ATP is a statutory pension fund covering 4.6m members – virtually the entire adult population in Denmark. Together with the tax-financed basic pension, ATP provides basic income security in old age for the Danish population. ATP was established as an independent entity in 1964 and has since grown to become the largest pension fund in Denmark. ATP pensions are life-long, with profit annuities. Members accrue pension rights based on a collective insurance-based defined-contribution model. Pension rights are guaranteed promises. ATP Group assets amounted to approximately DKK710bn at year-end 2009.
About the author:
Jacob Elsborg, Head of Technology, ATP Investment Area.
Jacob Elsborg is Head of Technology for ATP’s investment department, a position he has held since 2000. He holds a master’s degree in economics and mathematics from the Copenhagen Business School and an MBA from the Henley Management College in the UK. Jacob Elsborg previously worked as an IT economist for Danmarks Nationalbank, the central bank of Denmark, from 1995 until 2000.
Operational platforms in the asset management industry are treated very differently, but one fact is known by all asset managers: operational platforms are extremely costly. Many asset managers wrongly think that making two to three main statements that express general guidelines for their platforms is performing strategic management of their IT installation. In this article it is argued that this kind of management does not constitute strategic management of an operational platform. This management approach might be sufficient for simple and small asset managers, but for more complex businesses a more analytical approach is appropriate.
The key goal of this article is to demonstrate why formulating and implementing an operational platform strategy is a valuable and necessary tool for an asset manager’s strategic management, and to illustrate which elements strategic management can consist of. The length of this article leaves no room for long discussions or analytical models or for explaining strategic drivers, so it only discusses a high-level approach to strategic management.
This article’s main postulate is that an appropriate and well-defined strategic approach to an operational platform is economically beneficial and turns IT expenses from costs into a strategic investment.
The definition of an operational platform (Elsborg, 2008) applied in this article is:
An operational platform in the asset management industry is where the management of an organisation’s data and information takes place, together with the execution of decisions.
The operational platform as a strategic management tool
The choice and design of an operational platform is not an isolated technical decision. The platform is a strategic management tool that either supports the development of the business or creates obstacles. The operational platform can be seen as a way to gain competitive advantage through cost-efficient design, reliability, flexibility and scalability. The main goal for strategic management of the operational platform is to create alignment between the operational development of the platform and development of the business.
This article outlines a simple, straightforward approach to strategic management of an operational platform. Firstly, a basic definition of the operational platform is required. This definition forms the basis of the strategy. Thereafter, the direction and drivers of the operational strategy are defined, which leads to the actual definition of an operational platform strategy. A gap analysis must then be conducted to define the need for development of the operational platform.
The approach, however, can be more or less sophisticated, e.g. the basic model can be developed further according to the results of the analysis; the analytical approach is extendable; and the strategies and drivers of the platform are equally extendable. It is all a question of how complex a business the operational platform must support.
A general problem in the industry is that many asset managers do not distinguish between IT strategy and operational platform strategy. Far too often, making no differentiation between these strategies causes the operational set-up and the development of this set-up to be based upon technical considerations stated in the IT strategy (if one such exists). By contrast, the operational platform strategy – as defined in this article – is formulated by the business unit using the platform, which ensures that the management of an operational platform becomes an integrated part of the business. The underlying technology processes such as network, communication and hardware are managed within the framework of the IT strategy, which of course must be aligned with the operational strategy. The author of this article acknowledges that the management of an IT strategy is of equal strategic importance (and often more complex).
Model framework of operational platform
To implement a strategic approach to managing an operational platform, a functional model must be defined and in place. This model is the main outset for conducting analyses and for setting up a strategy for the operational platform.
Defining the activities of an asset manager within the concept of a value chain (Sondhi, 1999) is an equally simple prerequisite. The value chain consists of three primary activities, which are the investment processes:
- decision making
- transaction processing
- information delivery.
A general problem in the industry is that many asset managers do not distinguish between IT strategy and operational platform strategy.
Using this definition of the activities of an asset manager with respect to an operational platform, a model in its simplest form can be defined as where the management of an organisation’s data and information takes place, together with the execution of decisions (Figure 1).
To define a strategic approach to managing an operational platform, the primary activities in the value chain have to be defined separately.
The next part of this article is dedicated to the analysis of the primary activities of an operating platform. Figure 2 gives a brief presentation of a functional model framework (Heyes, 2007; Elsborg, 2008) for the defined activities of an operational platform.
In the framework in Figure 2, a differentiation based upon the characteristics of the instruments is suggested. The asset classes are:
Cash instruments are equities, fixed income and FX cash instruments.
- Exchange-traded derivatives (ETD)
ETD instruments are listed futures and options on all underlying instruments.
- OTC (named ‘Vanilla’ OTC)
OTC products are instruments with standardised procedures.
- Illiquid and private assets
Illiquid and private assets are complex OTC derivatives and private or physical assets.
The assets in each group have the same characteristics with regard to their defined main functions, and they are thus useful when analysing the operational platform. It is not the intent of this article to discuss in detail the characteristics of each asset class or how to use the various instruments in terms of portfolio management; however, one must be aware of the differentiation when defining a strategic model for the operational platform.
The basics of an operational platform strategy
As stated above, the strategy of an operational platform has its origins in the overall business strategy. Figure 3 illustrates the alignment of the operational strategy.
It is outside the scope of this article to define a business or investment strategy, which means it is impossible to define a specific operational platform strategy. However, it is possible to define basic operational drivers without having the precise strategic scope of the business, the investment or the operational platform strategy.
The definition of a business strategy derives from the usual steps: analysis followed by definition of vision/mission, objectives, strategy and tactics (VMOST; Sondhi, 1999), which again leads to the definition of an investment strategy (it has been seen that the strategy and tactics definitions of the business strategy are the definition of the investment strategy). It is upon this basis that the strategy of the operational platform is defined. The implementation of the operational platform strategy thus becomes an integrated part of the implementation of the business strategy.
The strategic direction of the platform has to be defined by developing an operational platform strategy. A useful framework for defining the strategic direction of the operational platform is Michael Porter’s competitive strategies (Porter, 1985) (Figure 4).
The alignment between the strategic direction of an operational platform and the business strategy is crucial because this direction has a direct impact on all levels of an operational platform strategy.
Several drivers are reflected within an operational platform strategy depending on the business strategy on which it is based. Three main drivers that should be considered when developing an operational platform strategy are:
These drivers are highly dependent on the strategic direction defined for an operational platform.
As identified within the competitive scope above, costs can be considered as a separate driver or simply as a function of the drivers defined above.
Having defined a functional model and strategic direction/drivers for a platform, a strategy for an operational platform can then easily be defined. Afterwards, a strategic fit between the existing operational platform and the strategy should be determined in order to decide on the future development of the operational platform.
As stated in the section above, the main purpose of the analysis is to determine the fit between the business demands defined in the business strategy and the existing operational platform. The outcome of the analysis decides the direction for development of the operational platform, instead of a day-to-day-driven method. This approach demands that the strategy of the operational platform is aligned with the business strategy.
The analysis of the operational strategy is based on the objectives and strategic direction of an operational platform, which is again based on the overall business strategy. The critical success factors (CSFs) and the main drivers of the platform can be determined from this process, along with the key performance indicators (KPIs; Henley Management College, 2002). Figure 5 illustrates the flow of the analysis.
Having derived the KPIs from the operational strategy, an analysis of the fit with the existing setup can be performed. It is obvious that this analysis is meaningful when the business strategy is changed, and as a consequence the operational strategy is aligned. It can be expected that changes will result in gaps between future demands and ex¬isting set-up and thus changes to an operational platform.
The analytical framework
A basic analysis can be performed on the basis of the KPIs derived as mentioned above. The analysis comprises two steps based on two questions:
- What information is required at what level (Kanter, 1987)?
- Is the operational platform capable of performing the task (Wild, 2002)?
Basic analytical framework: information analysis
The main purpose of the information analysis is to define what information is required at what level (Kanter, 1987). This process must be performed for each of the main functions defined in the functional model (Figure 2). Also, the second target is to conduct a gap analysis to define the informational need (Henley Management College, 2002).
The analysis is based on the KPIs defined in the strategy analysis outlined above. The structure of the analysis is described in Figure 6.
The KPIs derive from the strategic analysis mentioned above, and they are used to decide the information requirements. These requirements are expressed as critical information sets (CISs) based on the KPIs. (A model for analysis is Anthony’s Triangle [Kanter, 1987].)
The information gap is defined as what is lacking between the CISs, which are the information sets that the users of the operational platform require and the available information sets that are provided by the operational platform (Henley Management College, 2002). It is then a question of defining the added value of information to fill in the gaps.
Basic analytical framework: process analysis
The basic process analysis of an operational platform has the same basis as the information analysis. The analysis defined below is a simple process analysis, and it would only determine the basic operational parameters. Bringing the analysis to a higher level will depend on an actual operational platform, which thus determines the selection of analysis.
The main approach is to perform an analysis of the gap between the KPIs and the existing processes. Figure 7 illustrates the flow of this analysis.
The process analysis depends on the actual set-up of an operational platform and its functions. A process analysis has two obvious layers (Wild, 2002):
- process mapping
- capacity analysis
The process mapping defines each process on an operational platform in order to secure that all processes framed within the business strategy are handled in an acceptable manner, and in order to analyse how capacity against fluctuation in demand is handled.
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The capacity analysis and management is about handling the flow of information, orders, transactions and analysis. Wild (2002) defines the process thus: “The determination of capacity requires not only the estimation of steady-state or average demand levels but also decisions on how best to deal with demand level fluctuations.”
The scope of the capacity analysis is to define where the capacity has bottlenecks and how they are managed.
Defining and implementing a strategic approach is not an easy task, which is why many asset managers choose the approach of using a technical IT strategy or some general statements as guidelines instead.
Taking a strategic approach to managing the company’s operational platform is fairly time-consuming, not only with regard to defining the first strategy, but also with regard to aligning the business strategy and operational strategy with the gap analysis and maintaining the functional model of an operational platform.
The value of defining and strategically managing the company’s operational platform, however, exceeds the cost, with the following main benefits:
- management buys into the development of the operational platform through working with alignment between the operational strategy and the business strategy;
- development of the operational platform is not driven by a day-to-day approach, but by defined long-term business goals;
- the platform development processes become more precise and timely due to the integration on a strategic level with the business strategy, which leads to a decrease in cost;
- a more stable platform results from the long-term perspective development and it is thus less of a ‘putting-out-the-fire’ platform;
- a better understanding develops between the users and developers of the operational platform due to the strategic alignment;
- on a strategic level, IT and operational management are separated, leaving the purely technical strategy and decisions to the technical staff and the operational strategy and decisions to the business unit.
Depending on the size of the business, a strategic approach to management of the operational platform is beneficial in terms of development, stability and cost.