Industry experts are beginning to agree that there is a need to bring together the underlying fund accounting and transaction processing application, with data management, reconciliation and business process management or process control in one system. Rather than having these functions separated out across several platforms, integration eliminates replication and drives efficiency.
However, if it were just a matter of technology, we might have to wait a few more years before challenging the way systems are currently used and what we expect from them. But this time the natural technology lifecycle has coincided with new financial realities.
For example, the funds industry has seen pension schemes rapidly increase their asset pool. The 13 largest pension markets hit a record high of $26.5 trillion in 2010, dwarfing the $3.5 trillion in sovereign wealth funds . But the corollary is that more educated investors are asking more questions about how much the industry is charging to manage their money.
Fund managers, therefore, have both the financial incentive for re-assessing their accounting processes and the technological means of achieving it. There are real opportunities for firms to take a strategic step back and look at their technology as a way of driving end-to-end operational excellence, addressing business problems rather than focusing purely on improvements to general ledger, trial balance and reporting functionality.
Three pillars of excellence
So what do we mean by operational excellence? It comes down to three separate – but overlapping – dimensions: efficiency, quality and service capability. A system built for operational excellence will deliver on all three.
In the funds processing world, one key measure of efficiency is the ratio of fund accountants to funds. Labor represents between 70 and 80 percent of a typical firm’s cost base and so the number of people you need is a good proxy of whether you are efficient or not.
Manufacturers talk of unit costs and the amount of labor needed to get a unit of product out the door; the same thinking applies equally to fund managers. The industry is therefore starting to look at the cost of labor and how it can be made cheaper. One option, widely deployed, is to outsource or offshore. The technological alternative is to bring in innovative solutions to do more with less, and eliminate wasteful and inefficient processes from the accounting and associated business functions.
Quality is a measure of how far errors are eliminated from the fund accounting process.
Operational errors are the worst kind: if you lose a dollar in new business and you have a cost-income ratio of 50 percent, you have lost 50 cents of P&L. But if you lose a dollar through operational error, you may lose another 10 from unexpected exposure to market movements or an improperly processed corporate action or tax accruals that have not been factored into the NAV price. And if investors are making decisions about portfolios that are based on incorrect data, there will be direct economic and reputational costs.
Errors often occur because competition for investors’ funds and the drive to offer better and more interesting investment products has introduced huge complexities to systems and structures – especially around interfunded hierarchies, their associated accounting and pricing models, tax treatments, and fee calculations. The industry is now – more than ever – geared toward the daily production of valuations, calculations and reporting, which adds to the pressure and increases the likelihood of errors. Although automation will improve the situation, if inputs are staged across multiple platforms, the improvement can be minimal in this high-pressure environment.
Finally, there is service, which is a rather broad area. The key number that matters to an investor is the value of the investment, so accuracy and reliability is paramount. But service is also about the timeliness of information given to the end investor, and to other stakeholders in the value chain. It typically involves measures like flexibility and whether the firm can deal with a client requirement, product structure or process that is not vanilla. It’s about ensuring that people are not waiting for data, reports, or the results of a price investigation if there is a query. Because many products have delays in the time between decision and action, execution and benefit, anything that can be done to shorten that delay will improve service quality from the end investor point of view.
From general ledger to enterprise view
However brilliant at producing reports, processing transactions or managing general ledgers, traditional fund accounting software is simply not designed to meet these pillars of excellence. To date, it hasn’t been its job to improve efficiency, quality or service. It has been a utility, not an excellence tool.
To illustrate the point, we can examine the industry stalwart, the fund accounting pack. With traditional processes and systems, these lengthy paper and printer-intensive documents are produced, checked, authorized, approved, discussed and archived daily. This has a negative impact on the ratio of fund accountants to funds. If you were to invent a process from scratch you would eliminate the need for their production with technology that validates and identifies exceptions that can be flagged and managed. You would immediately free highly-skilled fund accountants from paper chasing and focus them on added value accounting functions.
Similarly, why would you persevere with adding separate accounts within a balance sheet for each new share class if you didn’t have to, given the complexity that introduces? It’s handled that way now because systems’ limitations have dictated it, but from an operational perspective there are much better ways of supporting share classes. The same is true of reporting, of requesting data and the myriad processes that make up daily accounting procedures.
It is something of a paradigm shift. This is an industry, after all, in which the need for audit trails, transparency and checks and balances is expressed as the need to sign something, to view a report and get something printed out. Re-engineering the process and putting in the technology behind it means that the transparency, the compliance, the quality assurance can still be achieved at a level that meets or even surpasses the accountants’ needs, but without the paper and the signature “by hand.”
In every organization there is an intersection between product, accounting and operations. What these stakeholders really need is a platform that enables them to come together with their technology peers under a common vocabulary and a common approach to systems architecture that supports not just their own function and technology solution, but the business objectives at an enterprise-wide level.
Implement a single, seamless platform that has at its core a fundamental, in-depth knowledge of the product domain and the processes surrounding it, and the result can be transformational.
It’s the difference between focusing on optimizing individual pieces of the puzzle and bringing operational excellence to your entire business.