6 levers to achieve operational efficiency through standardization

Insights from my recent session at our International User Community Meeting (IUCM) on standardization trends in the investment management industry.

Read the article and learn about:

  • Why standardization of the investment platform and processes is vital
  • How standardization supports the scale and scope of global organizations by achieving economies of scale
  • Six business practices throughout the overall value chain that benefit from standardization
Benoit Glineur 600x387
Benoît Glineur
Senior Product Marketing Manager, SimCorp

My guest speaker, Gary Logan, Associate Partner and Operational Efficiency Lead at EY Wealth and Asset Management, UK talked first about the roots and causes of the industry trend towards standardization. He argued that the good times have continued in recent years with demand for investment products continuing to create positive net new asset flows. In addition, the rising equity markets have increased AUM by 10% p.a. over the last five years and operating margins remain robust. Moreover, there was a significant growth of passive funds (c.20%) and active funds moved into positive flows in 2017 creating revenue growth.

However, these have masked underlying headwinds with AUM growth slowing due to asset owners increasingly managing more assets themselves; sovereign wealth funds continuing to withdraw assets; defined benefits pension assets being drawn down and not replaced at the same pace; and finally, poor savings habits among the younger generations. He concluded by explaining that with industry revenues slowing and operating margins under pressure, operational efficiency is key for divergence between winners and losers. This was supported with the poll conducted among participants of the session, where 59% of SimCorp clients in the audience pointed to the growing cost of regulation as being their primary competitive concern for the future.

At SimCorp, we believe that decreasing operational complexity through consolidation and standardization of the investment platform and processes can support the scale and scope of global organizations by achieving economies of scale and thus reducing costs and improving profitability. Let us focus on six business practices throughout the overall value chain:

1. Process automation from front to back office

It starts with a front office environment based on an integrated IBOR with one central repository of real-time data. Point solutions with inefficient integration create multiple operational challenges when transferring data from one system to another and are costly to maintain in the long run. In recent years, we have seen trade confirmation, settlement matching and payments becoming almost completely automated via the adoption of industry-wide communication standards. Today, we see corporate actions handling being another area where automation is improving but still not enough. When asked how they would rate their current STP level for corporate actions, only 13% of the session participants evaluated their current level to ‘Good and High’.

How would you rate your current STP level for corporate actions?

Current STP level

By moving to a more automated flow with all information gathered in one consolidated overview, front office and back office staff can act directly on corporate actions, moving away from the heavy burden of highly manual and cumbersome processes involving web portals, print screen views, double-checking data, etc. It was clear from the audience that the top two objectives of was to ‘reduce of operational risk’ (37%) and ensure ‘staff reallocation to more value-added activities’ (32%). Increasing automation and overall front-to-back STP rate will enable these objectives together with improving efficiency.

2. Consolidation across all asset classes

Prompted by today’s low yield environment, there is a growing need for more diversified portfolios to enhance returns. As an example of this trend, some investors are now allocating up to 40% of their portfolios within alternative investments, making it the fastest growing investment category, doubling in size since 2005 and expected to double again by 2020. However, alternatives are the most costly and challenging asset classes to support. Maintaining different asset classes in separate systems is thus not sustainable in the long term as it prevents an efficient standardization of processes, increasing risk and costs, as well as time-to-market for new products. To be able to handle these new asset classes along with existing ones, we foresee that investment managers will be requesting integrated IT architectures with multi-asset class support to standardize processes and reduce the number of operating systems and the need for spreadsheets. We found a keen desire to see ‘improved risk and compliance management’ and ‘improved reporting’ in order to better integrate alternatives across an organization.

Which improvements are needed to better integrate alternatives in your organization?

Better intigrate alternatives

3. Data lakes and analytics

Today, investment managers are primarily using data to support and facilitate the investment process. Overall, we observe that the consumption of data is constantly growing as the business expands to new asset classes or new markets, making the data management function more complex every day. In addition to the increased amount of data imported, a large set of data is also generated through day-to-day activities and associated to specific clients, products, or business lines. Among the audience, the most popular use of data analytics was to make better investment decisions.

How does your firm use data analytics today?

Better intigrate alternatives 770x375

Standardization of the operational data layer is thus key to improving operational efficiency and data management with the help of data warehouses. Plugged with powerful data analytics, this can also open the door for unexplored possibilities from a data intelligence perspective and would allow investment managers to improve investment decisions, optimize processes, lower costs but as well create new products for new customer segments.

4. Outsourcing and offshoring

Accommodating an increasing appetite for focusing on firm’s core business, outsourcing and offshoring processes can take many shapes and forms. We expect that investment managers will request more “out-of-the-box”, “as-a-service”, and cloud-based solutions in the coming years, from the smallest boutiques to the largest asset management firms. Investment managers do not only require cloud-based solutions, they also want them to work “out-of-the box” or at least be easy to deploy from a functional perspective. In survey initiated by SimCorp in 2017, 46% claimed they prefer solutions that include software, market data, and pre-configured processes. This is a clear change from the past, where most investment managers preferred a fully customized on-premise solution, perfectly fitting all their dedicated business requirements. Indeed, “out-of-the-box”, “as-a-service”, and cloud-based offerings will enable investment managers to leverage existing solutions and instead focus their resources on areas with more scope for differentiation and competitive advantage.

5. Machine learning

We live in a world where new technologies constantly emerge. Current machine learning research and pilot projects will yield a new set of products and services aiming to increase efficiency through standardization and automation of processes at multiple points in the value chain where there are still many labor-intensive manual tasks. One of the projects SimCorp recently delivered is how to use machine learning to run system tests faster with a higher level of automation to help enhance the human workflow for daily quality insurance. Another of our pending projects is related to Central Trade Matching first time match prediction. Research is looking to calibrate a model to determine if a transaction is most likely to succeed or to fail by giving a probability level. However, even tough data is growing, a major issue calibrating our algorithms is the lack of shared client data. A pending issue in machine learning innovation is the lack of shared client data, and it was clear in the audience that this is due to confidentiality issues and a fear of data unauthorized usage’.

6. Blockchain

Blockchain is a protocol for implementing a distributed database, which maintains a continuously growing list of data records secured from tampering and revision by using cryptographic functions and decentralized consensus. The most likely scenario to happen in the short term is a significant level of adoption especially for the issuance, trading, and post-trade processing, including settlement, of illiquid products that currently exhibit a low level of automation. Another common case that generates excitement in the industry is the issuance of financial contracts, most likely complex OTC derivatives in the form of smart contracts. We asked the audience what actions their firms had taken in the past year in researching the potential of blockchain - 40% of the respondents answered ‘no activities’ while 38% said that they were ‘passively following the market and industry trends’.

It is quite good news that 22% of present SimCorp clients’ in the audience are working on this new technology. However, some significant and genuine issues remain. Among the most important ones is the danger that a lack of standards could impede interoperability.

In conclusion, there are many opportunities to gain competitive advantages and to improve profitability by simplifying and standardizing the infrastructure and processes along the investment management value chain. To stay competitive in today’s fast-paced business environment, it is important for investment managers to incorporate the above levers gradually, while monitoring trends and market changes to be able to adapt and balance according to individual business cases.