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Q: How can investment managers cut middle and back office costs by 25%?

November 2, 2011

A: By streamlining processes – eliminating redundancies and increasing coordination –according to panelists from Beacon Consulting, Citi Fund Services and Milestone Group, speaking on a NICSA webinar last week.

Panelists Michael DiScipio, Sugata Gupta and John Herlihy reviewed the challenges and the opportunities for investment managers looking to increase operational efficiencies. Here are the highlights from their remarks:

  • It’s only getting tougher for middle and back offices: Investment instruments are increasingly complex, regulation is constantly changing, demands for transparency are growing and processing windows are ever narrower – and firms are moving faster and faster to stay competitive.
  •  While accuracy has to be extremely high: At Citi — which is responsible for the administration of over 8,000 funds — an error rate of just 0.1% means 7 or 8 errors every day.
  • The internal processing environment reflects the external complexity: Take the core transfer agent and investment accounting systems – add function-specific systems to handle tasks like trade settlement and fee computation – then layer on manual processes using spreadsheets for particularly complex items. Make sure that none of the components communicate automatically – and you have the recipe for today’s investment middle and back office. The result is an inefficient system where adding volume means adding headcount.
  • Startling statistics: The average middle- or back-office process (such as NAV calculation) involves 10 or more systems. Manual processes involve 40% of middle and back office labor and 70% of the risk.
  • Adding to the chaos: Many firms have moved some of their operations offshore, because of the increasingly global nature of the investment process and to take advantage of lower-cost locations. It’s not unusual these days for investment decisions to be made on the West Coast, trade settlement to be handled in Singapore, reconciliations to be done in India, valuation to be completed in Ireland, while NAV is struck in Luxembourg.
  • There’s hope, however: Technology now gives investment managers and service providers the ability to streamline processes – by replacing fragmented architecture with an integrated system. A redesigned system can process a complex transaction from beginning to end. For example, an exception management system would not just identify errors in a dashboard report, but also facilitate both the validation and the repair of the problems.
  • But change requires an honest assessment: Firms need to review and prioritize their current system of checks. While they may be able to stop doing some – especially the ones designed to prevent yesterday’s problems – they may also need to design new controls for emerging or particularly tricky issues.
  • Technology can also help communication: If information is stored centrally and accessible to all, hand-offs between units – whether within the same building or across time zones – can be handled more smoothly.
  • The benefits: Not just cost savings, though those can be substantial, ranging from 10% to 50%. Redesign can also have people benefits — helping to retain top performers by focusing their jobs on value-added functions, thereby making them more enriching. Most importantly, increased integration and interaction generate an environment that encourages innovation — planting the seeds for future success.

If you’re interested in hearing more, an archive of the complete webinar — The Evolution of Operational Efficiency for Middle and Back Office Processes — is available free to NICSA members.

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