The cost of everything, and the value of nothing
The standard viewpoint of the middle office has been as a cost center. As a result, middle offices have often been overlooked and investment in technology has been woefully lacking. But as the industry evolves, asset managers are recognizing that a middle office that is technology enabled can add real value.
Citisoft looks at this concept in its ‘Times of Change: A Look Back and a Look Ahead at the Biggest Trends in Asset Management Tech and Ops.’
“It’s no secret that legacy, sub-optimal technology stacks, especially in the middle and back office, can hamstring firms in their ability to stay nimble and respond quickly to front office demands,” it says.
“There are still countless asset management firms running mission-critical functions on enterprise software packages and applications that are, at best, struggling to keep up with today’s operational challenges and, at worst, borderline obsolete,” the piece says.
This opinion is far from an isolated one. During his keynote address at this year's Buy-Side Technology European Summit in London, Stuart Warner, head of technology at Fidelity International, said attitudes are beginning to change.
“Buy-side organizations are waking up to the fact that technology isn't a cost to control. It's not an overhead; it's a competitive advantage,” he said.
Middle office functions have the potential to contribute to the bottom line because of their direct link to the front office. The fact of the matter is that incomplete or missing data, errors in reporting, or tardy data analytics can reduce the ability of the front office to generate alpha, thus negatively impacting the bottom line.
Asset management firms of all sizes are increasingly looking to leverage predictive analytics to turn data into actionable insights. Risk analytics and performance measurement are additional areas that can clearly benefit from predictive analytics. In this way, middle office efficacy can contribute in very real ways to a firm’s success or failure in an increasingly competitive marketplace.
But for that to happen the right technology capable of delivering timely, accurate and high-quality data is critical.
However, the reality for many has been a focus on firefighting to make sure that outdated legacy technology remains functional. This ‘papering over the cracks’ attitude is dangerously narrow minded. As a result, many functions are now actually obsolete from an IT perspective, and so spending time and money on trying to maintain them is pretty pointless.
Smart tech is just a smarter solution
Innovative technology, on the other hand, frees up valuable resource to focus on creating value rather than keeping the lights on.
An Ovum report, Financial Markets Technology Spending Through 2020: Location Segmentation, says that: “The strongest technology spend growth will be seen in the front and middle offices. In the front office, technology spend growth will be driven by a focus on client servicing and increased trading effectiveness. Risk and compliance will drive spending in the middle office.”
Using the middle office’s data management capability in the most optimized way possible provides competitive advantage to the front office.
But that is not all. Smart data management also helps when it comes to managing and monitoring counterparties and providing regular and accurate reports to regulators and clients. Having the right data management tools can also help to identify patterns in investor behavior. Put simply, a decent data management framework means that the middle office can quickly access the right information and present it in the right way to other stakeholders who will then use it for strategic decision-making.
In fact, in a technology dependent world, success will depend on the extent to which asset managers can derive insight and business value from their data. That is not going to happen without investing in state-of-the-art data analytics tools and services where the technology is managed elsewhere, leaving the middle office free to harness that technology’s capabilities to:
- Serve the front office
- Manage risk and performance analysis
- Satisfy investors and regulators
- Boost operational efficiencies
- Create a competitive edge
KPMG’s paper, Revolutionary change demands speed and agility in the asset management industry, says: “We see a remarkable amount of inefficiency today among asset management (AM) businesses that continue to rely on paper documents, manual labor and dated processes. The opportunity for digital technology to entirely reshape business operations – improving efficiency and lowering costs to improve competitiveness and profitability – is absolutely unprecedented.”
Performing maintenance and upgrade tasks on legacy software and hardware environments doesn’t provide competitive advantage for an Asset Manager. These tasks are only necessary in outdated IT models. If old legacy systems and data silos can be replaced with tech smart platforms that are managed externally, then time is created to free up the middle office and IT departments to add value. And it’s that value that could give you the competitive edge you need.
- Asset managers are recognizing that a middle office that is technology enabled can add real value.
- The reality for many has been a focus on firefighting to make sure that outdated legacy systems remain functional.
- Managing and maintaining local legacy systems doesn’t make you a better Asset Manager. Switching the focus to the data and analysis can.
- Smart data can also deliver a competitive edge by empowering asset managers to respond quickly to new investment opportunities.