Asset managers, operational efficiency, and fast cars

It is hardly a surprise to institutional asset managers that current market conditions are as challenging as they have ever been. A popular scapegoat is the global financial crisis; however, this happened almost ten years ago and can no longer be used as an excuse for all that ails a business today. There are any number of well-documented reasons for the struggles encountered by many investment managers – compounding data volumes, regulation, client demand and more – but one key factor is often overlooked: lack of operational efficiency.

Bill Gates put it pretty well, saying that “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.” With that in mind, let’s look deeper at why asset managers are struggling with operational efficiency.

Treating the symptoms without addressing the disease

In an investment management context, operational efficiency is loosely defined as your ability to process investments in as optimal a manner as possible, the more automated the better. The core of operational efficiency is the technological infrastructure that underpins your investment management activities. An inadequate IT infrastructure ultimately leads to operations that are substandard at best and a threat to your firm’s viability at worst.

When assessing what your key pain points are, you need to determine the root cause behind them. In many cases, problems such as the inability to pursue growth strategies, lowering the degree of operational risk or difficulty in containing costs is not due to a bad strategy or incapable staff but rather an infrastructure that simply cannot support the needs of the business. If you try and work around infrastructure limitations rather than addressing them head-on, you are only delaying the inevitable.

The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.Bill Gates, Founder & Former CEO, Microsoft

Consolidate and modernize

One common mistake investment managers make is to add a new, best-in-class solution to the infrastructure every time a new ambition (e.g. support a new asset class) or issue (e.g. comply with a new regulation) comes up. The problem with this approach is that you are left with a series of modern, cutting-edge solutions extremely efficient at carrying out a particular function - but not at all designed to work with other solutions across functions. An example of this can be found in SimCorp’s recent white paper, Realizing growth through operational agility, where it was shown that investment managers with an integrated solution strategy were more likely to have real time access to front office data and a higher degree of automation than their so-called “best-of-breed” counterparts. The higher degree of automation was commensurate with both a higher degree of confidence in the infrastructure to support growth strategies as well as a lower likelihood of having to increase IT spending in the next year.

An analogy is trying to put together a car consisting of a Porsche engine, Ferrari body, Lamborghini transmission and a whole host of high-end parts from various other manufacturers. All the components are top of the line, but it would take an inordinate amount of time, resources and coordination to produce a car that actually runs. The same holds true for your investment management infrastructure. It is much easier and faster to consolidate the number of disparate systems to a bare minimum. This allows for a much higher degree of automated investment processing, as there is a single source of data and the different components of your infrastructure are optimized to work together. This in turn lowers operational risk, reduces operational costs and facilitates operational efficiency.

Don't wait, consolidate

If you find yourself in a situation where your infrastructure is hindering your ambitions rather than helping them, the time to act is now.

With vendor selection cycles lasting as long as a year and system implementations taking almost as long depending on the scope, up to two years could pass before you have a solution to today’s most pressing issues. If you choose not to decide, you still have made a choice. For the sake of your business’ viability, can you afford to wait to consolidate?