July-August 2012

BACK OFFICE VIEW: On the frontline

Nick FinbergFor many chief operations officers it can feel like the Four Horsemen of the Apocalypse, vanishing revenue, regulatory burden, operational risk and operational complexity, are closing in fast. But these formidable adversaries also present opportunities, and for many back-office organisations, change and evolution is more a necessity than a choice.

The list of major regulatory initiatives impacting asset manager operations is genuinely arm’s length. They compete for time and money in an environment where both clients and regulation demand a sharp focus on operational risk. An independent operational risk function commensurate with size and complexity of a firm must be developed. Robust risk-identification and assessment processes, and informative and decision-oriented operational risk reporting (including analysis of external events) are necessary for the quantification of operational risk exposure and resulting capital requirements.

The consequences of getting this wrong, both in measurable monetary terms, as well as in reputational terms, are high.

And of course, being a back office would not be the same if you were not constantly being asked to support new and more complex business and services, with increased transparency and accuracy, and more efficiently – regardless of whether your clients are internal or external.

All of which contributes to technology spend that can typically range from 15% to 25% of a firm’s total expense budget – often equating to hundreds of millions of dollars annually. It’s a situation in which those few global organisations with significant scale and resources are increasingly outspending smaller players, who lack the scope and budget to develop robust and scalable responses to every operational challenge.

What’s the response to all of this?
If you’re an in-house back office, never before has forensic scheduling and structuring of regulatory efforts been more important in developing a manageable and compliant programme portfolio. Such an approach will focus on those aspects of a programme which can and should proceed in advance of final regulatory detail – but which nevertheless schedules final implementation and roll-out for a timeframe consistent with regulatory timetables. There is no escaping the time and cost involved in staying on top of the competing demands on service – and only strong internal governance and a clear product strategy will produce a coherent operational response.

Of course, for third-party administrators (TPAs), regulatory programmes and a focus on risk, present opportunities to generate new revenue lines by assisting clients with compliance-related services. Those TPAs that are most effective at pre-emptively leading their clients through the regulatory jungle and developing a clear service offering are already confident about off-setting a significant proportion of their implementation costs – which they share across their client base first.

Risk and data management services are major new areas for service and revenue growth. Indeed, with the recognition that several core areas of historically significant revenue (foreign exchange execution, securities lending, etc) have probably diminished for good, the current operational challenges provide a major impetus for extension and diversification of revenue that the TPA industry clearly needs.

Keeping all the plates spinning is a tough balancing act for today’s back-office chiefs. Budget discussions get no easier, and the change pipeline only grows. But in a world where transparency, efficiency and regulatory compliance enjoy renewed focus, and where front-office margins are feeling the pressure, the back-office increasingly finds itself on the frontline.

Nick Fienberg is a senior manager at Alpha Financial Markets Consulting

©2012 funds europe