Examining Total Cost of Ownership to Drive Profitability

July 27, 2011

In a recent study by McKinsey, the firm discusses how the global asset management industry has not only recovered to pre-crisis levels, but also how the industry faces significant obstacles for exceeding these levels in the next few years.  According to the research, global Assets under Management hit EUR 35tr by the end of 2010, which equals pre-crisis levels in 2007 at constant exchange rates. However, this rebound is entirely due to performance – it has very little to do with net inflows into the industry. In fact, the report states that only 0.02% of the industry’s recovery in 2010 is due to inflows.

The industry’s profitability is also on the path of recovery, with operating margins rising from 9.6 basis points in 2009 to 12.5 in 2010. However, the pre-crisis levels of 16.6 basis points are still far off.

McKinsey highlights three challenges to continued industry growth:

  • Falling market share needs to be halted, and funds need to flow back to asset managers from alternative investment providers
  • The industry must focus on product development and testing to increase inflows
  • The industry needs to overhaul “inefficient and ineffective business models” by increasing economies of scale and reducing complexity and costs

Although PORTIA has little influence on how asset managers generate revenues, we can help asset managers achieve scale and reduce complexity and costs in their middle-to-back operations.  They key to doing this is ensuring that the total cost of running your middle-to-back office is in line with your firm’s strategy and goals.  One of the largest drivers of operational costs is infrastructure, including how infrastructure integrates with a firm’s larger IT strategy.

When evaluating middle-to-back office solutions, firms should examine total cost of ownership, including costs for upgrades, implementation and maintenance.  Here are a few key questions to help assess your total cost of ownership:

  • Is your current infrastructure fully scalable or will it create bottlenecks as your portfolios grow in size and complexity?
  • Does your software solution interface seamlessly with your existing infrastructure and will it accommodate future growth?
  • How often will you need to upgrade, and what is the cost of the upgrade (both license and installation costs)?
  • What functionality do you need and are you paying for functionality you are not using – i.e. is your infrastructure fully modular?

 Understanding total cost of ownership is a critical component of ensuring your operational model is helping your firm execute against its strategy.  Middle-to-back office solutions can be a driver of profitability for your organization so long as they are properly managed.  To learn more about how PORTIA can help you improve the profitability and manageability of your middle-to-back office operations, email us at portia@sscinc.com.

 -Markus Allard, Regional Business Development Manager

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