With geographical boundaries in Europe disappearing, foreign players are increasingly penetrating the domestic investment management market and new web-based distribution platforms such as funds supermarkets have begun to reshape the European industry.
In Germany, the crisis of traditional pension schemes and the proposed changes in legislation have the potential to open up a multi-billion market for private pension initiatives and many of the large insurance groups are launching new investment management units.
All of these developments are leading to greater business volumes and a massive increase in the number of transactions that need processing. Global competition, increasing customer demand and the impact of e-commerce are setting the scene and our benchmarking study of the investment industry’s middle and back office procedures looks at whether the German industry is ready to cope with these challenges.
Results of the study suggest the current situation in operations areas is largely characterised by bottlenecks in human resources, by process inefficiencies and by complex, heterogeneous systems. Since the market only offers a limited number of suitable standard software solutions, many institutions have been adding in-house system developments to cover missing functionality, creating extensive interfacing and maintenance effort and, as a result, a lack of flexibility and responsiveness to changing requirements.
One of the findings of the report is a dissatisfaction with the type of IT available. Due to the small number of software vendors supplying the industry, the system landscape shows a great deal of similarity between KAGs. Up to now, competition in the software market has been almost negligible and true innovation is hard to come by. According to the study, the majority of participating companies use a standard software package which is widely considered inadequate for today’s market, let alone for the future and many companies refer to unacceptable system downtimes and to the effort associated with extensive resource absorption in IT departments.
There is also widespread dissatisfaction with software vendors’ release policies. In spite of relatively short release cycles, 71% of the KAGs have rated the quality and actuality of software releases between three and five on a scale of one (very satisfied) to six (very disappointed).
In terms of order processing, most of the current systems offer only a limited choice of order types and execution parameters. For example, only half of the KAGs are in the position to process a simple stop-limit order and execution limits such as “immediate or cancel” are available to only 25%. None of the participants appears to have a system configuration allowing for automated, straight-through transaction processing. Instead, all KAGs are faced with long processing times and high error rates as a result of manual interventions and missing real-time data-feeds.
One of the biggest challenges is the automated control of regulatory, client-specific or KAG-internal investment limits. To detect limit violations prior to order execution, it is vital to have an automated checkpoint on the basis of real-time data so that the portfolio manager complies when making decisions. In this respect, our results are disappointing as automation is weak and related controls are mostly manual. In fact, only 20% of KAGs have an automated checkpoint in place. The consequences of manual control are all too evident and therefore only a fifth enjoy the benefits of quicker control and lower limit violations.
The exchange of data and information between various departments is traditionally done via hardcopies (tickets and reports, etc), or by telephone or fax. At present, many KAGs are automating communication flows but, for the time being, a good portion of KAGs still rely on manual processes for reasons of safety and control. Such lack of automation in cross-departmental communication is a major cause of errors and unsatisfactory processing times.
For example, approximately 50% of KAGs require up to half an hour to transfer an order from the portfolio manager to funds disposition and the situation is no better when it comes to settlement and matching. There is also a lack of automation in internal and external reporting, due largely to the fact that software solutions providing full automation are not yet available. Furthermore, existing systems are often not adequately parameterised and do not offer all reporting formats required.
As for online reporting, less than half of the KAGs interviewed confirmed that they already offer it for mutual funds or are planning to do so in the near future. In the area of special funds this observation is even more significant. Room for improvement is also evident for online distribution. Surprisingly, the majority of KAGs acknowledge the importance of a web-based contact between the client and the sales force. However, only 25% are actually planning to implement a one-to-one marketing concept on the basis of personalised homepages.
In general, all KAGs are dealing with similar if not identical problems. Many of the observations pertain to all of the interviewees, especially when it comes to the issues arising from complex IT architectures and widespread system restrictions. The co-existence of various system components and the combination of off-the-shelf packages with in-house solutions leads to what is often called a ‘spaghetti architecture’ which is not only difficult to maintain but also the primary cause of multiple data capture and the associated burden of frequent processing errors and time-consuming reconciliation.
The internet era means the investment management industry is under pressure to run increasingly complex IT while at the same time, coping with ever more demanding customers, increased product sophistication, exploding transaction volumes and shrinking margins. In this context – and in the light of a tight market for qualified personnel – pursuing operational efficiency and creating new distribution vehicles is seen to be absolutely crucial.
Under the conditions laid out above, IT is restraining the development of new business models. Most KAGs find it difficult, if not impossible, to formulate an IT strategy that follows and supports the business rationale. Instead, many organisations are becoming “slaves” to their own systems.
This reality has a direct impact on the extent to which KAGs are able to leverage their e-business potential. The study found that all players have understood the significance of the Internet and its implications for organisational change. The “e-factor” is already evident and further rapid growth of e-commerce activities is clearly expected in the near future. Nevertheless, the majority of participating companies still see substantial room for improvement and admit that their current internet strategy meets neither market expectations nor their own ambitions.
From a process and technology perspective, the ultimate goal is to establish intelligent platforms addressing the needs of both the KAG and the client. A successful player will be determined by its capability to build an operational framework providing flexibility, transparency, efficiency and safety, thus allowing to pro-actively manage the profitability of fund products and client relationships. To achieve this target, key measures will be the replacement of proprietary systems, an in-depth analysis and redesign of business processes and, last but not least, the introduction of an integrated relationship management with clients and all business partners.
Bettina Krause-Wurmlinger and Anke Köth are senior consultants with KPMG in Frankfurt and authors of the study Operations 2001 – Middle and Back Office Processes in the Investment Management Industry