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SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2009

# Taking operational benchmarking to the next level:


thoughts for investment management firms
The investment management industry is now being challenged by volatile markets, changing revenue models and substantial client issues. As a result of the 2007-2009 financial crisis, many investment managers are facing the need to adjust their operational strategies to these changing conditions. Both benchmarking and best practice analysis have been proposed as tools to help asset managers understand their relative position in such operational areas as specifics of service delivery and cost structure. Once complete, however, these studies can be difficult to link to particular choices and activities. This article examines the specific methods that firms can use to extend their analyses with focus on determining what is next. by Adam Schneider , Principal, Deloitte Consulting LLP
1

enchmarking is a standard practice used across industries to define firm business performance and compare across firms. It is defined as follows: To measure [a rivals product] according to specified standards in order to compare it with and improve ones own product.2 The definition tends to be about specifications and quantification, for example the cost of a unit produced. In investment firms, an operational benchmark might include cost per dollar of assets managed measured in basis points, or the percent of trades handled on a straight-through-processing (STP) basis through the back office. Separately, the concept of best practices has emerged to define how leading firms perform specific business functions. While best is subjective pretty good practices is just not as attractive it can be a valuable method for understanding the specifics of how competitive firms accomplish specific operational tasks and therefore be a guide for choices. For an investment management firm, an example of an operational best practice might be automating trade processes so that they need little human intervention and can be

measured by the STP benchmark indicated above. TYPES OF STUDY Generalising, there are three different types of benchmarking/best practices study that are often conducted between firms: ompare facts: Studies that compare C specific facts across firms. These studies include comparing organisational structures or comparing functional costs. Many benchmarking analyses fall into this category. ompare processes in use: Studies that C compare in detail how firms perform certain functions, in an attempt to identify best practices or at least practices that are more successful than others. Studies of this nature typically involve detailed functional analysis across multiple firms. For an investment management firm, this might be a comparison of how firms reconcile with custodians which shows how some firms use automated tools, some offshore work and others outsource to a third party.

1 Adam Schneider is also a contributor to the new volume by SimCorp StrategyLab: Operational control in asset management: processes and costs edited by Michael Pinedo (see walkthrough, pages 11-14). 2 Dictionary.com

December 2009

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Taking operational benchmarking to the next level:


thoughts for investment management firms
ompare projects others are doing: C These studies compare projects and investment programmes across firms, and share their experiences. For example, firms may compare how they use a methodology such as Six Sigma to re-engineer processes or reduce costs. The goal is not to understand the outcome, but how projects are being performed and how specific tools fared in a real-world situation. STRENGTHS AND WEAKNESSES Benchmarking/best practices studies can be hugely valuable and provide significant insight to investment managers. Their value comes from the ability to understand multiple operating models, including models for change, and provide insight on firm choices with respect to operating

esults are normalised across firms, r allowing careful inspection and comparison; nables an apples-to-apples come parison to be made of the area or subject being dealt with; ocuses on the specifics of the f investment business, for example processing equity transactions rather than being a general study focusing on generalised transaction processing strategies; irms can better understand or forecast f the consequences of major choices, such as re-engineering strategies or technology implementation strategies; nd, perhaps most importantly, allows a firms to look beyond their organisations and assess where they stand in terms of key management processes, capabilities and metrics. However satisfying studies of this type are, there are weaknesses. In particular, we have seen many instances where studies are disconnected from next steps. We might call this the now what? problem. For example: we learn that a successful competitor has a widely different organisational structure now what? Or, we learn that another firm has a different processing strategy, preferring to insource operations and technology now what? The issues of translating study into action generally include the following: n excess of data but a lack of insight. A This is probably the single largest issue. That is to say, weve learned a great deal, but the study itself does not translate into strategies and specific action steps. he risk of noise overwhelming the T answer. Cost structure comparisons, in particular, have challenging accuracy requirements, and one common issue is the difference in cost allocation methods. During one study, a firm proudly announced they were a low cost provider, a position they

achieved by not including information technology costs in their analysis, which were counted by peers. he reality that the cumulative weight T of different business strategies may explain most results. Choices about product offerings, distribution, or technology investment decisions and other historical factors may well explain most of the output differences found. BENCHMARKING: A PROPOSAL FOR IMPROVEMENT Is there a way to both get the benefits of external peer measurements while also linking them to business objectives? Perhaps by combining the benefits of external information with ongoing business planning. Benchmarking/best practice studies effectively treat the business being measured as a black box. The output is a series of measures: it uses process x. It costs y per billion of currency under management. It has a success rate of z%. However, few of these benchmark measures tie the visible service levels to internal and external constituencies. We propose to focus less on internal processes and more on the relevant service level metrics. If we find operational performance is far away from these metrics, we can immediately identify strategies for change. We propose to align the external benchmarking and annual planning processes by using visible service level measures to drive internal plans for improvement. In essence, we would use benchmarking techniques to compare both other investment management firms and output metrics important to internal/ external clients. Such a programme would have significant advantages as it would be focused.

In investment firms, an operational benchmark might include cost per dollar of managed assets measured in basis points, or the percent of trades handled on a straightthrough-processing (STP) basis through the back office.
strategy, cost structure, systems implementation decisions and human resources decisions. Some of the key benefits include:

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2009

Figure 1 shows an example of a programme successfully used in investment management firms. It would work as follows: nderstand the service level U expectations of relevant parties such as clients, custodians and other key internal clients. etermine whether or not peer firms D are meeting this level of service. Note service level may include a wide range of subjects such as specific timings, accuracy levels, internal cost or level of technology enablement. The goal is to identify specific expectations that are or are not being met. ocus on service level metrics visible F to external parties, as opposed to those that are used to manage internal processes. Benchmarking of this type would work through a waterfall process that starts by understanding the needs of external parties, then working towards peer firms and then measuring the internal operation. The goal is to assemble as many outside-in measures of operational effectiveness as practically possible. A sample process chart, including participants and types of questions asked, is included in Figure 2. LINKING TO IMPROVEMENT PROGRAMMES Tying information from the outside-in benchmarking process described above to business improvement programmes is relatively straightforward. Our proposal is to directly link the results of the benchmarking to potential change and re-engineering projects. For example, the business function of performance measurement is essential to investment firms. The calculations are precise, compared to external parties, and directly determine how firms, clients and

Internal and external client surveys

Internal and external clients that o er varying perspectives

Custodians that service and interact with many investment rms

Investment consultants with relationships and experience

Survey of requirements

Externally visible functions

Reporting Performance measurement Client service including inquiries and escalation Fee accounting/billing Contributions/withdrawal Investment accounting Accuracy Corporate actions

Trade processing Cash management Trade settlement Reconciliation Reference data Corporate actions Investment accounting

Reference data Assets under management Client administration Performance measurement

Analysis and comparison

Study analysis

Firm pro le*

Services and quality measures

Current delivery e ectiveness

* including general statistics and operating ratios

Interviewee Client

Potential participants Investment manager to establish meeting Senior management for perspective and tone Line functions interfacing with investment managers Advisor services unit Senior management for perspective and tone communication? Client service partner Investment advisors Performance analyst Operations manager Middle/back o ce managers IT representative CFO, COO as appropriate

Sample questions asked What are the service and support dimensions that are most important to you? How does the investment manager satisfy your needs relative to these dimensions? What is your desired end state relative to the key dimensions? What are optimal trade communication procedures? What de nes client expectation relative to investment manager to custodian What incentives should be built into the process? Any report card/MIS reporting How is your organisation aligned to meet internal and external needs? What de nes client expectation relative to consultant communication? What are the gaps in servicing the key identi ed dimensions? Internal cost metrics as per cost benchmarking studies What are the most important service dimensions to your clients? How are your products and services aligned with their expectations? What is your desired end state relative to the key dimensions? Internal cost metrics as per cost benchmarking studies

Custodian

Investment consultants and other rms Investment management rm itself

consultants view their success. At the same time, the specifics of executing performance measurement are highly internal and rarely visible.

December 2009

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Taking operational benchmarking to the next level:


thoughts for investment management firms

In our outside-in approach, firms would start with the goals of the performance management function and use these goals as benchmark questions for external parties, for competitors and finally for the performance operation itself. When done, the study should be able to reach a

Benchmarking/best practices studies can be hugely valuable and provide significant insight to investment managers.
conclusion about the areas relative operational position. That assessment can be used as the basis for deciding how to move that function from its current level of capability to what is required.

In the performance measurement case, one might learn that clients expect to have daily performance available, with month-end audited performance ready three days after month end, and that other firms are meeting this goal. Meanwhile, the internal survey indicates that our firms operation is achieving only ten-day-after-month-end readiness. An illustrative example of operational functions benchmarked on an outside-in approach is indicated in Figure 3. There are significant benefits to this approach. Firms would formally understand the service levels they must provide for key constituencies. They would understand how they and their competitors are meeting those service levels and whether there is a gap. They can then assess whether the gap in capability is significant enough to require improvements to be made. In fact, the competitor benchmarking would be likely to indicate whether the required improvements are cost-related, processrelated, or technology-related.

The benefits of linking external measures to firm improvement projects are significant and ongoing. We believe this structure for benchmarking will provide significant benefits over traditional approaches.

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