As the industry matures, margins can no longer cover inefficient practices, or the costs of operational errors or failure. Regulators are increasingly aggressive about the need for robust infrastructure. More than ever before, they are placing a premium on fiduciary responsibilities and investor protection. As a result, more and more funds and administrators are targeting these remaining pools of inefficiency and risk.

 

And with good reason -- fund processing is now front and centre for business transformation as it yields the highest immediate return on technology investment. Milestone Group’s analysis shows that these functions tie up around 40 percent of all middle- and back-office staff effort, and represent about 70 percent of the operational risk. The potential for improvement is significant.

 

A problem of definition

 

Fund processing has evaded the efficiency spotlight for so long due, in part, to it being a relatively ill-defined grab-bag of processes. These functions are often best identified as the functions that have evolved around, or ‘sit outside’ those supported by traditional portfolio management, fund accounting and unit registry systems.

 

However, it is possible to view fund processing as a distinct area of activity, in which a number of key functions can be identified. The list can be lengthy, but includes NAV validation, often across more complex fund of fund or investment structures, cash allocation and rebalancing for multi-tiered investment structures, income distribution management, tax and fund expense forecasting, regulatory reporting and more. These examples show that fund processing can be a breeding ground for fragmentation, unnecessary hand-offs and operational risk.

 

The second problem is the widely held, yet incorrect belief that automating this range of functions will require either a series of point solutions -- that will then need to be connected -- or a new all-encompassing enterprise-level core platform replacement that sounds pretty unachievable. Understandably, neither of these options is popular.

 

But firms are beginning to recognise a third way? These functions often share common data and require an understanding of the same underlying fund structures. They are not as diverse as they first appear. They can in fact be automated on a common platform that exploits their shared features and data flows, and allows functions to be added sequentially over time, while critically, offering a much simpler, transparent and manageable operational design.

 

Process vs. production management

 

Identifying fund processing as a set of related processes is the first step towards efficiency. The next step is less obvious. To illustrate, in the 1970s, Bank of America hired an executive from Chrysler to use their knowledge of how to design efficient processing systems at a time when bankers and fund managers did not have this skill. By importing the latest process design and quality management thinking from manufacturing, the banks saw dramatic improvements to their process efficiency in a range of areas.

 

To date, financial institutions have continued to follow this model, delivering efficiency through sequential process review or workflow management initiatives. They have constructed logical processes by looking at one area of their workflow and refining it before moving on to the next area, so each individual process becoming as efficient as possible.

 

Although the approach is not optimal, the efficiency gains it yielded have now largely been consumed by the industry. For most firms, the piecemeal approach of reviewing individual workflows and best-of-breed technology solutions has been stretched to its limit.

 

This is where production management comes into play. Again, we can look to automotive manufacturing to see serious advancements in how to approach breakthrough efficiency initiatives. Rather than taking an incremental approach, production management also looks at all these processes as a whole, and how they interact. Whereas process management develops an efficient stand alone workflow, production management zooms out to see what else is going on. Rather than attempting to endlessly fine tune the one production line, it looks at the interaction of a variety of upstream, parallel and downstream processes to unlock significant new efficiencies.

 

Going back to our car manufacturing plant, process management originally delivered a carefully calibrated series of sequential and simultaneous activities. But production management thinking has encouraged the development of a single production line, capable of producing a sedan one day, a station wagon the next and a convertible or SUV the next – the ability to support multiple products and tailored requirements without the need to ‘re-tool’ each time.

 

When translated to fund processing, a production management mind-set offers the same flexibility: the ability to value funds, allocate cash and process income according to demand on a common platform or ‘production line’.

 

The power of this approach is that it automatically leads us to leverage common validated data across multiple processes because of the single platform approach and integrated data management capability.

 

Thinking straight, thinking strategic

 

Unlocking the efficiency gains from fund processing and its varied functions is about getting the right mindset when designing your operating model, and making sure technology supports that approach.

 

A production management ‘culture’ allows a firm to chart a more strategic path towards its ideal operating model and make better decisions within the same budget parameters, resource constraints, and short-term priorities. The difference is that even as change is rolled out in manageable increments, short-term decisions will not limit the firm’s ability to meet its long-term strategy. It gives the firm the confidence of knowing that any processes that may need to be re-engineered, added or automated in the future can be dealt with on the same platform.

 

That opens up a much wider pool of opportunities for generating efficiencies. It also means that the firm is no longer constrained by the need to deal with numerous point solutions within the fund processing space, or to have to ‘hardwire’ data flows between systems – effectively ‘pouring concrete’ into processing infrastructure, increasing cost and stifling agility.

 

The hard bit is actually adopting this new way of thinking in the context of the bigger picture. It is about looking at the business’ future technology and operating requirements as a dynamic process, rather than focusing on a functionality-based approach to system deployment: an important distinction that is often lost in the rush to meet the newest development in the market. Once adopted, even the most disparate and complicated fund processing operation becomes relatively straightforward – and the latest efficiency frontier can be conquered.