Mirror, mirror on the wall: Asset managers must look within themselves to find operational dividends

By David Higgins, Managing Director of Citisoft's UK Practice – It was only two years ago that the news agenda was dominated by 2008 financial crisis anniversary stories, dissecting the lessons that were learned and discussing how far the financial services industry has changed in the intervening years. And yet, in the asset management sector, some of the key learnings were laid to one side more recently. This has been particularly acute from a business strategy perspective.

Following the financial crisis, many asset managers sought to shed unnecessary business lines and products, becoming leaner organisations and removing significant cost pressures from their bottom line. But since then, as the economy has recovered, those same organisations have fattened up again.

Now, with the implications of Covid-19 setting in, it is likely that asset managers will once again be retrenching to focus on their core business models while looking for cost efficiencies.

In my view, this is the correct approach, but I would also encourage asset managers to think about the operational dividends they can achieve while going through this process. When I talk about operational dividends, I’m simply referring to the dividend or capital injection businesses can generate from their own internal operations. For example, Citisoft has recently assisted a client to monetise its previous investment spend in quant and predictive analytics technology through a licensing agreement. Another example is where we have assisted a UK multi-asset manager realise internal and outsourced middle and back office cost savings, freeing up an ‘operational dividend that they have chosen to invest in a new portfolio and order management technology.

Operational dividends are an excellent way of taking advantage of your operational expertise, realising the value that has already been built up, while delivering cost savings that can be reinvested back into the business to achieve other strategic priorities.

As asset managers begin their cost cutting drives, they should also consider if they have any opportunity to monetise components of their operating model. Specialist in-house solutions that are no longer needed may have value to third parties. Examples include proprietary technology and niche products.

This trend is currently sell-side driven, whereby heritage software businesses are selling their systems, processes, and capabilities to asset managers, but there is no reason that asset managers cannot turn the tables. In fact, given the fee pressures that end investors are placing on asset managers, it is imperative that they fulfil their obligations to end investors by becoming as efficient as possible and reduce the costs for those investors.

As an example, I have been having conversations recently with a global private markets firm that has spent 20 years growing its global business and in the process, perfecting in-house processes and technology, that now has significant value to other organisations who have not been able to invest in such systems. That firm now has a prime opportunity to realise great operational dividends by selling components of its people, process and technology,  and to reinvest those dividends for the better of the company and its clients. They are not the only company to be thinking this way.

The increased demand for automation and the evolution of technology, alongside the challenges thrust upon everyone by the pandemic, has put plenty of businesses at an important inflection point.

Every asset manager has an operating model that is rife with opportunities. They simply need to take the time to consider what those opportunities might be. As we move into 2021 and business strategies get updated, now is the moment to do so.