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New Generation Operating Model

While investment managers haven’t yet had to deal with their version of an ‘Uber-moment’ driving a sudden step-change to the typical operating model, CIO’s and COO’s still operate in an industry which is constantly evolving and is subject to market and technology disruption. With new entrants creating more competition, new products, new distribution channels and the constantly changing regulatory environment, the executive management team have had their hands full reacting to the demands of change. Throw in the need to improve customer experience, investors demanding more transparency, pressures to reduce costs/ increase margins and it’s no wonder the typical investment manager operating model is under stress and in need of change.

That’s not to say that investment managers have been sitting on their hands. The operating model for investment managers changed quite dramatically in the mid-2000’s to respond to more complex investment processes and heightened regulatory oversight. This gave rise to the concept of a middle office as opposed to the traditional front versus back office. The operating model has also evolved to enable a greater focus on investment risk management and support of more complex investment products and strategies.

So while there has been slow and steady adaptation, we haven’t seen a dramatic change in the last 10 years and there is still an emphasis on developing ‘industrial strength’ operating models that may be at odds with the need to respond to the needs of agility and flexibility.

To deal with these challenges we believe that the operating model for an asset manager might look very different to today.
Specifically:

  • Rather than delivering investment capability through the distribution of pre-defined investment products such as unit trusts and mandates, investment managers will need to become product ‘agnostic’ and support distribution through structures defined by their clients. This will require introduction of new ways to distribute their investment IP and will require investment managers to adopt an open architecture model towards investment products. Invariably this will require establishment of operational relationships with multiple product partners and will also require a re-think on the commercial model for investment managers to reflect the fair value of investment IP delivered to their clients
  • The decision to ‘outsource’ versus ‘insource’ operational functions is likely to be less binary and sourcing decisions will be applied on a case by case basis as opposed to being based on enterprise sourcing principles and philosophy. To support increasing investment specialisation and open architecture product structures, investment managers are likely to choose specialist best of breed providers over the current ‘one stop shop’ approach
  • Improving technology and service provider capability will further commoditise operational activities, supporting the case for leveraging specialist outsource providers over building internal capability. Internal capability will be more orientated towards capabilities to develop investment insights and analysis, rather than management and support of operational processes
  • The current trend towards deploying large and fewer IT systems may reverse, again driven by the need to support more specialist capabilities. Like outsourcing providers, IT providers that base their business model on single ‘one stop shop’ propositions may find their competitive position eroded by more nimble, lower cost, specialist applications

While these may be long term trends, there are some questions that can be asked now to determine if your current operating model is ready to meet these challenges.

  1. Does your organisation have the right operating model strategy to adapt to the changes above or is it focused on existing challenges and market capability? For example, imagine it is 1984. Are you planning to build the world’s best tape cassette player when you should be planning on retooling to build CD players?
  2. If you are a service provider or an IT vendor are you positioned to be able to shift your model from being the ‘soups to nuts’ provider to being the service provider ‘app store’? To achieve this, are you willing to cannibalise your own capability if it is not market leading and where should you choose to complete as the specialist provider?

Shoreline has developed a comprehensive view of what the next generation operating model should look like. Its focus is on delivering operating advantage, long-term profitability and a roadmap of agile and innovative technology initiatives, all based on our successful track record of delivering change within the investment management industry. Contact us now for further information. 

Bruce Russell  

Director

18 Aug 2017