By Ulrik Modigh, COO at Nordea Savings & Asset Management
With around USD 318 billion in assets under management, Nordea Savings & Asset Management (S&AM) is the leading Nordic asset manager, providing products and competence within equities, fixed-income products, alternative investments and other savings products.
With a presence in the Nordic countries, New York, London, Frankfurt and Luxembourg, S&AM is one of five business divisions within the business area Shipping, Private Banking & Savings Products.
Comprising part of Nordea S&AM is the Global Operations business area. Employing approximately 150 fulltime employees, Global Operations includes all back- and middle-office functions as well as fund accounting, transfer agency, IT and business processes.
Since 2006, Global Operations has focused work on cost management as a strategic tool to ensure that Nordea S&AM has a favorable cost position compared to its peers. The strategy has been to emphasize centralization and standardization of operational processes, implementing operational key performance indicators (KPIs) to increase efficiencies, as well as to establish transparency in operational costs.
Despite higher volumes and increased complexity in business demands during this timeframe, Nordea S&AM has succeeded in reducing the operational cost base as a whole. In doing so, Nordea S&AM has compared its operational costs against other asset management companies in an annual benchmark study and has been able to effectively learn from other companies’ best practices.
The entire cost management strategy has relied on the fact that Global Operations operates with SimCorp Dimension’s wall-to-wall system, which provides the ability to implement a global operational strategy. The system as such has been the foundation for rolling out the strategy in relation to centralization of activities, standardization of activities and automation.
One of the cornerstones of Global Operations’ strategy is cost management. The strategy consists of four building blocks, altogether supporting the objective of enabling growth at lower incremental costs to support S&AM’s overall business strategy.
As the starting point for developing the strategy, an external consultancy company was asked to undertake an independent strategy review of Global Operations’ IT platform and operational processes/strategy. The purpose of the review was to investigate how to optimize the operating model, as well as to exploit the potential for economies of scale and increase efficiencies within operational processes. The outcome of the strategy review produced a clear indication of the relative cost position compared to peers and recommendations on how to focus in order to maintain and improve the cost position.
The review found that to date, Global Operations’ IT and operational strategy had resulted in an attractive and competitive cost position vis-à-vis most of its peers. The very best players provided some inspiration for further improvements, and it was important for Global Operations to build a consolidated and transparent cost view. Second, Global Operations had had more success in moving towards a single IT platform than many other large asset managers. Finally, not that many other asset managers could boast lower IT and operational costs.
It was further recommended that Global Operations’ strategy should include the following key initiatives to support the cost-related business strategy going forward:
- Centralize and standardize Global Operations’ processes (also covering a central solution for derivatives and risk management)
- build transparency into Global Operations’ costs
- establish Luxembourg as strategic domicile to reduce average running costs
Acting on the findings, Global Operations has focused its efforts in line with the specific recommendations. Significant synergies have been realized through decommissioning old local platforms and centralizing into focused competence centers. Global Operations has established an operating model where Nordea’s entire Investment Management/Investment Funds value chain is covered by the same platform – hence no overlapping routines such as reconciliation, corporate actions, static data, pricing, risk, etc. The centralization activities have covered:
- Implementing a derivatives strategy. Listed derivatives are now operationally handled from the Copenhagen back office, whereas owing to limited flows all OTC derivatives were operationally partly outsourced to an external partner;
- Rolling out all valuation and risk management processes within the Copenhagen middle office in Copenhagen;
- Centralizing and standardizing all Nordic (and partly Luxembourg) back-office processes (i.e. reconciliation, corporate actions and settlement) in the Copenhagen back office;
- Centralizing and standardizing Nordic net asset value (NAV) processes in the Helsinki fund accounting unit.
The final step in relation to centralization was taken in order to build up a global fund accounting function. Originally, fund accounting was situated locally in Finland, Norway and Sweden, covering each of the respective markets according to the funds’ registered domicile.
By creating a critical mass of competencies in the key processes in the form of central hubs, the operational units have been developed into more specialized units. This has created an environment and culture within Global Operations to focus on automating processes, improving efficiencies and dealing with change management in general. Further, the operational units are now much better prepared to handle complex issues, products and processes.
The standardization of processes has been performed partly with Nordea’s internal lean office business process and partly by Global Operations alone. In order to ensure that the effect of centralization and standardization activities actually improved operational efficiencies, a range of 20 different KPIs (in the form of efficiency and delivery targets) was defined and monitored. These included:
- straight-through-processing (STP) rates;
- security settlement processes and number of transactions per back-office employee;
- ·number of bank accounts and custody accounts per employee;
- ·number of limit restrictions per middle-office employee;
- delivery targets for client reporting;
- NAV delivery times.
KPIs prove their worth
The definition, introduction and implementation of KPIs have certainly proved their worth in terms of cost efficiencies. Based on different automation and lean-business studies, for example, the STP rate for settlement processes improved from 85% at the start of the project to around 99%. This has reduced the head count where otherwise handling manual trades and/or corrections would have tied up these resources.
The latest STP rates received from Global Operations’ custody bank (JPMorgan) clearly reflect Nordea S&AM’s improved STP rate. The JPM benchmark STP rate for settlement processes shows that Global Operations is in the forefront compared with other JPM clients.
Another example is seen in the development of transaction flows for securities in the period 2005-2009 and, more importantly, in the number of transactions handled per back-office fulltime employee. The number of trades handled per employee in Global Operations has risen at least by the same pace as the volume, highlighting that efficiency has been significantly improved (from 1,100 trades per month in 2007 to around 1,700 trades per month in 2009). Similar evidence is seen in relation to the number of holdings, accounts and custodies, investment restrictions, OTC derivatives, etc., all of which recorded increased volume when measured in terms of a fulltime employee base.
In order to improve the cost management of operating with different types of investment products, a so-called Product Cost Model has been developed. The model’s methodology is based on an ABC analysis covering Global Operations. The model makes it possible to allocate cost components throughout the entire value chain across functions, to the different types of investment products in our product range. The cost drivers have been transaction volumes, corporate action frequency, holding universe, investment restriction universe, product complexity, etc., and have been combined with time studies of specific operational processes in order to ensure correctness in the cost analysis.
With this it is possible to estimate how much a given portfolio within a specific product group will require in terms of running costs. This is extremely valuable when assessing the product profitability across the product portfolio within Nordea S&AM. Furthermore, break evens on individual mandates/funds can easily be estimated. The calculated product cost can be used for evaluating the profitability of a specific product using the estimated product cost, the size of the mandate and the product margin.