4. Realising transformation:
Making new friends
So how do we actually realise the change? What lesson have we learned that can maximise the delivery and impact of any project?
Where to focus? Replace Excel and then...
Faced with an unprecedented mixture of external pressures and potential technological change options, it is no surprise that asset owners are today overwhelmed by the possibilities.
With approximately 40% of asset owners running transformation projects over the coming three years, there is no absence of change activity - particularly in Australia and in Europe (where the number exceeds 50%). Yet there is surprisingly little consistency across markets around the services and technologies being deployed.
What is clear is the organisational change and the removal of spreadsheets and manual processes are a priority for two in every three asset owners globally. But beyond that the project focus for different profiles of asset owner becomes more diverse. Historically proven alternatives (such as system replacement or outsourcing) appear to be losing momentum, lost in amongst a wide range of projects that runs from cloud deployment to consolidating providers. We appear to be trying a lot of things.
This is in part due to challenges in defining the problem today. Highlighted as the #1 challenge for asset owners in realising change (and described as a blocking obstacle by 23% of our respondents), the definition of the scope and nature of the business case for change is a major challenge for many. Is ESG or investing into private securities a data problem alone? Or is it a software-problem? Or a people problem? Most pressures today are a mixture of all of these - making the definition of target solutions extremely challenging.
Equally there is no awareness of technology solutions across the market today. Ten years ago the answer was arguably simple: outsource; hire more fund managers, appoint a master custodian to whom you could outsource your middle and back office and you could watch your unit costs fall. Today the answer is more opaque. After over a decade of digital innovation we are faced with more technology solutions than ever leaving each asset owner to reach their own conclusions around what is best.
...focus on the data
But above a muddled mix of projects and technologies, one core theme is dominant: data is indeed the new oil.
Six of the top ten most frequent projects for asset owners have data at their core - ranging from external data connectivity (including APIs); to data quality; to speed; and to new data coverage. At every stage of the trade cycle, asset owners are enhancing and broadening their data capabilities.
Whilst the focus on data is no surprise today, the reasons that underpin the business case for change today is revealing - and stretches well beyond the operational need to price and manage new securities or new ESG data.
In the context of increased regulatory enforcement, asset owners (like brokers and banks before them) are faced with a growing need to provide ever-more complex data-sets to oversight bodies, on a regular basis. With disclosure requirements advancing well past simple trade blotters or portfolio holdings, asset owners must have flexible access to clean and complex data in order to satisfy the powers that be - which is well beyond the capabilities of spreadsheets.
Beyond simple data access, asset owners are also under pressure to evidence sufficient oversight of key functions (such as NAV, tax or regulatory reporting). Having grown dependent on their master-custodians for the majority of their processing, asset owners today describe being sanctioned by regulators for their inability to evidence the in-house checks and verifications that are required of them, as part of their fiduciary responsibilities.
After decades of relying on third parties (usually custodians) to generate, manage and store their data, a number of Tier 1 asset owners are now taking control of their data back from their providers - looking to embed "data sovereignty" as a core value as they build the capabilities in-house to source, manage and manipulate their own data. This can be driven by a desire for confidentiality, by the need for flexibility and / or the need for commercial freedom. If an asset owner is no longer reliant on their master custodian for their data servicing, then they are free to recraft operating models in their favour (towards having the custodian simply settling and processing trades).
But data sovereignty is not cheap. Smaller funds, who are already highly dependent on their custodians to manage their data, are inevitably turning to these same providers to address these new requirements. As a result, custodian roadmaps and partnerships are becoming a critical dependency for smaller and mid-tier funds.
Asset owners today describe being sanctioned by regulators for their inability to evidence the in-house checks and verifications that are required of them, as part of their fiduciary responsibilities
Who to turn to on the journey?
Given the evolving nature of asset owners' project roadmaps, it is no surprise that the 'change team' supporting the transformation is undergoing a significant shift - particularly amongst larger asset owners.
For smaller funds, vendor reliance continues to be a core theme - with over 60% of smaller respondents naming their software provider and/or their master custodian as their core change partner. The mutual reliance of vendor and customer is a core industry characteristic today, underlining the critical role of relationship governance and of continued innovation by custodians, on their customers' behalf.
The seats at the table are changing much more for larger funds, with one third of larger asset owners citing boutique consultancies and/or fintech start ups as their primary change partners. In the face of challenges in problem definition and given the multitude of technologies available, asset owners are clearly seeking help in making sense of the change journey - from conception to execution. That they are turning to niche providers (more than the big banks or advisory firms) is evidence that they are looking for deep expertise in specific asset class verticals - more than generalist guidance on their macro-operating models.
By contrast, only 7% of larger asset owners see their master custodian as their core change partner - meaning that asset owners are almost five times more inclined to speak to boutique advisors or technology firms than they are to their core banking partner. For custodians, this diminishing influence indicates an existential challenge, in that their major clients are no longer looking for a single party to support their operating model. Instead, major asset owners are looking both for niche innovators and for organisations to integrate and orchestrate (but not to own) the overall model. Custodians may choose to play for both seats at the table or only for one, but the need for them to deliver deep, subject matter expertise and innovation is clear.
"Fintechs today are playing the role of subject matter experts that banks used to before offshoring"
Is it about time?
Amongst the different factors at play for asset owners in evaluating their options for transformation, one factor appears to be of critical importance: time.
In an era of limited investment budgets, it is not surprising to note that there is a tendency for asset owners to prioritise projects that are quick-to-deliver. But is it important to realise that these same quick projects end up delivering smaller pay-offs than other, more fundamental, multi-year projects. With two-thirds of the market investing in removing spreadsheets or team restructuring (for example) we are limiting the resources available to fund wider system replacements, cloud deployments or vendor consolidation - all of which will deliver significantly greater efficiencies. Our short-termism risks undermining the long-term value that we create in our firms.
But not all asset owners have the luxury of time. Our research highlights that larger asset owners are running transformation projects that are up to four times longer than smaller funds could realise if only they had the time - creating a major disparity in long term efficacy between larger and smaller players. Whilst large asset owners are able to focus on driving lasting, long-term efficiencies, smaller funds are limited to largely tactical changes.
Conclusion: Getting the story right
The challenges faced by asset owners across the globe are an excellent summary of their macro-environments, of their external pressures and of their priorities today.
Owing to the volume of regulatory enforcement, time is not on asset owners' side in Asia-Pacific (most notably in Australia). Record levels of regulatory pressures are impacting superannuation funds' planning and thinking in fundamental ways and, as our research highlights, the urgent pressures they face to avoid forced consolidation are enough to force them back towards Excel and other tactical options today. They simply don't have the time to implement more sustainable, longer term solutions.
Europeans, by contrast, clearly struggle to reconcile the needs of their increasingly activist policy holders / investors with those of their operational well-being. Given the clear trade-offs that we highlight in this report, European asset owners face a clear and continuing tension in how they allocate their scarce investment budgets: towards the shop-window or towards the engine room.
North Americans are making new friends. Given their huge size and scale, asset owners are seeking to diversify their exposure across the providers to which they outsource key activities. By working with blockchain providers, consultancies and other market leaders, North American funds are looking to transform their entire operating models, building an independent and sustainable future.
