Engineering a path to profitable growth

Four years on from the credit crisis and asset management CEOs are turning their attention towards growth once more. But margins remain under pressure and they’ve not forgotten the impact of market volatility on their revenue streams – and so they’re looking to grow in an efficient and cost-controlled manner.

Asset management (AM) companies’ relentless focus on efficiency was evident in our PwC CEO Survey, published in January 2012. According to the survey, 66% of the sector’s CEOs plan to cut costs in 2012, only marginally less than the 78% that did so in 2011.¹

While this indicates asset managers’ austere mindsets, we believe that cutting costs by itself is a short-term measure, with limited benefits. Instead, they need to review their operating models and look into options including consolidating operations, introducing business process engineering and outsourcing a range of functions. By taking a strategic approach, asset managers can achieve economies of scale and significant profitability improvements.

The credit crisis and its aftermath topped a decade of falling margins. Across the industry, assets under management (AuM) and the revenues that they generate are still below their peak 2007 levels. Assets under management were $25.2 trillion at the end of 2007, according to ICI Global, compared with $23.8 trillion at the end of 2011. Furthermore, there’s been a significant shift in assets to lower margin products such as exchange-traded funds during the period.²

With operations and information technology accounting for an estimated 40–50% of asset managers’ total expenses, reviewing these areas reveals opportunities to cut costs and enhance scale.

The benefits of centralisation

Asset managers have been consolidating their back-office operations for many years, yet there are more efficiencies to gain from centralisation in the back office and even in the middle and front offices. Centralising operations and IT into regional or global centres of excellence, combined with standardising processes, greatly improves efficiency and scalability.

An operational review might well find the greatest potential for improvement in the front and middle offices. Broadly speaking, asset managers have three models here: decentralised business units with different platforms and processes; hub and spoke models with partially integrated processes; and regionalised/globalised models joined to a single platform and process.

Evidently, the more centralised the model, the greater the scope for scale and cost-efficiency. So an asset manager with a decentralised platform might gain considerable efficiency from moving to a hub and spoke model, or even a regionalised/globalised model.

But increasing investor demands and widening regulatory requirements mean that firms have to strike a balance between small company mindset and large company efficiency. In Europe, multi-boutique models are becoming increasingly popular as investors ask for tailored products and regional services.

This trend means that asset managers need to remain close to their investors and investment markets – effectively working against centralisation. Recognising the different demands on different organisations, an optimal operating structure reconciles the need for proximity to market with efficiency.

New wave of outsourcing

Outsourcing has gained credibility over the past decade as a way of gaining scale and allowing an asset manager to concentrate on the core competencies of managing money and distribution. As asset managers look to become more efficient, it’s no surprise that outsourcing is on the rise.

Forty percent of AM CEOs plan to outsource a business process during 2012, according to the PwC CEO Survey, in line with the 42% that did so in 2011. Further illustrating the trend, asset managers currently outsource middle-office functions for $11.6 trillion of their $53 trillion of global AuM (i.e. 20%), yet by 2013 this number is expected to rise to $20 trillion (40%).

By comparison, in the automotive sector, outsourcing and value chain management has become a crucial competitive factor. Showing the scope for expansion of outsourcing, automotive industry suppliers provide more than 70% of production, while in financial services as a whole, independent suppliers provide less than 30%.

Economically, outsourcing converts fixed costs into variable costs and increases the predictability of costs. By outsourcing responsibility for key processes, asset managers also transfer responsibility for IT maintenance and upgrades. This makes outsourcing highly attractive at a time when regulators and investors are demanding broader and more detailed reporting.

So while the initial wave of outsourcing that started a decade ago was in the back office, asset managers are now looking to outsource processes across the value chain, including the middle and even the front office. In a few cases, even the core competency of making the investment decision is no longer sacrosanct.

Making processes more efficient

Just as asset managers are following other industries in embracing outsourcing, so they’re also increasingly re-engineering their processes. Judging by our experiences, asset managers might achieve savings in working hours of as much as 20% through re-engineering processes. But, importantly, this type of reorganisation does not just reduce costs, it also increases efficiency and the quality of processes. Invaluably, these improvements often enhance client satisfaction.

Process management improvement identifies and fixes problems such as:

  • having an unjustifiable level of resources and costs in a particular area;
  • unclear internal separation of responsibilities;
  • too many interfaces and inappropriate methods of communication; and
  • duplication of resources and controls.

Deploying business process management resolves these problems in a variety of ways: it increases automation; separates processes and defines new ones; and reduces internal controls.

But the exercise of making these improvements should not be seen as a one-off, singular event. Re-engineering business processes is an ongoing exercise that uses a continuous flow of ideas over time to progressively improve performance.

Strategically safeguarding margins

Across the AM industry – from asset managers to administrators – today’s combination of low investment returns and squeezed fees is forcing people to look into how to make their businesses more efficient. Managers are looking to grow once more, but in order to do so profitably, they need to enhance scale.

We believe that growing numbers of asset managers will choose to review their operations and other areas of their businesses. Clearly, outsourcing is on the rise, but intelligent centralisation and business process management are also becoming more commonplace.

By strategically introducing these measures, asset managers will tackle any erosion in profitability, making sure that the benefits of their actions accrue over time.

Footnotes

  1. PwC 15th Annual Global CEO Survey. January 2012. www.pwc.com/ceosurvey.
  2. ICI Global (www.ici.org/iciglobal).

Author:

Janet Hanson

PwC (US)
+1 704 560 3266

Christian Gürtler
PwC (Germany)
Tel: +49 69 9585 1184