INDATA, a provider of end-to-end software solutions for the buy side, has published a how-to-guide for leveraging technology to cut operational costs. David Csiki, managing director of INDATA explains the key changes asset managers can make to shave operating costs by at least 25%.
What is the aim of publishing this guide and what has the response been so far among the buy-side community?
Our clients, which are primarily buy-side institutions, wanted INDATA to provide a systematic look at operations and technology and qualify key areas where an asset manager can reduce costs. The guide covers the basics of our cost-reduction framework and serves as a tool asset managers can use to aid their internal review process when looking to cut operational costs.
We’ve had positive feedback so far on the guide and asset managers have appreciated the big picture perspective the guide provides because this systematic view of the entire area of technology and operations is not often offered from industry sources. In fact, our clients have asked us to do a quarterly survey where we focus on specific operational areas.
What are the main ways an asset manager can leverage technology to achieve cost savings and why?
In our research, we discovered that senior management within buy-side institutions often look at the wrong areas first, such as head count, when trying to reduce costs. The good news is that we found in our research that greater cost savings can be achieved by reviewing the underlying systems and operational practices firms employ.
Historically the main way of looking at buying and setting up operational infrastructure followed a ‘best of class’ or ‘best of breed’ approach. This means a firm would often license separate applications, such as a separated trading, reconciliation and accounting systems, and have its IT department integrate all disparate systems. Obviously there would be a lot of cost with each underlying systems initially and in ongoing support of those systems. As this ‘best of breed’ approach became the norm, the software vendors created a set of business practices and fee schedules to support this method.
We’ve found that with modern technology and systems there are a greater number of vendors providing front-to-back solutions, which often support 90% of the functionality a client is looking for. If an asset manager, for example, uses separate systems for trading and accounting systems, by looking at a single end-to-end solution that does both functions, the firm would likely get 90% of the functionality and at 25 to 30% of the cost. This finding was a surprise to many of our clients who didn’t know the potential cost savings with a move to an end-to-end solution.
The vendor’s fee schedules are also changing and prices are lower now because the technology is much more modern. There are a lot of legacy pricing structures – fee structures based on the number accounts for instance, that are no longer the norm when it comes to pricing. Updating the vendor fee structure is an immediate way asset managers can reducing operating costs of the underlying systems.
Outsourcing is another operational area we have seen is a lot of activity in. The industry is moving towards component outsourcing, or the outsourcing specific operational functions such as reconciliation processing. Outsourcing specific components to a third party can be a very successful strategy for reducing operational costs.
A secondary benefit of outsourcing, and a condition of the current economic environment, is that outsourcing creates an added level of compliance and control because you have the additional oversight of a third party over a particular post-trade process. This means if there was fraudulent activity it would be more likely to be caught with these extra controls in place. In fact, the fraud likely wouldn’t have occurred because with the outsourcing of reconciliation process for instance, any issues with statements not reconciling would have been flagged immediately. Outsourcing is another way we’ve found firms can really reduce their costs, both in terms of reducing the manual process and gaining improvements in operational efficiency, while also increasing controls.
Often these secondary and tertiary benefits of outsourcing are often overlooked, but asset managers who use our guide will see that by making a change or outsourcing specific functions they can take advantage of these additional benefits. And of course, asset managers who modernize technology and reduce operating costs now will have the operational efficiency and scale to add assets without adding overhead when the markets do improve.
What are the cost savings a firm can achieve?
We’ve found that at minimum a firm can save 50% of the cost of a full-time employee (salary of $80 and $100k). But really, this is likely to be the bare minimum an asset manager can save. Many times we’ve found an asset management company will have an entire team of staff dedicated to doing a particular function, such as reconciliation or product pricing. So they might have $300k in costs that they can get rid of by outsourcing one process. Of course, the cost savings will depend also on how much they do themselves to begin with.
What is the biggest obstacle a firm faces when trying to adopt a cost-cutting strategy?
There are two different fears prohibiting implementation of cost savings strategies, such as outsourcing. One fear is that outsourcing means losing control and quality and assurance of the process. This fear can be easily alleviated by picking the right outsourcing partner. Obviously a firm must conduct the same level of due diligence that you would do with any partnership when selecting an outsourcing provider. The partner/provider must have a track record and be able to demonstrate success with clients. Most service providers out there can show this.
Another fear is the intangible one – the fear of change. Certainly there is momentum built around the status quo and keeping things the same and sometimes an asset manager can have a lot of internal resistance to change. But if you look at things subjectively and in the current environment, making changes to cut costs is an easy decision to make. By picking the right partners in areas of outsourcing or in buying new software, all of those concerns can definitely be alleviated.
Were there any findings from your research that your clients and readers of your guide found surprising?
The surprise was there were a lot of ways a firm can reduce costs and most readers of our guide found new and additional areas where they could cut operating costs. The bigger the change you make, the more costs there are to be saved.
Another trend we picked up on in our research is that the view of outsourcing technology platforms is evolving. Historically, outsourcing and software as a service (SaaS) solutions were viewed as the weaker type of processing structure compared to having in-house software. But, our survey findings show that this is no longer the case. SasS is the same functionality, if not better than many in-house systems, but SaaS solutions has a lower operating cost compared to maintaining systems in-house in terms of staff and services.
What is next for INDATA?
This first guide really provided the big picture and the basics to a cost cutting strategy, but future guides will focus on specific operational areas, such as reconciliation, which are often areas full of redundancies at large asset management firms.
* INDATA’s Guide was developed based on INDATA’s experience working with buy side firms on their technology and operations initiatives. INDATA’s clients consist of firms with between $25 million and $80 billion in assets under management across asset classes and management styles.
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