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A middle path for the middle office

A flexible framework is needed to create scale and leverage while ensuring cost-effective compliance and oversight

Jonathan HinkleyPart of the Linedata Blog Series

As investment management firms come to grips with the post-COVID-19 landscape, many are re-evaluating how they operate. From decentralized daily operations to remote investment management and trading, and even office real estate, the playing field has shifted. In a previous blog post we examined how the end of the ‘Proximity Myth’ has altered decision-making around outsourcing. Today we will explore “operational optionality” and how taking a middle road to support the middle office can provide the highest value outcome.


Responsibility for risk, regulation and reporting makes the middle-office mission critical, but also costly. For asset managers to compete and comply cost-effectively, these three areas must be carefully managed and deeply understood. But to handle the challenges of the coming decade, they also must become more highly automated, allowing staff to switch from day-to-day tasks to support evolving client needs in a fast-changing competitive environment. In addition, managers must find the cycles for their key staff to focus on the highest value-add activities while still ensuring that day-to-day ‘blocking and tackling’ is addressed.


As firms re-emerge from the shock of the pandemic, the daily task list has not shortened, but how one solves the problem has evolved. Potential volatility spikes, lingering questions about overall economic rebound, and future ‘stimulus debt’ knock-on effects all conspire to create a very complicated and interconnected mosaic. As a result, today’s middle-office teams are like highly alert traffic officers, keeping information flowing smoothly at a busy intersection or roundabout, knowing the rules, risks and directions to follow. In the past decade, middle office ‘traffic’ has grown exponentially, driven by tighter regulatory requirements, as well as efforts to improve transparency, reduce systemic risk and manage collateral more rigorously. Yet despite leveraging technology to automate some workflows, and outsourcing other routines to third parties, senior middle-office staff still spend an ever-larger share of their time directing traffic. They are expected to supply more information, manage more risks and comply with more regulations.

Middle office data can help asset managers reshape processes and channels for optimized performance

Perform better, pivot quicker


But directing traffic is not an end in itself. In addition to providing early warning of potentially severe problems, middle-office data can help asset managers reshape processes and channels for optimized performance and provide valuable input into new initiatives. Thus, using technology and strategic outsourcing to free up middle-office managers for value-added activities doesn’t just prevent gridlock; it also enables firms to perform better and pivot quicker, while minimizing costs and risks. When firms evaluate this issue they can chose to follow the old paradigm of buying technology and hiring staff, they can look at executing a total lift-out of processes, or they can take a middle of the road approach and look to get the best of both worlds. Creating leverage and scale while maintaining operational control and oversight is the key.


Even before the regulatory deluge of the 2010s, middle offices were experimenting. The 2000s saw an upsurge in outsourced offerings that sought economies of scale from centralized processing capabilities, e.g. for shadow NAV calculations. Results were mixed, with processes executed more cheaply but not necessarily more efficiently, risking compliance failures and damage to client trust. While over time, the skill and automation levels at outsourcing and offshoring facilities have increased to mitigate these early shortfalls, so have the regulatory concerns. The extension of the UK Financial Conduct Authority’s Senior Managers and Certification Regime (SM&CR) to asset managers is just part of the latest evidence that regulators expect the most thorough oversight over all operations, outsourced or otherwise.


Insight and oversightInsight and oversight

Fee pressure and client demands requiring firms to be ever lighter on their feet were already increasing the appeal of outsourcing and partnering, and the instant ‘remote workforce’ of COVID-19 has simply accelerated the process. Even before the pandemic, a Deloitte survey reported 59% of asset managers implementing or planning an outsourcing/offshoring project, with 49% working on streamlining initiatives to increase control. Higher skill levels have allowed more complex tasks to be located offshore, but the greater value occurs when this is married with technology integration. When people, processes and systems are re-engineered to be truly end-to-end, API-connected and cloud-hosted, insight and oversight are improved, to the satisfaction of regulators, managers and clients. Customizable NAV oversight capabilities that support validation, testing and mitigation are just one example of a more integrated and robust control environment.


The regulatory landscape will always evolve, along with increased client directed compliance constraints. Cybersecurity threats are a constant factor, and regulatory and client expectations, for example with respect to ESG, have disclosure, performance measurement and position limit implications. Compliance must become more standardized, automated, and integrated with the front office, but must also be scalable.

Outsourcing in isolation is only a piece of the puzzle

Toward a new middle path

Outsourcing in isolation is only a piece of the puzzle. As noted, compliance and reporting challenges have skyrocketed, with buy-side firms adopting triage to handle multiple deadlines and requirements from diverse regulators. Oversight and control must be maintained, so just passing the work outside the firm is not the final solution. The value gained from outsourcing must be combined with a common operating platform and next-gen technologies in order to reap full benefit. Between the extreme black box of a full outsourcing lift-out and the heavy burden of in-house manual processes, increasing staffing costs and legacy systems, there is a new middle path to be followed.


The route is not the same for every firm, but most are striving for a more virtual, aggregated shared framework of tools, platforms, and services.  This allows key staff to focus on value add activities, leverage outsourcing for heavy lift and provide a technology ecosystem that gives staff time to monitor, design and refine.  Leveraging outsourcing for specific point solutions in concert with an overall expansion of automation and machine-centric processes is becoming the new paradigm design of choice. Centralized data management, greater use of cloud-based analytics, and artificial intelligence/machine learning (AI/ML) applications are all part of the middle path solution. These tools enable staff to proactively operate on an exception basis, with common knowledge shared by all parties.

The middle path trend is emerging and gaining steam. Ten years ago, firms were still building in-house systems. However, the need to reduce fixed costs means the shift is now from human-oriented processes to ones managed by machines. Over the next five years, the middle office could prove to be the part of the asset manager’s operation most impacted by digital technologies, AI/ML, blockchain apps and outsourcing.


Why so certain? Because combining people, process and technology provides optionality.  In the unpredictable future we’re looking to thrive in, only flexible operating models that blend and integrate multiple services can direct traffic effectively, grant staff the time to look further ahead, and provide a collaboration venue with client-facing colleagues on strategic goals.

Combining people, process and technology provides optionality.  In the unpredictable future we’re looking to thrive in, only flexible operating models that blend and integrate multiple services can direct traffic effectively, grant staff the time to look further ahead, and provide a collaboration venue with client-facing colleagues on strategic goals.

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