Regardless of size and specialism, today’s asset managers face the same core, potentially existential, threats related to operational transformation. And, like any business assessing how they must adapt to today’s environmental challenges, the task ahead can seem insurmountable. In both cases, breaking it down can make the problem more manageable and the solution more sustainable.
Margins are falling, while costs and competition for assets are rising steeply, squeezing those in the middle, but also adding to pressure for change at the top tier managers that bestride multiple markets, asset classes and client segments. Margins fell to their lowest level since 2009 last year1, while asset concentration at leading firms is higher than in 20002. As a Seeking Alpha blog pithily warned last October, after another sharp fall in managers’ stock prices, “If you are not growing – you are dying”.
Common Challenges – Individual Solutions
The challenge may be common, but the path to resolution will be individual, informed by the asset manager’s existing operating model and business strategy. As swirling headwinds impact client expectations, distribution channels and product ranges, the search for coherent solutions is becoming more urgent. Too often, terms such as ‘digital transformation’ or ‘data-driven enterprise’ are thrown around as a catch-all panacea.
In theory, digital technology has the power to eliminate manual processes, improving efficiency across the transaction chain and enabling new investment insights. In practice, any enterprise-wide change management programme is a high-risk and resource-intensive activity. When it also raises the prospect of replacing tried-and-tested systems and models with unfamiliar technologies and partnerships, the very concept of embarking on a digital transformation whilst keeping the existing business running can seem overwhelming.
Across the industry, we see a gap between theory and practice. Firms acknowledge the challenges and opportunities – but digital transformation is a concept that is proving hard to swallow. There is a growing recognition of the need for business model renewal, and the potential power of technology to support it, but there is much less consensus on how to go about it, both within and across individual firms.
Considering a Modular Approach
Of course, strategic direction must be agreed among stakeholders before it can begin to inform a transformation project. Even if the changes required are far-reaching, it’s not necessary to bite off more than you can chew. Rather transformation can be regarded as a menu, with constituent elements selected based on individual tastes, appetite and capacity to digest. I see three reasons for taking a modular approach.
First, beyond perhaps the most niche of boutique players, it is critical that asset managers develop and retain the scalability and flexibility to respond quickly to fast-changing customer demand. ‘Twas ever thus, perhaps, but the range of products, assets and markets that customers expect asset managers to access has expanded rapidly over the past decade and shows no sign of slowing. This obliges even the largest firms to develop partnerships and alliances as a core part of their operating model, supported by an open architecture and complemented by outsourcing options. In short, asset management itself is becoming modular.
Second, a modular approach to overhauling and maintaining your business model is now much easier than before, thanks largely to the fintech-led innovation of the past decade. In the era of open architecture, cloud and APIs, service providers across the finance sector are increasingly using their domain expertise to become aggregators of components, collaborating with a range of best-of-breed partners to deliver bespoke solutions. In this context, any transformation should be a series of federated projects rather than a centralised ‘command and control’ initiative, leveraging where appropriate the support and experience of trusted partners.
The final reason is that asset management has proved time and again that it is too complex an industry to attempt wholesale transformation. From the back-office lift-outs of a couple of decades ago to some of the complex technology-based alliances of recent years, it has been amply demonstrated that major change projects rarely realise anticipated returns within their planned timeframes.
Flexible Solutions for a Sustainable Future
Both in the asset management trade press and in the wider media, the headlines may exaggerate the risks, but the underlying turmoil is real. There are many competing pressures on senior executives, making it hard to prioritise and plan. But as individual firms decide on their strategic direction, we believe it will be possible to take a modular approach to implementing the necessary changes to their operating infrastructures.
Similar to the environmental challenges we all face, there is no single quick fix. But the best chance of success lies in building a framework that can bend with the headwinds, accommodate the unexpected, and bring together all the talents in a common purpose.
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