Transforming the Operating Model

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Transforming the Operating Model

The Evolution of Public Asset Owners

June 2022

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The rapidly evolving environment for public asset owners is driving significant change in their investment strategies, including exploration of new asset classes, a revival of securities lending, greater emphasis on ESG and shifts in the balance of internal and external portfolio management. All of these trends have downstream implications for public asset owners’ operating models. Strategy changes in these areas require corresponding adjustments to operating models, processes, providers and technology – with a foundation of data that enables future scale and flexibility. Public asset owners concur that current operating models are not adequately meeting their evolving needs.

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One crucial investment-management decision – which assets to manage in-house and which to manage externally – has outsized implications for operating model design. The promise of new technologies, the value of better data management and the need for resiliency and cybersecurity also give institutions further reasons to reimagine how their front, middle and back offices operate.

  • 6%
    Only 6% of survey respondents are satisfied with their operating model.

Interview Perspectives

“We simply cannot continue with our existing operating model as we grow. We’ll have issues across the board – not just in the front office, but the middle and back office too.” 

— Public Pension Fund

“The more we internalize and diversify, the more complex our operational needs become.” 

— Sovereign Wealth Fund

Figure 1:  The Majority of Public Institutions Are Changing Their Operating Models

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Source: BNY Mellon/OMFIF operating model survey

Surveyed public asset owners’ top concerns are streamlining processes and improving efficiency across the board. But addressing these challenges requires them to undertake operating model transformation. While each transformation, like each institution, is unique, we can group institutions into two broad buckets.

  1. Foundation transformers implement or overhaul a single system organization-wide, focusing on a central system as the backbone of their operating model. In many cases, they already use these systems in a more limited capacity, for instance, as an order management system (OMS) or accounting system. They work with their provider to stretch or upgrade these systems to encompass end-to-end operations as much as possible.

    These large-scale systems can enable middle-office teams to receive inputs directly from a front-office OMS and perform activities such as trade confirmation or corporate action processing. Back-office teams can likewise perform accounting activities such as portfolio valuation on a book of record that more easily reconciles with front-office positions. These large platforms can also facilitate diversification and growth. Each new instrument or asset class adds complexity, but leading foundational systems typically accommodate most asset classes that public asset owners seek to add.

    However, implementing foundational systems is a significant and often expensive undertaking, typically only available to the largest public asset owners. Interviewees from several medium-sized and small institutions expressed this sentiment. In addition, some public asset owners, most often central banks, hesitate to adopt high-profile brand name providers.

  2. Component integrators tackle critical front-, middle- and back-office components before integrating. They consider all of their priorities and choose to address specific pain points in the front, middle and/or back office, and then weave those solutions into their broader operating model. While every institution has its own unique challenges, there are a number of common themes.

    The front office needs to operate efficiently and effectively, with a fundamental focus on investment performance. The key improvements depend on whether the public asset owner relies on external or internal managers or a combination.

    For the middle office, the most common approach to streamlining and improving efficiency is to deploy technologies such as robotics or AI for targeted pain points such as reconciliation. Several mid-sized institutions interviewed use robotics solutions. However, automation is not necessarily a panacea. Entering new markets or asset classes and continued industry evolution are already stretching the ability of many institutions to address their middle-office challenges through automation. As a result, institutions consider outsourcing activities to those specialists that can bring scale, efficiency and continuous investments in innovation.

    Public asset owners typically delegate their back office to custodians, with central banks, public pension funds and sovereign wealth funds uniformly highlighting custodian responsiveness as their greatest challenge. Still, most institutions appear wedded to their existing arrangements, with just 14% of survey respondents planning a change in the next three years.

Asset Servicing Global Disclosure

© 2022 The Bank of New York Mellon Corporation. All rights reserved.

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