Workflow automation, information management and outsourcing will be critical to successfully navigating the newly decentralized operational landscape
The COVID-19 crisis has forced firms worldwide to re-evaluate their operations. Forced lockdowns created an instant remote workforce. The knock-on effects have been manifold: acceleration of IT re-engineering to facilitate remote access, increased demand for automation-centric processing, and a debunking of the ‘proximity myth’ – the long-held belief that “my team needs to be near each other to operate effectively”. This viewpoint – a self-imposed impediment to many firms fully embracing the leverage, scale, and risk reduction benefits of outsourcing – was rendered obsolete overnight.
As firms return to work, we are seeing a universal challenge of the status quo. COOs worldwide are pausing to re-evaluate how to reengineer their operations for optimal efficiency and scalability at the best overall value. The ‘new normal’ has highlighted the need for asset managers to adopt operational flexibility, shared application platforms, and increased automation – all operating within a framework of remote accessibility.
The middle office on the front lines
While the pandemic’s impact has left few functions untouched, the pressures of extreme market volatility coupled with the unplanned, instantly decentralized workforce were particularly acute in the middle office. Drastic market fluctuations stressed middle-office employees with outsized volume spikes. This was compounded for firms that had lagged on operating platform automation and outsourced services utilization, with the net-net being that firms exposed themselves to increased operational risk.
Going forward, the question will not be if investment managers adopt an operating model that combines the integration of enterprise application technology and outsourced turnkey services teams with traditional staffing, but rather can they adopt the operating model fast enough to maintain pace with their competition.
For the middle office, this means a permanent shift towards automation, an adoption of artificial intelligence, an embracing of global services outsourcing, and the adoption of new technologies to streamline daily operations, settlements, investment accounting, NAV oversight, and more.
"Going forward, the question will not be if investment managers adopt an operating model that combines the integration of enterprise application technology and outsourced turnkey services teams with traditional staffing, but rather can they adopt the operating model fast enough to maintain pace with their competition."
Shift towards automation and global services outsourcing
The information management and operational task baseline for maintaining asset management firms has risen dramatically since the 2008 financial crisis. That event proved that successful investment performance was no longer a guarantee of a firm’s longevity. An efficient, variable cost operating model is now equally critical to bottom-line success. Over the past decade the competing drivers of regulatory oversight, information demands, and volume and fee compression have increased the operating pressure on asset managers like never before. Cost pressures were already much discussed before the COVID crisis. As firms re-evaluate what they will look like on the backside of this crisis, there is growing consensus that new routes to profitability must be forged upon fundamental changes to their businesses.
Fixed costs, such as employment, are hard to manage and control on a variable basis. The ability for enterprise service providers to offer integrated automation and staffing solutions now presents asset managers with multiple options to drive down operating cost. By embracing the combination of automation and some level of outsourced services in the front and middle office, forward-thinking firms will increase efficiency and scale while reducing cost and refocusing inhouse staff on higher value-add activities. Different asset managers will opt for different solutions along the continuum, depending on size, and capability. However, they all must either adopt the paradigm or see their operational risk levels increase while profits are driven down.
Outsourcing and automation – two sides of the same coin
In the wake of COVID, investment teams, trading desks, risk management, compliance, operational staffs, and technology teams are all operating in a decentralized fashion. This sudden lack of team proximity has highlighted how every task can be evaluated for its outsourcing potential and has accelerated the need for adopting next-gen technology as part of the future operating paradigm. In essence, all tasks can now be bifurcated into activities that add competitive advantage, and daily BAU tasks.
With economic dislocation comes changes in information needs and sources. Beyond the operating model shift noted above, firms are now utilizing cloud-based functions and new Artificial Intelligence and Machine Learning technologies to streamline and bolster their information gathering and analysis capabilities. Public cloud, coupled with remote workplace productivity tools and the rise of AI, have been changing how we all “get work done” for the past several years. The net effect of COVID was to dramatically accelerate the process and blow away the institutional impediments like a mist before a strong wind.
"The net effect of COVID was to dramatically accelerate the process and blow away the institutional impediments like a mist before a strong wind."
With outsourcing now a viable option across the capital structure as well as the enterprise, all facets – from physical office space, to staff location and use of next-gen technology – are on the table. Creating a follow-the-sun workforce and re-evaluating the future staffing mix are all part of the new recipe. And while wholesale changes will not be undertaken by all, we can expect that every successful manager will adopt some element of change into their future operating model. Efficiency and ‘optionality’ are the driving forces – streamlining processes using new technologies and/or global integrated teams.
Information – both access to it and the ability to utilize it to competitive advantage, is still the catalyst that separates ‘the good’ from ‘the great’. Having the ability to get a step ahead in the information race not only reduces operational risk, it also helps lower regulatory overhead. With advancements in cloud computing, managers are leveraging AI techniques to mine unstructured data, manage increasingly larger data sets, predict operational risk events, improve reconciliation and enhance compliance adherence. And while regulation, oversight and the volume of critical information will never materially decline, having confidence in your information and your operational backbone can make these more manageable.
As the dust settles from the COVID-19 pandemic, many questions surround the future of the asset management industry. There are some certainties, which should motivate firms to adjust their operating model to leverage both automation and outsourcing. Overhead pressure will increase, cost to earnings ratios will climb, information needs will expand, the work force will skew decentralized, the criticality of NAV and compliance oversight will increase, and unforeseen operational risks will materialize. In successfully tackling these challenges, the combined pillars of workflow automation, information management and the integration of outsourcing services will provide the bedrock upon which successful asset managers will operate and grow going forward.
About the author, Mark Seaman
Mark Seaman is the SVP, Business Development and Advisory Services at Linedata. Mark has supported the operational and technology needs of traditional as well as alternative asset managers for over 35 years. Prior to joining Linedata, where he oversees both business development for the Services business, and the Advisory Services practice, he was a principal and senior managing director for Gravitas Technology LLC prior to its acquisition by Linedata. Mark has also been a past Principal of a boutique fund administration firm, as well as an alternative asset software firm – Spectrum Global and Shepro-Braun, respectively. Earlier in his career, he managed all front office technology for Neuberger Berman. Mark holds a BA in economics and an MBA in finance. He is a frequent conference speaker on technology and operational efficiency, and operating paradigms within asset management.