Introducing the second episode of Prodktr Spark Podcast, powered by Prodktr ‘Everything About Outsourcing’
The Prodktr Spark podcast is aimed at people who work in the capital markets, in particular those involved in the process chain from the front office all the way to settlement. We will be inviting guests who have first-hand experience of the challenges of processing multiple assets classes from multiple markets, either in a bank, asset/investment manager or third party service provider.
If there is a topic you would like us to cover please get in touch via the Prodktr website, and if you would like to appear on our podcast get in touch too.
Episode 2
Investment and Fund Managers face the challenge of processing complex products in a changing landscape. Competition and cost pressure means no firm can stand still, but the process of transformational change can create personal and organisational stress. How willing are firms to grasp the nettle of change and reach for the cost and efficiency improvements available? How do staff feel when strategic change takes place? Where are the high risk areas to transform? What is the pot of gold at the end of the transformation rainbow and will industry utilities make the problems go away?
Find out more in this revealing podcast.
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Time points
- Introductions
- Difficult choices (1m 15s)
- Cost drivers (4m 07s)
- Culture & productivity (6m 21s)
- Scaling (9m 21s)
- High risk areas (11m 10s)
- Transformation benefits (15m 09s)
- Fintech disruptive change (17m 48s)
- Governance (20m 40s)
- Industry utilities (22m 31s)
- Magic wand (25m 10s)
Transcription
1. Section: Introduction
Bill Hodgson :
Welcome to this episode of the Prodktr Podcast Series. My name is Bill Hodgson from the OTC space and I’m here with Bryan Kelly, John Read and Torquil Wheatley. Guys, if you could just introduce yourselves then we will begin.
Bryan Kelly :
Thanks, Bill. Bryan Kelly, managing director at SS&C running middle office.
John Read :
Hi, Bill. John Read, founder of Prodktr.
Torquil Wheatley:
Torquil Wheatley, head of business development for Coremont.
Bill Hodgson :
Imagine a CEO came to you as the COO or CTO. Somebody seen me and said, you need to increase efficiency, reduce cost, generally make things better. Where are the quick wins? Where are the hard bits to transform and change? Where are the easy bits? Should I outsource everything or where are the cost drivers? It’s how do you achieve efficiency? I guess, it’s not so much outsourcing. Maybe we’ll start with Torquil and talk about, what is the willingness of firms when they’re faced with the idea of big cost savings to actually do it? Is there resistance?
2. Difficult Choices [01:15]
Bill Hodgson :
So Torquil, when senior people are offered the choice of making big cost savings or efficiencies, do they actually do it or is there some resistance to this?
Torquil Wheatley:
I think there’s always going to be resistance to change. It just depends on how imperative it is to make that change. What’s really driving it? Is it a reduction in AUM? Is it just sort of benchmarking across the street and seeing that your operating expenses are higher? And it goes back to sort of other conversations that we could typically have in the space around the variety of operating models that are out there.
Torquil Wheatley:
You often find that the founders of the firms have their own distinct views themselves as to what they want to keep in house and what they want to outsource and where they’re willing, if you like, to put the operating model in the hands of other people. So I think it’s very different across each firm in terms of what drives it. Yeah, it’s again looking through a microscope at each part of the organisation and really being thoroughly honest with yourself and saying, do I really need this? Can I really add value? Does the department I’m looking at cost cutting actually add the value that I think it does?
Bryan Kelly :
Yeah. Just to take up on that point. I think no change is easy and humans are generally resistant of change. And so if the question is posed in terms of how an executive comes in and they’ve been charged with reducing the costs or making the entire operation more streamlined, they’ve also got the other human aspect of that, which is looking at their own firm, making sure that their own staff and everybody else is content and happy with those decisions, that by any decision that they make, that there’s not a mass exodus. So it’s a very difficult conversation in those initial phases of any outsourcing arrangement. But what you’ve got to factor in in those initial chats are is that, where is that organisation and the life cycle of even contracts that they may have with other providers.
Bryan Kelly :
So if they’re in, say, the matching space, and they’ve got a contract with any of the utilities that’s out there, what is the longevity of that? Because there’s no point in disrupting that in year one, and they’ve got to pay it out for the next four years anyway. So you’ll often find in those initial chats that you will have somebody that is very buoyed up by the idea of outsourcing. You have a conversation with and you assess with them where their business is, where their business risk is, and then you say to them, “Do you know what? You would be better off coming back to me in 18 months, and then we will discuss it further then because then you will be ready.” So those factors have to be factored in. You’ve got to work with your client to achieve that change.
3. Cost Drivers [04:07]
Bill Hodgson :
So where are the high cost areas? Which are the bits of the least efficient in, I mean, talking broadly, but are we talking about banks or asset managers or is it generally the post trade environment for derivatives?
John Read :
Well, it’s a small question. I think firms have to measure their productivity. So service level. So whether it’s trading a certain asset class or whether it’s compliance or whether it’s post trade, I think you need to measure the unit cost. You can put that against an AUM or you can put that to a transaction cost. But I think if you know what your efficiency ratio is, where you are to stay and where you want to be, then I think that helps you measure your efficiency, as in, it obviously measures your efficiency, but where do you want to be? Yeah. And then you’ve got all these wonderful opportunities around robotics and AI and machine learning, etc. I think, again, you have to measure and assess where you are today to understand where you want to get to tomorrow.
John Read :
And that’s a, honestly Bill, that’s a really … I know I keep going on about this, but it’s a really interesting challenge for firms, because many firms, when you put productivity up there, they don’t want to understand the graph or the data, but ultimately it’s the hard facts and analysis and data that firms need to understand top to bottom so they can transform. Transformation programmes are normally two, three, five years of change. Whereas, some of the things that we’ve been describing pro robotic, pro process automation, that seems like a small short term enhancements. So, it’s really, again, I’ll go back to it, define, assess and measure.
4. Culture & productivity [06:21]
Bill Hodgson :
This stuff must get under the skin of in-house teams where you start digging around saying, well, how much time does it take to book a trade or get the settlement done? Do the recs, I mean, do you find that is a problem?
John Read :
I don’t think so, no. If you’ve got a good culture that’s vibrant, integrated, tech savvy, wanting to enable transformation, and lots of firms do, lots of resources have that skill set, they’re hired for that, then that’s what you should expect.
Bill Hodgson :
So which bits of organisations are labour intensive?
Torquil Wheatley:
Well, it’s the bits they’re going to be … What you’re really saying is which bits are the least scalable, I suppose. So I think when we look at the investment management industry, we think about it as probably around the operations, the operations areas. I think in many cases, part of the problem is that … Let’s think about it. I mean, you mentioned derivatives earlier, and it’s a good point. I think, if you’re setting up a fund manager 15 years ago, you’d look to automate as much as possible on an STP basis, all the simple stuff, but derivatives, you’re only doing a few, so we’ll do those by hand.
Torquil Wheatley:
So that’s fine. Just now you’re in a position where actually you need to be thinking about how you can handle derivatives at scale, because I think everybody in the industry and certainly something that we are seeing is there is this general shift towards a greater complexity of people’s portfolios or investment manager portfolios as they move away from just being long only equities there. So many more of them are looking at entering the absolute return space. I think predominantly as a hedge against, well, we’ve had equity markets, fixed income markets going up for the last 30 years. What if they go sideways for five years?
John Read :
It’s interesting. We’ve seen the private asset market really grow obviously in the last couple of years. And I think the shift people … There’s a lot of folk that have come from derivatives FX market and seen the kind of, to a point, the common standard service levels that you expect or service lines. And of course the private asset space hasn’t had the same focus because of regulation, right? So as we see the shift into real assets and the lack of regulation, I think the industry is expecting the same type of focus and delivery around real assets. And I think that comes from trading and all the way into post trading fund accounting. So I think that seems to right now that seems like a great opportunity for the same type of delivery.
5. Scaling [09:21]
Bryan Kelly :
I think just, if you go back to the point about what are the biggest areas, I think was your question of a cost driver, it to John’s point the right way to do it is to look at that transaction on a productivity basis, right? But if you take the analogy of, I woke up this morning and I started up an asset management business, would I do it all myself? Probably not, right? Because would I want to take on the tech, would I want to take on the people, would I want to take on all of that. So that’s one end of the scale.
Bryan Kelly :
The opposite end of the scale is then where you got your kind of north of 200, 300 billion asset managers, that are in the larger end of things. They’re in all product, they’ve got their own R and D, they’ve got their own tech and everything else. That’s a monumental change for a manager like that to decide that they’re actually going to outsource that. They’re still assessing it 100%. We’ve seen that over the years, that some big names have shifted in the last couple of years to even a component of outsourcing. They might decide that to talk with a point about derivatives we can’t scale there. So let’s outsource that portion of it, but we will keep the rest of it in house ourselves. That is happening, too.
Bryan Kelly :
And then you’ve got that middle ground that are sat there kind of going, oh, well now we got to consider, are we going to renew those licences or should we actually consolidate this to a provider? So they’re kind of the three scales that I look at it with, but central cog of all of that are organisations that can provide the services, can provide it en masse and can help organisations scale their business quickly. I think that’s the key component.
6. High risk areas [11:10]
Bill Hodgson :
So are there particular areas that are difficult to transform in the sense that they’re very high risk, they involve high skill levels or very exception-based?
Torquil Wheatley:
Data. Data is and also client reporting is probably the, from our perspective, the two changing areas. If you’ve got good data and you’ve got good client reporting, you often have happy, happy consumers.
Bill Hodgson :
What is this team of data people doing?
John Read :
Well, you’ve got the security master and an order necessary transaction data that feeds. And so that’s fundamental within the operating model that works well.
Bill Hodgson :
And could you not automate a lot of the reporting or does it really involve or need humans to actually get it to high quality?
John Read :
I think it’s moving from legacy to where you want to be, Bill. And firms, on different parts of that journey, there’s firms that are kind of cutting edge and moving very quickly into where they want to be and using data to drive where they want to be and invest and research, et cetera. And then some firms are really on that transformation journey. They’re at this point in time with their platform and they want to kind of upgrade journey to get to where they want to be. So I think data is key in that element.
Bill Hodgson :
Well, surely something like the middle office in accounting is one of those things that involves high levels of people because it’s handling high levels of value in high impact.
Bryan Kelly :
So let me come back to something. I think that we mentioned in a prior episode, which is that the concept of catch-match-record-reconciled in their report, right? So the first four captions are there to get to the point that you can report it accurately, right? So if you look at it from an audited book, you might be feeding a GL feed to a financial statement’s perspective to John’s point on reporting. And I agree with him in terms of access to data and client reporting. Client reporting has moved away from the pack that one would get at the end of the month saying, here’s the performance of your firm, and this is the sectors that we’re all invested in. And some commentary from your lead PM to much more agile one-pagers is that you’re heading out the door to meet a client and you literally want to know where is it at as of now on a page, because the world wants to see everything on the tablet, on the phone, it’s got to resize itself. To page through a 10-page PDF is not where it’s at anymore.
Bryan Kelly :
So I think that the ability to slice and dice data, to be able to get to that point where you can say on a page, here you go, you’re good. You’re good. And then to take it back from an asset management perspective, you’ve not lost control of anything that you’ve done from the catch match record reconcile. You’ve got faith in a lot of those processes that’s there, that embellishes the trust and the partnership that we’ve spoken about, and you’ve literally got access to it, and you can derive other data points from what is there. So I think data warehouse and giving clients the ability to look at their entire portfolio with any which way that they want is how we need to look at the world going forward.
John Read :
But there’s dependencies on external information. And that is the key that a lot of folk who put together data operating models, they have a dependency on themself, right. You know, defer as the internal data. But as we all know, you are dependent on the external parties and information, and that’s something that often doesn’t get captured.
7. Transformation benefits [15:09]
Bill Hodgson :
So what would you say would be the potential benefits of transformation in terms of cost and efficiency? I mean, is it … how to express it? Is it in terms of much lower error rates and much lower cost, or is it cumulative over time as you deal with more chunks of your organisation?
Torquil Wheatley:
I think it’s more fundamental than that. In many ways, we’re sort of being quite microscopic there looking at one particular piece. But the reality is that in the old days, you’d have to, if we’re thinking about just overall opportunities and efficiency, in the old days, if you wanted to enhance your existing capabilities, it would cost a lot of money to do it. Your cost base will go up, but now with the outsourcing model, and dare I say this sort of brave new world, the opportunity is there to not only enhance your existing capabilities, but also cut your costs at the same time. I think that’s what’s changed. That’s what’s new.
Bryan Kelly :
I’d sum it up probably in one sentence, the biggest compliment that an outsource provider can get is that the front office has been allowed to focus on what they should be doing, which is delivering alpha for their underlying client. Right. Dead simple. You get to something like that, then that is why you make those decisions. And that should be the start of the decision point. We all have customers that we need to deliver a return for, be they shareholders, be they clients, be they, whatever, but that’s what we’ve got to aim for.
John Read :
Yeah. I think it’s a simplification as well. So I think under transformation is simplification of the investments and also the operating model. So I think that the advancements in data enable firms and banks to look at the rather than having multi-channels around asset classes and then the subsequent cottage industries of operating model, I think that can be simplified. I think it’s being simplified. And for the first time we’re seeing cross, a real pure drive to cross asset from a training perspective, investment perspective, and also into the post trade. Now, of course, we’ve seen the digital enablers that are coming, Bill, as well. So I think that’s really driving. You can invest in crypto, you can invest in private asset and all the rest of it. You want a simplified experience.
8. Fintech Disruptive Change [17:48]
Bill Hodgson :
So what I’ve noticed is that FinTech firms, in some cases, because they’re relatively small and relatively focused, they’re coming up with almost like chunks of functionality and processes that you can hook up to them and just not even bother building it yourself. You know, you connect it into your infrastructure, but does that not confuse a more integrated approach to servicing your business? You know, is it a case of, they seem like quick wins, like neat packages, but it just becomes a patchwork of bits and bobs that make it all work. Can you stitch together an environment that way?
John Read :
I think you can. I think the advancement into data like Snowflake and others, right. And Microsoft and Amazon and all these, like, that are heavily done this in other industries. I think it can do. I think you can integrate, if you are comfortable as a firm, as a principal, that your data may be shared and you are comfortable with the cloud and et cetera, et cetera, then I think it’s open and that’s something that I think takes time to get your head around. But if you’re comfortable with that, then opportunities open up.
Bryan Kelly :
I think the tech farms have been a welcome addition to the industry, right. I think if it had have stayed where it was at, it would’ve just jogged along very traditionally. I think what’s happened now is that you’ve got firms that are coming in that are offering very good specific solutions rather than kind of a rebranded thought of a dare I say it, but like of, let’s just say a traditional person right now, you’ve got strategic thinkers that are coming in and saying, what does the next generation want to see? And we can’t lose sight of the fact that people are on the move now, right. To talk to this point of before about working from home, everybody is much more remote now. Right. So to release the payment, it’s got to be quick and easy, right?
Bryan Kelly :
You’ve got people that they don’t need that, to have the hassle to ask them to go through the 10 step programme. They expect to just receive a thing to say approve. Right. And that’s the way it goes. So the tech firms have advanced that. And then the trick to John’s point is that, in selecting what your business operating model should be, your business process is that, have you got central communication around all of that? Have you got an oversight of that? So choosing a provider that can actually give you that oversight as well, again, going back to cost basis, do you want to have a provider that can link into other tech firms and be the synergy around all of those solutions at once? I think that’s the key and that’s the next 10 years.
9. Governance [20:40]
Torquil Wheatley:
But I also think that there was a case, many cases where people outsourcing already, they were just doing it within the same firm. And the COO had to coordinate all these different parts of the firm. Now the COO has to coordinate the same number of parties, but they’re often external.
Bryan Kelly :
Correct. Right. And then what you’ve got to think about, so there’s what we call the governance and oversight. I mean, any of the financial authorities are all looking for investment firms to make sure that they’ve got governance and oversight, not just over their custodians and fund accountants, they’ve got to now have that oversight over any relationship that they have, right. And that’s actually generated an entire new kind of band of employment within that side of the business to monitor everybody else. And that’s fine. Right. But what you’ve got to look at, you’ve got to have a provider that is wanting to think along the ways of your business and looking to solve for the future problems.
Bryan Kelly :
So I think the next area focus not to disband middle office, because that’s my passion. But you know, the next area focus is what else sits between front office to middle office, where else can there be value added, right. In terms of liquidity management, treasury management, anything like that, what are the other bits of the business that we haven’t truly looked at that can actually just make more sense for a front up person to come in and say, that’s exactly what I’ve been looking at for the last 10 years.
Torquil Wheatley:
I like that approach. I think that’s the right, because I think what’s happening and you’re seeing it is people are just getting more granular with the concept of outsourcing. See outsourcing front or outsourcing execution, well, what does that mean? Is it just trading or is it also cash management?
10. Industry Utilities [22:31]
Bill Hodgson :
Well, something that sort of my career history is in OTC derivatives and something that might emerge is that of an industry utility who brings together almost the post trade environment and says, you don’t need to buy software or rent it or integrate it. And it’s not necessarily outsourcing, it’s not buying a team of people. It’s just buying a platform that is in effect supported by a wide range of people.
Bill Hodgson :
So I can think of two examples. One is the Trade Warehouse at DTCC and the other one is SwapAgent at LCH. And they’re both almost front to back processing. There’s not, it still requires your team to operate what goes on in there. If you see what I mean, you’ve got to interface to it, but you’re not renting eight teams. You can’t hear the problem at them. It does what it does or it doesn’t do at all. But I don’t know whether you think in the various asset classes, whether that’s sort of thing, is that a model that will progress or will people want to keep control of the approach?
Torquil Wheatley:
I think it goes back to what Bryan was saying on governance, as long as you’ve got the relevant transparency and you can see what’s going on, that you feel you can provide the necessary oversight. I don’t think people have a problem with that.
Bryan Kelly :
Yeah. I’d agree. And to pick the word transparency again, I think one of the things that we’ve been challenging for the last while is, is what is the process within the future’s clearing market, right? I mean, is it too convoluted? So relook at it again and say, why does it need to go through so many hops to get there and start to challenge that. And again, if I start to look forward to look back, I would say, it has gone into its second and third generation from an outsourcing from, but where is it all now? It’s kind of that middle ground between front office to middle office, but also then looking at the traditional aspects of everything that we’ve always done. If you look at the onslaught of CSDR coming in, right, that is going to change the settlement market, because it’s going to put pressure on everybody to make sure they deliver, or they will get penalised. Right. It is that simple.
Bryan Kelly :
So when you start to put regulation into everything like that, and then you start to challenge how the status of the flow of transactional processing works. Right. But you’ve got to have groups of people there that want to challenge that. And I think that the FinTech market has brought that to bear rather than just leaving it up to the traditional banks.
11. Magic Wand [25:10]
Bill Hodgson :
Right. So guys, before you wrap up, if you had a magic wand, how would you transform somebody’s post trade environment? One of you.
John Read :
I’m really intrigued by the advancements of AI. I think that that is going to transform the post trade space. I think utilities are difficult. They’ve got clients are competitors, that’s it? You know, and we’ve seen things pop up. I think Markit were brilliant back in the day, getting the banks to build products for them and then they can put a Chinese wall and start selling it back to the bank and back to the firms. Right. So, I mean, that’s brilliant, but I think everyone’s got that gravy now.
John Read :
So I think it’s AI is going to transform and FinTech, you know, I think to Bryan’s point and to what we spoke about, I think individual enhancements are fine, but I do think what we’re seeing is both from the buy side and the banks making big investments into smaller firms, into small tech firms. But they’re actually beginning to use that capability as well. And I think that’s what’s going to drive the next generation of capability.
Bryan Kelly :
Yeah. I’d pick up on John’s point. I think AI, it’s not just the buzzword, right? It is because it’s going to produce efficiencies across the board. That’s by virtue of the term itself, it will. Right. But I think that the introduction and I will say introduction of FinTech, right, and the disturbance that it’s caused, that is the wave of the next 10 years. It’s to challenge the traditional methodologies upon which we’ve gone.
Bryan Kelly :
And if you look at even the cash flow settlements, right, you’ve got all of this every single day, you’ve got thousands of people calling each other from different sides of, from the broker side to the client side. Do you agree with this? Do you agree with that? When you think about it in reality, right. It’s pretty 1960s, right? So that’s going to be where we’re heading to. And there are firms that out there already that are providing services to create the linkages that are needed to automate all of that, but is now just a case of a couple of people getting on board with it. So I think that’s the future in terms of just continual automation.
Torquil Wheatley:
I think that’s to echo that point, it’s really about at the moment, there’s still a finite number of products that you can describe digitally and that some things do escape that net and you have to go do manual processes. And I think that’s going to be the biggest trade change, if you like, that everything is going to have to be captured digitally in some shape or form and described digitally. And that’s going to encompass, John, what you’re talking about with private equity or private markets, it’s going to have to include even the most complex derivative, but that’s going to make the biggest opportunity. The more we can remove any form of human intervention from the post trade process, the better.
John Read :
I think also the people that are involved, I mean, we’ve invested in AI as a product and also you see people that are, you know, not people you see firms that are so far down into AI channel now and some of the capabilities that have come along, I think it’s absolutely going to make a difference into the industry at post trade.
Bryan Kelly :
I think one final point for me to mention back from the pandemic, the impact that the pandemic has had has seen many firms on the return to work pro or the return to office profile, remove printers from offices. Right? So to talk with point, that’s going to continue to digitise absolutely everything, this idea of printing anything, be it a report, be it a whatever, that is absolutely starting to move away. There’s a cost driver for firms right there in number one in terms and reduced eco footprint. Right. But it is definitely everything will go tablet from this point forward and end to end.
Bill Hodgson :
Well, thank you guys. I think we’ll carry on this into another episode, but for this one, I think we’re done. This has been the Prodktr Podcast Series. Thank you for listening.
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