In today’s highly competitive and challenging economic landscape, the fundamental need for an optimal operating and technology model is often overlooked. An effective operating and technology model will not only set you and your business up for success but also will create competitive advantage and operational excellence, reducing cost and risk and increasing customer satisfaction.

In a recent webinar with experts from ONE group solutions, Reframe Capital and Zetland Capital, we discussed the current operating models we see fund managers deploying in the market and how they can become more efficient, as well as the key challenges and how to achieve such efficiency while also maintaining a focus on investor outcomes.

Key challenges

There are various factors to consider, with the most common challenges being resource constraint and the time and cost of implementing change, particularly where this can inflate when the target operating model is not clearly defined and all necessary research hasn’t been comprehensively performed to ensure all “gaps” and deficiencies are fully understood.

Once a target operating model is defined, there is of course the time, effort and cost of integrating new processes, software and third-party stakeholders to consider, not to mention the inherent operational risk that comes with this. These challenges are compounded by the fact that resources are stretched, cost pressure is mounting and regulators demand more and more from the industry in terms of governance, controls and vendor management.

The key challenges faced include:

• Time, cost and resources (and how best to deploy them). The first needs sponsorship to optimize (agreeing that pros outweigh cons in effecting change). The second needs decision on operational priorities. No two models are the same, so your firm needs to decide on core vs. non-core activities and where to invest to get the most bang for your buck.
• Buy, build or rent decision, factors to consider.
• Choosing the right systems and partners. What’s right for your business?
• Risks of over-engineering, no defined outcomes/deliverables (change for the sake of change), project leadership, accountability to deliver on time, on spec, on budget.
• Intrinsic risk of change, lack of familiarity with new people, processes, systems, controls.
• Potential loss of focus on clients you serve. You must always continue to look outwards, as internal operations will always influence external performance (positively or negatively).

Key drivers for an optimal operating model

The key drivers to keep top-of-mind when considering an efficient operating model for your business include:

1. Cost management, in a time of rising pressure on margins/P&L
2. Efficiency, better deployment of resources, reduced friction or pain, scalability and competitiveness
3. Value creation, differentiated service (front office considerations), incremental P&L, improvement to the bottom line
4. Reducing redundancy and duplicity in process, data management and reporting, which creates significant friction, resource waste and cost, and is fundamental in addressing the challenges outlined above
5. Governance, transparency, informed decision-making (based on complete and accurate data), risk management, operational rigor

Defining the “ideal” target operating model

In most cases, businesses believe they have a solid target operating model in place, but more often than not, they haven’t taken a step back to consider the end-to-end process as one would on a production line. It is imperative to look at what inputs are needed, the controls and processes and the outputs to consumers for governance, client and regulatory reporting; this end-to-end view is essential to break down siloes. For example, technology innovation, responding to market changes, product innovation (like ESG and regulatory change), greater functional connectivity and insourcing vs. outsourcing. By not reviewing your operating model, you could potentially be putting yourself at a competitive disadvantage.

Partnering with third parties who adapt and are flexible to managers’ needs enables them to grow and adds tangible value. Vendor consolidation is a problem for managers, and the same vice versa, as there are many elements to work through in each of those scenarios to ensure a positive outcome.

ESG is another example of how operating models have had to evolve. Investors require greater evidence that managers are building sustainable investment considerations (e.g., considering climate risk) into their investment process, capturing, managing and reporting on portfolio data. This data is then used to inform decisions and accurately position products, reflect measurable impact, build strong credentials and mitigate greenwashing risks.  Getting it right can bring that competitive edge.

If the goal is international expansion, then doing it strategically—in a measured way that adds incremental revenue—is key to differentiating from others and ensuring greater functional connectivity and alignment across different regions or markets.  Many make the mistake of trying to accomplish too much too quickly, and that ambition can damage your reputation, strain your people and the business model, lead to uncontrolled cost and limit your growth potential.

A target operating model can be a key differentiator that sets you apart from the crowd at a time when investors are increasingly sophisticated and due diligence is conducted rigorously by LPs and their representatives (like investment consultants).  A competitive advantage can be achieved if you take a step back, look at your operating model, optimize it, work out what you can and should insource and what you can and should outsource, and then invest in solutions that support your target operating model. It’s increasingly important to focus on what is core, and ensure limited capital and resource is used in areas that maximize your business potential and client/investor outcomes.

The target end state should also be flexible and adaptable to new changes in the regulatory landscape, as well as able to work in sync with ever-evolving technology enhancements.

Meeting investor demands whilst creating efficiency

Having outsourced partners in place that you can rely on to help create efficiency and add value will certainly be beneficial. It is important to take a look at different functions (back office, middle office and front office) holistically and not as independent functional pillars of your operating model. All are critical for effective management of business and fundamentally linked to delivery of investor outcomes. When identifying partners to work with, you have to also ensure you are leveraging their services effectively and recognizing that distribution is an essential part of your operational ecosystem. There must be harmony between the internally-facing operating model and externally-facing distribution model, enabling the business platform to meet the complex needs of investors.  If you are not building in this way, you are not outcome-oriented, and that could result in problems for you later down the line.

Partners should have the right technology to complement your operating model, but people are vital—particularly as we are in a service industry and trusted relationships still matter. Technology and automation of workflow is so often an enabler, but not a perfect substitute for people and relationships. Vendor partners must bring knowledge and expertise. Also, a track record in supporting managers with their efficiency goals and trust is key. Building trust from the get-go to ensure you are getting the best client service possible is extremely important.

Improving operational efficiency for the long-term‍

First, adopt an effective go-to-market strategy with informed expansion plans.  It is important to consider resource demands, cost, goals, timelines, and challenges of cross-border activity while not compromising target investor needs. Make clear decisions when expanding into new territories and new strategy types or asset classes—growth does not come easily and can have negative consequences if it’s not founded on the best possible operating model.

Then, scale efficiently and effectively. Uncontrolled expansion is damaging to the business, and potentially your reputation. It can deplete valuable resources, and in some cases, directly impact profitability. Ensure that your product roadmap is mapped out to target the market and to the needs of investors and that you are adopting structures that align with expectations, offer competitive advantage and are efficient from regulatory, capital, commercial and economic standpoints.

ESG considerations, ESG data and reporting, in today’s market, must be integrated into your business if your investment offering is to align with sustainability regulations and investor expectations on the demonstration and reporting of measurable impact through your deployment of capital.

Technology impacts on efficiency

As operations become more complex, technology can hold the key to supporting them.  The use of Artificial Intelligence (AI) and machine learning is aiding firms in managing risk and performing tasks faster and more accurately. It is also helping identify investment patterns, anomalies and trends, and even develop workflows, tools, external messaging and process management. However, AI and machine learning—although adopted in research and front-office trading,—have not made significant progress in back-office operations, and this is primarily an issue with the data. Without reliable, harmonized and standardized data on which AI and machine learning depend, sophisticated use of AI is a pipe dream. Data standardization is key.

Advances in technology and innovation (and how firms embrace and adopt them) are seen as a basis for remaining competitive in today’s market. It has the power to disrupt. Cloud-based architecture drives efficiencies.

Businesses that are not becoming data-driven will lose ground to competitors who adopt such an approach.  An effective data strategy is foundational. Data accuracy, consistency and centralization are vital, along with a structured, harmonized taxonomy (even more important for large, complex, multi-asset investment firms). Risks and costs will also increase, as the regulators move to data-driven analytics and examinations, and thus will demand more and more data from the industry.

Some estimates suggest that 15-20% of total industry costs are technology related, and firms with deeper pockets are outspending their peers, arguably giving them a digital advantage. And, the battle for talent is fierce, which only adds to the cost burden.

Technology can help to inform decisions on allocation of resources to build or outsource to a third party.

Enhancing performance

An efficient and scalable operating model is essential for achieving business growth and maintaining a competitive edge in the market. Technology plays a key role in efficiency. Partnering with the right third parties who are flexible, agile and have the scale and technology infrastructure to support your target operating model is also important.

At SS&C, our exposure to different client types, with varying investment strategies by sector and location, gives us exposure into the effectiveness of different forms of operating models adopted. We help to enable alternative asset managers and investors to scale and focus on core competencies while streamlining and creating efficiencies across investment and fund operations. Not only do we adopt and develop best-in-class proprietary technology solutions but we also have deep experience supporting managers with achieving an optimal operating model across all asset classes.

If you missed the webinar, watch the replay. Or if you are interested in speaking to one of our expert private markets specialists contact us.