Challenges Driving the Need to Transform Middle-to-Back Office Infrastructure

September 3, 2014

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During the global financial crisis of 2008, many asset managers turned to cost-cutting measures in the face of deteriorating revenues.  In particular, IT and operations budgets were cut extensively, as at the time they were not viewed as critical to revenue generation as the front office.  This point of view has changed since the market crash.  Investors and regulators realized that pressure to achieve high returns encouraged risky investments, creating an environment that was unstable and ultimately impossible to sustain.

Thankfully, the market is poised for a strong recovery.  According to PwC’s recent report “Asset Management 2020: A Brave New World,” global assets under management (AUM) are expected to grow significantly in coming years, surpassing $100 trillion by 2020.  Investors are willing to be creative to capitalize on the growth, resulting in the emergence of numerous innovative asset classes.  However, they also demand change from asset managers; regulators and investors require increased transparency and security for their investments to avoid the risks of the recent past.

In a recent paper, “Making the Middle Office Top of Mind,” PwC states that previous simplistic cost-cutting measures in middle-to-back office functions resulted in “an infrastructure that is inflexible and unable to scale for increasing product complexity and regulatory requirements.” In the past, top-down cost cutting demands did provide short-term benefits, but asset managers must now deal with the consequences of sustaining these tight budgets while supporting performance.  An underdeveloped middle-to-back office threatens efficiency and profits, and portfolio managers are challenged in keeping pace with industry changes.

Unfortunately, even as asset managers accept the need to change how they operate, they often do not have the resources required to catch up.  In addition to budget limitations for the middle-to-back office, PwC notes that talent constraints have forced asset managers to concentrate resources on tactical operations.   Operations teams are often run as lean as possible, and the resources required to develop and support a meaningful expansion strategy are not available.

How is an asset management firm supposed to adapt under these circumstances?  The solution: outsourcing.

PwC recommends “right-sourcing,” the process of evaluating options to determine the most efficient and effective method for providing these functions, and often that solution will be out-of-house.  Creating a strong infrastructure in the middle- and back-office will build investor confidence and ensure compliance while supporting flexibility for expansion into new asset classes and regulatory environments.  Legacy systems cannot accommodate the necessary improvements to remain competitive, and asset managers who do not adapt will miss the opportunity to optimize operations and increase efficiency.  However, PwC concludes that, “those who take steps now to right-source their middle office stand to create a powerful infrastructure that results in a competitive advantage – which, in turn, boosts the bottom line.”

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