Pivoting from optimisation to automation
21 Mar 2019
Gary Casagrande of Confluence explains why firms that move first to embrace and operationalise the digital transformation of their back-office operations will reap the biggest advantages
Image: Shutterstock
For asset management firms, back- and middle-office functions have typically not been hotbeds of innovation or the source of competitive advantages. But that is all changing as a confluence of factors is driving fundamental change and pushing these formerly low-profile areas to the forefront of firms’ operations. To capitalise on opportunities that the emerging next-generation back office offers, firms will need to adopt a new mindset. Their teams need to focus less on back-office outcomes, such as new regulatory reporting requirements and tweaking their processes to accommodate them. Instead, they need to embrace a ‘data first’ and process automation orientation.
This starts with firms enhancing and unifying their existing data collection, normalisation, and processing functions. Once they have their upstream data assets unified and modernised, the next step is to weave more automation into their downstream back office processes. Doing so will enable firms to use their data more efficiently, flexible, and dynamically.
With modernised data structures feeding new, automated processes, it will be fast and easy for firms to make adjustments and meet any new business needs or regulatory requirements. For asset managers, this will unlock new ways to increase their operational efficiency. For service providers, this operational agility will create opportunities to differentiate their offerings and gain competitive advantages.
All of this requires the reinvention and retooling of old processes, replacing them with new, automated processes with next-gen digital technologies at their core. This fundamental change called ‘digital transformation’ is happening, and smart, forward-looking firms are already pursuing it in their back and middle offices.
The old paradigm: perform needed functions and cut costs
Back office operations have always been an important part of the asset management industry, but perhaps not an exciting one. The standing orders were to strive for efficiencies while containing costs. It’s entirely unlike the front office, where superstar portfolio managers and traders are always in the spotlight, and always have the latest and greatest technology at their disposal. Back- and middle-office professionals are rarely in the limelight, and their requests for new systems seem to be among the first to be turned down due to ‘budget constraints’ and those investments not producing significant enough return on investment.
Much of this cost-consciousness stems from the fact that back office work is all post-trade and, therefore, perceived as outside asset management firms’ core competency and value-add for investors. That perception has affected back-office IT and staff budgets. That, plus long-standing processes and ingrained cultures, have contributed to technological advancements being very slow to work their way into back-office operations. Thus, only incremental process optimisation occurred, most often at a glacial pace.
Slow, incremental and siloed process advancements
Let’s step back and look at the evolution of post-trade activities over the past few decades. This includes all of the communication between parties that is required from order execution, through clearing and settlement, custody and asset servicing, accounting and fund administration, transfer agency actions and other investor services.
Throughout the 1970s, most back office activities, such as matching the details of buy and sell orders, were handled over the phone with pen and paper. The process worked but it was slow and error-prone. The fax machine arrived in the mid-1980s, which sped up the process, but hand-written faxes became a new source of errors and problems.
Technological advances in the 1990s ushered in new systems that enabled more process optimisation. One example is trading allocation matching systems. These products gave all involved parties one place where they could set forth their understanding of forthcoming allocations. Early systems relied on unstructured data which limited their effectiveness. Subsequent generations of these products, which came out in the late-1990s, tapped the power of structured data to leverage automation in functions such as exception-based processing. The trend of back-office automation had begun.
Regulatory burdens point toward automation
In more recent years, especially after the global financial crisis of 2008 to 2009, regulators have emerged as a major driver of back-office change. Managers of those operations have had to make many more of the incremental optimisations referenced above to accommodate an alphabet soup of new regulatory mandates. These include: Form N-MFP, Annex IV, Form PF, Form CPO-PQR and Solvency II, the second Markets in Financial Instruments Directive (MiFID II), Alternative Investment Fund Managers Directive (AIFMD), and the list goes on.
Like the earlier changes, these requirements were accommodated by incrementally optimising processes to produce new, human-readable outputs. Essentially, each of these changes was treated as one-offs and handled with small workarounds as opposed to making a wholesale change.
Collectively, however, the number of process changes started to pile up. So much so that back- and middle-office operations pros at top firms have started to think differently about post-trade data. They are trying to avoid starting downstream with the required outcome and bending their processes to produce it. Rather, they are looking upstream at ways to structure and manage the data so it can serve multiple operational purposes—in automated, machine-readable ways.
Getting there requires new roles, but not necessarily new hiring. For example, firms will need data stewards who understand data provenance and data governance frameworks—but they can be existing staff who receive some specialised training. Also needed are data architects and scientists who can design new workflows and processes. These people can often be found in-house and reassigned, even if temporarily. Firms also will need data platforms capable of supporting the automation that is the real payoff for all this process reinvention.
This will result in single, unified bodies of data, and easier ways to access and use that data to quickly meet evolving requirements. As mentioned earlier, this will provide asset managers with new ways to streamline their operations and give service providers new opportunities to gain competitive advantages through differentiating their offerings.
Take shareholder reporting functions as an example. Today, producing items such as annual reports, shareholder letters, and fund factsheets involve building processes around human-readable outputs, and a great deal of human intervention and interpretation is required. With a digitally transformed back office and a data-first (versus output-first) focus, a firm could automatically populate various investor communications with data and insights that the firm knows are reliably accurate. The result is a faster and more cost-effective production of high-quality investor communications—and that’s in just one part of back-office operations. The data-first approach combined with automation can drive new operational efficiencies throughout the post-trade chain of activities and communications.
On the cusp of digital transformation
The requisite pieces are well within reach for most firms. The ingredient that is most often missing is a vision. Leadership teams must see that major changes are already underway. They also must realise that given how fast change happens in the markets today, the old approach of focusing only on the next output with incremental process optimisation will no longer cut it. Leaders need to pivot to a data-first orientation powered by automation. Firms that move first to embrace and operationalise the digital transformation of their back-office operations will reap the biggest advantages.
The process of reinventing back-office operations requires vision and bold action. It’s a path that is not without risks, but those risks are greatly outweighed by the major improvements in operational efficiency, flexibility and responsiveness this approach can deliver.
The only question is whether your firm and your team will make the change now or later. It’s your call.
This starts with firms enhancing and unifying their existing data collection, normalisation, and processing functions. Once they have their upstream data assets unified and modernised, the next step is to weave more automation into their downstream back office processes. Doing so will enable firms to use their data more efficiently, flexible, and dynamically.
With modernised data structures feeding new, automated processes, it will be fast and easy for firms to make adjustments and meet any new business needs or regulatory requirements. For asset managers, this will unlock new ways to increase their operational efficiency. For service providers, this operational agility will create opportunities to differentiate their offerings and gain competitive advantages.
All of this requires the reinvention and retooling of old processes, replacing them with new, automated processes with next-gen digital technologies at their core. This fundamental change called ‘digital transformation’ is happening, and smart, forward-looking firms are already pursuing it in their back and middle offices.
The old paradigm: perform needed functions and cut costs
Back office operations have always been an important part of the asset management industry, but perhaps not an exciting one. The standing orders were to strive for efficiencies while containing costs. It’s entirely unlike the front office, where superstar portfolio managers and traders are always in the spotlight, and always have the latest and greatest technology at their disposal. Back- and middle-office professionals are rarely in the limelight, and their requests for new systems seem to be among the first to be turned down due to ‘budget constraints’ and those investments not producing significant enough return on investment.
Much of this cost-consciousness stems from the fact that back office work is all post-trade and, therefore, perceived as outside asset management firms’ core competency and value-add for investors. That perception has affected back-office IT and staff budgets. That, plus long-standing processes and ingrained cultures, have contributed to technological advancements being very slow to work their way into back-office operations. Thus, only incremental process optimisation occurred, most often at a glacial pace.
Slow, incremental and siloed process advancements
Let’s step back and look at the evolution of post-trade activities over the past few decades. This includes all of the communication between parties that is required from order execution, through clearing and settlement, custody and asset servicing, accounting and fund administration, transfer agency actions and other investor services.
Throughout the 1970s, most back office activities, such as matching the details of buy and sell orders, were handled over the phone with pen and paper. The process worked but it was slow and error-prone. The fax machine arrived in the mid-1980s, which sped up the process, but hand-written faxes became a new source of errors and problems.
Technological advances in the 1990s ushered in new systems that enabled more process optimisation. One example is trading allocation matching systems. These products gave all involved parties one place where they could set forth their understanding of forthcoming allocations. Early systems relied on unstructured data which limited their effectiveness. Subsequent generations of these products, which came out in the late-1990s, tapped the power of structured data to leverage automation in functions such as exception-based processing. The trend of back-office automation had begun.
Regulatory burdens point toward automation
In more recent years, especially after the global financial crisis of 2008 to 2009, regulators have emerged as a major driver of back-office change. Managers of those operations have had to make many more of the incremental optimisations referenced above to accommodate an alphabet soup of new regulatory mandates. These include: Form N-MFP, Annex IV, Form PF, Form CPO-PQR and Solvency II, the second Markets in Financial Instruments Directive (MiFID II), Alternative Investment Fund Managers Directive (AIFMD), and the list goes on.
Like the earlier changes, these requirements were accommodated by incrementally optimising processes to produce new, human-readable outputs. Essentially, each of these changes was treated as one-offs and handled with small workarounds as opposed to making a wholesale change.
Collectively, however, the number of process changes started to pile up. So much so that back- and middle-office operations pros at top firms have started to think differently about post-trade data. They are trying to avoid starting downstream with the required outcome and bending their processes to produce it. Rather, they are looking upstream at ways to structure and manage the data so it can serve multiple operational purposes—in automated, machine-readable ways.
Getting there requires new roles, but not necessarily new hiring. For example, firms will need data stewards who understand data provenance and data governance frameworks—but they can be existing staff who receive some specialised training. Also needed are data architects and scientists who can design new workflows and processes. These people can often be found in-house and reassigned, even if temporarily. Firms also will need data platforms capable of supporting the automation that is the real payoff for all this process reinvention.
This will result in single, unified bodies of data, and easier ways to access and use that data to quickly meet evolving requirements. As mentioned earlier, this will provide asset managers with new ways to streamline their operations and give service providers new opportunities to gain competitive advantages through differentiating their offerings.
Take shareholder reporting functions as an example. Today, producing items such as annual reports, shareholder letters, and fund factsheets involve building processes around human-readable outputs, and a great deal of human intervention and interpretation is required. With a digitally transformed back office and a data-first (versus output-first) focus, a firm could automatically populate various investor communications with data and insights that the firm knows are reliably accurate. The result is a faster and more cost-effective production of high-quality investor communications—and that’s in just one part of back-office operations. The data-first approach combined with automation can drive new operational efficiencies throughout the post-trade chain of activities and communications.
On the cusp of digital transformation
The requisite pieces are well within reach for most firms. The ingredient that is most often missing is a vision. Leadership teams must see that major changes are already underway. They also must realise that given how fast change happens in the markets today, the old approach of focusing only on the next output with incremental process optimisation will no longer cut it. Leaders need to pivot to a data-first orientation powered by automation. Firms that move first to embrace and operationalise the digital transformation of their back-office operations will reap the biggest advantages.
The process of reinventing back-office operations requires vision and bold action. It’s a path that is not without risks, but those risks are greatly outweighed by the major improvements in operational efficiency, flexibility and responsiveness this approach can deliver.
The only question is whether your firm and your team will make the change now or later. It’s your call.
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