Why are we changing?Key Triggers
When is enough enough? What are the compelling thresholds that, once crossed, make transformation across investment operations inevitable?
There is no single line across the industry that makes change compelling – and yet there are limits and thresholds all around us in our macro-environments and in our daily operations. The key themes that we have identified are set out below.
1. Geography
At a strategic level, where you are in the world is a major
influence on how and when you are driving transformation today.
#1 factors driving the strategic agenda per region in 2023
In Asia, continuing asset growth amongst pension funds and insurers is a major driver of transformation – as volumes and investment complexity escalate in keeping with the continued growth of the middle classes in ASEAN especially.
As we saw in 2021, the fast-escalating levels of regulatory activity and enforcement in Australia and South Africa are the dominant driver of change. Fear of being singled out in APRA’s industry scorecards, for example, is driving superannuation to transform quickly and profoundly in every area – well ahead of their global peers.
Out West, with limited regulatory oversight or enforcement, asset owners in Europe and North America are more focused on making technology changes and upgrades in order to grow their portfolios further and improve efficiency – with lower levels of intensity than those seen in Asia-Pacific and South Africa.
2. Errors
Beyond the macro-context, the single largest driver of change at an operating level is errors (and operational resilience).
Given the prevalence (and residual risks of) the spreadsheet-based operating model across many key tasks in investment operations, many asset owners continue to survive against a backdrop of continuing minor errors – and under the looming threat of a major, multi-million-dollar error presenting itself (see above). This continuing risk and cost is especially acute in areas such as collateral management, reconciliations, cash management and financial reporting – all of which remain highly manual, opaque and therefore prone to manual failures.
As many asset owners begin to deploy automated, inter-connected processing infrastructures (as a replacement to manual-processing and human dependencies), it is no surprise that the primary intended benefit for 24% of firms is a reduction in these errors – well ahead of any other strategic or more abstract criteria. Cost reduction, scalability and flexibility may be desirable – but reducing errors is a non-negotiable way to keep management and regulators happy.
Yet whilst many larger asset owners are able to proactively address their error risk, several firms in the mid-tier pensions space see the focus on errors as a reactive problem. In many cases, stretched budgets can mean that change projects are repeatedly deferred and then only approved as a result of a high-profile and costly error. There is a risk for many of waiting for the next disaster to be a catalyst for change.
3. Consolidation and Organisational Change
Behind error reduction, the second most significant trigger for change in the industry today is entirely external. Organisational changes and consolidations (of plans and managers) are the core driver of one-in-five transformational projects today – well ahead of any internal efficiencies. As we continue to see in Australia, Canada, South Africa and elsewhere, the ongoing consolidation of the industry (whether voluntarily or when driven by regulators) is triggering a huge amount of change activity – as two operating models become one.
Depending on the circumstances, the enforced timing and nature of these consolidation projects can often be a blessing and a curse. On the positive side, these events can offer funds significant opportunities to drive new synergies and select best-of-breed solutions (either based on existing operating models or leveraging the chance to make a fresh start). However, they can also effectively hijack or derail existing, multi-year investment programmes and hence reduce their value and returns.
“Consolidations can give people the chance to have an absolute rethink of everything”
4. Insourcing
18% of asset owners are currently internalising asset management – meaning that entire new competencies and operating processes are required for these asset owners. Some asset owners are insourcing equities because they are low-cost and low-complexity to run; whilst others are focused on building in-house capabilities in highly complex or long-term investments such as private markets.
Whilst the rate of this insourcing is slowing (down from 30% of asset owners in 2021), the requirement for asset owners to shift from aggregating, allocating and monitoring to active management and portfolio execution can often prove fundamental in many areas. As we are seeing with the LIBOR transition, the acceleration of settlement cycles (in North America) and the increased regulatory focus on settlement discipline (in Europe), asset owners face an increasingly high bar for efficiency and performance as they take their first steps into portfolio management and trading – demanding an investment operations platform that is able of meeting stringent market thresholds. A far cry from spreadsheet management.
5. Volume growth and complexity
Within investment operations, there are a myriad of other thresholds that can trigger major transformation, such as entry into new (often private) asset classes; increases in the number of external fund managers (often from one to many); and dealing with the pressures of volume growth.
That these criteria, collectively, make up only 11% of change projects today is evidence of the industry’s ability to stretch and withstand change. Rather than triggering significant, enterprise change, these pressures are often dealt with locally (through a tactical fix in the front office, for example) or through additional headcounts – meaning that we often end up deferring the costs of risk to tomorrow.
“We’re happy to outsource investment management – but why do we think we should still be writing code today?”
6. People
Outside the explicit confines of regulatory pressures or organisational consolidation, the role of people in driving transformation must not be under-estimated.
At a staffing level, many asset owners are still acting now based on lessons learned during COVID – a shock event that is acknowledged to have driven decades worth of change in only a few months. Against a backdrop of highly manual and centralised processes, lessons were quickly evident for asset owners of all sizes when people were simply unable or unavailable to complete their daily processing. In response, decision-making, data analytics and error-handling have all been either removed entirely (through automation) or moved away from desktops and into core processing platforms – in order to ensure continued access and continuity.
“Covid accelerated the industry’s transformation by at least ten years”
“We hire good people and good people want good platforms. Talent is the one area where pension funds are in a competitive situtation and so we have to be able to compete”
But the people challenge is deeper than a one-off event. Investment operations departments are all now contended with a generational shift in talent, which is becoming both younger and more tech savvy. With many new hires are not content with relying on manual processes and antiquated systems when performing daily tasks, leading asset owners are realising that, if they want to attract the best talent moving forward, then they will need to digitalise their middle offices.
Benchmark your plans
Are you an asset owner?
Are you looking to drive transformation across your investment operations?
Make sure you use this unique opportunity to benchmark your own change ambitions and journey. Compare your work with over 350 of your global peers today.
Complete our ongoing market survey and you will receive a detailed, personalised benchmarking scorecard to show you exactly how your plans compare with those of other global asset owners