The need to optimize operational performance to increase profitability – dubbed “operational alpha” – is not a new topic of discussion in investment management. However, it is becoming increasingly urgent in the face of a continuing squeeze on margins – no longer a “nice to have,” in the words of Cubillas Ding, Capital Markets Research Director with Celent. Speaking at the SS&C Advent Engage virtual conference in September, Ding said firms must address business economics front-to-back to succeed in alleviating margin pressures for the long term. That means taking a firm-wide, integrated view of operations to maximize efficiency, contain costs, and optimize the value of data shared across different functions.
In his wide-ranging presentation, “Operational Alpha on the Buy-Side,” Ding delineates several trends reshaping the industry, notably the “unrelenting” shift from active to passive strategies, growth of multi-asset portfolios, and increased demand from institutional investors for more tailored, outcome-oriented investment solutions. Meanwhile, revenue growth has plateaued as operating costs have continued to rise, creating an unsustainable margin compression.
The trend having the most significant impact, however, is the rapid advancement of technology. According to Celent’s research, a majority of buyside firms expect to increase their technology investments in the near term. In Deng’s view, firms must look at new technology deployments not just as cyclical upgrades but as a foundation of structural change. It’s an opportunity to modernize and reengineer a firm’s processes, and make firms operationally lean and nimble with increased automation, artificial intelligence, and machine learning. Moreover, outsourcing and managed services are part of the mix for achieving these goals.
In the front office, the drive for operational alpha intersects with the quest for investment alpha, as portfolio teams leverage technology for what Ding calls a “data-rich” approach to portfolio design and construction. Researchers and portfolio managers seek to incorporate more alternative data, notably ESG-related, into their decision-making processes to generate new insights and help differentiate their value propositions. Firms are also looking to data to support marketing and distribution by better understanding client preferences and behavior.
This growing application of external data underscores another important point Ding makes: the front-to-back vision must extend within a firm and outward into the broader investment ecosystem of service providers and data marketplaces. Firms need the means to quickly aggregate data from external sources and integrate it into their front-, middle- and back-office processes.
A front-to-back technology solution doesn’t necessarily mean a single front-to-back platform, Ding also notes, however it does mean having a level of integration and system compatibility to ensure data consistency across a firm to support collaboration among different teams. A “data-centric culture” will be a key determinant of success in the evolving investment management landscape, Ding believes. To that end, he says, Firms need to:
- Have better information
- Process that information more quickly to make timely decisions
- Be able to process information more effectively – to “separate the signals from the noise” so their data is reliable and actionable
Movement to the cloud has helped many firms reduce costs and increase efficiency. However, in Ding’s view, the full potential of the cloud has yet to be realized in the investment management space. The cloud is enabling a more seamless convergence of software solutions and operational services, which will ultimately allow firms to offload more non-core but critical activities, from technology hosting and maintenance to data management.
Ding concludes by outlining several “strategic levers” and success factors firms can employ to accelerate operational alpha – essentially a framework for comprehensive, firm wide integration to elevate operational performance across the board. For firms that recognize the strategic and business imperative to take operations to a higher level but aren’t sure how to go about it, Ding’s presentation is informative, thought-provoking, and well worth the time. View it in its entirety.
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