SGSS Global Investment Mangement Survey - Part 4
As a consequence of the new challenges faced by the buy-side industry and strategies undertaken by players to adapt their business models, operational organisations have been thoroughly shaken up recently.
The regulatory framework, as well as new client requests, are increasing pressure on back-offices, thus requiring investments and, at times, a complete renewal of IT platforms.
It is therefore becoming apparent to many of our respondents that the introduction of digital transformation and new technology is the cornerstone of a new operational strategy.
Nevertheless, the needs of multiple skill and finance resources simply make it impossible to support development in isolation. It is becoming the case for all buy-side players but also securities providers who are also building platforms where they can offer, through API, access to a broad range of internal services and those from external partners (fintechs, for example). It is now time for “Co-opetition” that goes beyond the apparent contradiction between cooperation and competition.
As a result, new operational models are emerging in the market, incorporating digital means as a new standard and based on outsourcing covering a broader range of new functions.
Main operational drivers
Digital versus costs
Big data, flexible data management, accessibility of information to deliver regulator and investor reports in real time and at a low cost.
At this time of the data revolution, respondents (especially the largest AMs and Asset Owners) logically put digital and new technology issues at the top of their list of priorities, as an enabler of their operational process improvement and cost reduction.
It is also worth noting that several respondents expressed not only the conviction that digital issues are about process optimisation, but also stressed the need to improve flexibility and agility. A better understanding of clients’ demands in order to be more reactive is clearly the objective. For this purpose, improving client knowledge (with order earmarking, closer distribution follow-up indicators) is a pivotal issue.
Building efficient partnerships with external providers is also considered as essential, especially by PE/RE managers (36% of them). To this respect, large Asset Managers expect global platforms that minimise processes and the number of partners, to support their international strategy and reduce risk and pain when producing regulatory reporting
Outsourcing versus in-house
Little resistance to task sharing
Outsourcing is a common operating model element, and keeps us ahead of regulatory change challenges. Retain low-key outsourcing as much as possible,have control. We perform a lot of non-core activities in-house, but this may change in the future.
Almost 2/3 of our sample consider the outsourcing of services to be a key element of their operational strategy.
Smallest Asset Managers and PE/RE actors are the biggest supporters of outsourcing their organisation, seeking pooled investment benefits.
At the opposite end of the spectrum, Asset Owner respondents choose in-sourcing as their preferred solution (45% of them). In-house operational strategies are commonly associated with a desire to limit dependence on external suppliers and to rely on an existing substantial middle and back-office organisation. The data issue is a crucial one in this respect: the ability to remain in-house and better protect customer data is mentioned.
Nevertheless, a third of in-house supporters say they may change their mind in the future.
Added-value solutions with a consolidated platform
I strongly believe in the value of outsourcing, and have taken it to the extreme by outsourcing the entire operational value chain: fund accounting, transfer agent, middle office, collateral management, loan administration, etc.
Activities listed as good candidates for outsourcing reflect business trends and environment challenges. Middle Office becomes costly and complex in asset and geography diversification strategies. The stakes are the same in a highly demanding regulatory context for reporting, risk management and collateral exchanges. Lastly, demand for full front-to-back solutions emerge, freeing managers from all non-core functions.
A large proportion of outsourcing supporters (28% of our sample) would also like to consolidate their relations with one or a small number of global providers, when this is possible (one per asset class or one per region). All Asset Owners are in this category, expressing a need to industrialise relations with platforms consolidating markets and asset classes (right-hand diagram). At the opposite end, PE/RE managers outline the importance of local market experts, as opposed to global specialists.
Lastly, 21% of large and 11% of mid-size Asset Managers are also prepared to pool their internal set-up with peers or securities servicers.