After nearly two decades of leading technology, data and strategic change programs at AMP Capital, Doug Talbot, formerly Director of Strategy and Investment Services, has launched 1886 Consulting to help asset managers, asset owners and administrators with strategic operational, data and technology initiatives. Fund Business spoke to Talbot about the impact that operational efficiency can have on business profitability, what to consider when embarking on operational change projects and those initiatives that achieve maximum bang for buck.
It is clear that margins are under pressure across the investment industry. At the same time, the role of technology in asset management is growing exponentially. What does that mean for operations departments and to what extent can operational and technological efficiency offset the decline in broader organisational profitability?
Operational teams are very important to the overall efficiency of the firm and should have a strong voice about which processes are and are not scalable.
It’s absolutely true that margins are under pressure. We are seeing three material top line pressures, which are particularly prevalent for listed market asset managers. These are the shift to passive investments, the internalisation of investments by asset owners and a redefinition of value by asset owners, which is resulting in lower fees. That’s compounded by bottom line pressure including the cost of regulation and compliance and the cost of legacy operational and technology platforms that are inefficient, unscalable and are unable to cope with the new requirements of stakeholders. In Australia, we also notice that there is a finite pool of industry specialists, which means that hiring talent can be costly.
Given these challenges, only the most efficient and scalable managers will survive and we are seeing increasing consolidation activity amongst medium sized managers, as well as the rationalisation or closure of smaller managers as evidence of this.
It also means that for profits to be sustainable, operating models must be able to absorb any growth in funds under management, new data requirements, and new regulatory or compliance reporting. Incorporating flexibility to adopt newer lower cost (such as cloud) or high productivity technology whilst concurrently de-commissioning and or rearchitecting less contemporary technology platforms is also key. Those managers that haven’t made consistent operating platform and technology investments will need to bear even greater short-term profit pain by investing in a change program that delivers medium to long-term efficiency benefits.
How would you describe the current level of operational efficiency among Australian asset managers?
From our experience with managers here and abroad, there are very few that have established a business that is operationally and technically scalable. That’s in part because over the course of the previous three decades, healthy margins relative to other industries such as fast-moving consumer goods or manufacturing have meant that asset managers have not been required to build an efficiency culture. Instead, they’ve tended to focus on product innovation and customer intimacy as key value propositions. What that does mean though is that meaningful efficiency upside is available to those who make this a priority.
Many organisations are currently undergoing or have recently completed operating model change projects. In your view, what are the areas of change where asset managers can achieve the greatest long-term benefits? Do you see most value in the front office, middle office, back office or in process improvement generally?
For starters, I don’t recommend thinking about an investment business in terms of “Front Office, Middle Office, Back Office” or Business and IT teams, because it creates an immediate mindset that fosters division and encourages siloed behaviour. A connected investment outcome focused culture that respects and understands the role all play in adding value to clients is a foundational element of success. At the same time, end to end thinking is important when choosing what initiatives to prioritise.
It also depends on the ultimate objective. Some efficiency projects will provide significant end to end benefits but may produce a lower return on investment (ROI), while other more narrowly defined projects can provide a higher ROI. Both can be correct for different circumstances, but we would argue that whilst end to end projects are often hard to execute, they can have positive secondary benefits such as improving overall firm efficiency and improve collaboration across the organisation.
Saying that, if your data quality and management practises are weak, that is probably a great place to start before moving into technology and sourcing strategies and making any decisions around whether to in or outsource activities.
There’s a lot of talk about emerging disruptive technologies. What do you see as the most promising technologies currently on offer? Conversely, what would be red flags?
When I think about the investment life cycle or value chain I can see meaningful innovation playing out in the short and medium term. Consider what machine learning will do to analysis, distributed ledger to settlement, reconciliations and reporting etcetera. I’d argue that beyond innovation, truly disruptive change is a once in a generation exponential cost reduction or productivity improvement. That’s much harder to predict, but I would say that many managers are still establishing the foundations and are not yet ready to consider meaningful innovation impacts, let alone prepare for disruption. This is an opportunity and challenge.
How should firms assess these new technologies? Do they need a formal process? If so, what should that process look like?
The starting point is to establish a fit for purpose structure for your business – each business is different and what works for a 50,000 employee hierarchy is different from a 10 person boutique. Being open to pilots that quickly fail and provide learning for the next pilot is a nimble way to learn and build experience in new technologies and new ways of working.
How should the workforce evolve to support the evolution of firms’ operations and what do you see as new skill requirements for operations departments of the future?
The first question I ask is how data and technology literate are your Board and C-Suite executive teams? Having conversed with some global asset managers who have recently appointed new CEO’s, I was not surprised to hear that these firms are explicit in their intention to become more like a technology company than an asset manager.
Firms that foster a technology culture will find it easier to bring data and technology savvy people into decision making forums and they will promote and reward people who are skilled and experienced in these areas. It is important to note though that people who are experienced in these roles may thrive in different work place environments to those traditionally provided in asset management. They may prefer a different physical workplace environment, they may need specific nuanced leadership support and motivators can be about autonomy and mastery.
At a personal level my advice for operational team members is to build your data literacy, get involved in projects that work closer with technology and understand what new technologies are in the market. You will also need to be open to the real possibility that the functions and experiences that you established, often over a period of years, may be automated or outsourced to other companies or locations. Separating the emotion of this change and being informed and proactive about building new skills and experiences can get you back in control of managing your career.
Finally a culture of technology goes beyond the boundaries of the firm – who are you partnering with and how innovative and technology-enabled are they?