolved, there were investment operations to look after direct investments and the associated trade lifecycle, as well as asset servicing, treasury and accounting functions and so on. The focus was simply ‘getting the job done’, with margins wide enough to support a relatively labour-intensive approach to operational functions.
Back then, the application of technology was limited to a few ‘core’ platforms. Over time, it evolved to accommodate increased product and functional demands, which in turn saw the introduction of a range of additional surrounding processes and tasks. Likewise, although these were initially manual, they have been progressively replaced by spreadsheets and other tactical or function-specific solutions. This somewhat ad hoc and fragmented evolution has resulted in inflexible operating models that are a global phenomenon in the investment industry today.
Tactical solutions
While such operating models may have all of the functional capability to operate the business, they are not geared up to be transparent, efficient, or quick to market with new products—not to mention the overhead associated with achieving effective operational risk management. It is typically effort and time intensive to adapt models that have evolved in this way.
Instead, what firms need in the current environment is the flexibility that a dynamic operating model can deliver in terms of accommodating change without escalating costs. They must be easy to adapt in the face of unexpected events and demands, without the need for expensive and time consuming ‘transformation’. They also need to help organisations tap into new sources of efficiency, support new products and services, and respond to the demand for greater transparency—all of which must be delivered within short timeframes.
Such flexibility can release asset owners, managers, and administrators from the current generation of infrastructure, which was designed to service the business at a point in time, but ultimately has ‘locked in’ a high cost of dealing with change. Given the tendency of organisations to seek tactical solutions to immediate challenges, the industry has in recent years become obsessed with offshoring and outsourcing as opposed to being genuinely innovative and changing what is possible from an operational perspective.
Fund-centric approach
The ‘fund-centric operating model’ is a transformational approach to achieving dynamic and enhanced business performance, and is characterised by a shift towards recognising the flow of money through the product structure, and away from individual processes and functions. The approach is anchored by a single record of the fund product structure, and implies a reduced number of ‘moving parts’ in the business operations and technology architectures. It has an identifiable set of characteristics that differentiate it from models that are commonly used across the industry today:
Dynamic operating models anticipate change and shift focus to the flow of money and away from functional silos;
Performance metrics are a key tool in the design and operation of dynamic operating models;
Traditional static operating model design will not deliver desired operational performance; and
Dynamic models also solve common challenges relating to geographically distributed operations.
There is a compelling case that increased demand for real transformational change in fund servicing will only be met with a fresh and innovative approach to operating model design, both within and across corporate boundaries.
Operating models are no longer simply a choice of administration approach, but a key driver of execution capability that directly contributes to business agility and performance. The transformation, or pay off, for firms that embrace this type of dynamic operating model is a steady flow of benefits across their business in terms of efficiency, risk management, customer service, and the ability to deal with change without the level of associated costs that the industry has come to accept.
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