Five Steps to Getting a Real Competitive Edge from Operational Cost and Compliance Challenges

By Rabih Ramadi, Advisory Principal and KPMG’s Investment Management lead for Management Consulting

The investment management industry is facing major challenges in various aspects of its business, from pressure on margins to ongoing market volatility, tighter scrutiny and regulation and more demanding client requirements. Like any industry, the natural tendency for investment managers may be to retrench, address each of these issues on a silo basis and wait for the market to return. However, the scale and diversity of the changes underway means that a piecemeal approach will be inadequate. A holistic change management program is essential to enable future profitability – and the time to act is now.

The “regulatory new normal” is here to stay, investors’ demands for greater transparency and lower fees show no signs of abating and markets don’t seem likely to repeat their high-flying performances of the early 2000’s any time soon.  Investment managers caught in this pincer of rising costs and plunging revenues have two solutions: 1. Hope for the best or, 2. Manage their way out of the bind. Firms which choose option 2 by implementing a holistic change management strategy, may not only be avoiding the pincer’s crush but may also be able to lower their long term operational costs by as much as 20-30% per year, based on our observations.

Each firm is different and each may not achieve these types of results. It all depends on every fund’s individual circumstances. However, real savings can be realized by firms of all sizes and types through effective change management. While that phrase, “change management,” may smack of ivory-towered academia, I assure you that it is really quite a practical matter that can be broken down into 5 simple steps:

 

1. Get the complete support of firm leadership. Change is seldom simple or comfortable and attempts to take a different approach are often met with resistance by those who would like to believe that the good old days will come again and those who just simply are not comfortable with the risk of such change. The stamp of approval from your firm’s top leadership will go a long way towards overcoming these and many other natural barriers to taking a new direction. It will become clear to the whole company that change is happening, no matter what. Moreover, the leadership needs to not only have a consensus that something needs to be done, they need to be agreed on what it actually is that the firm needs. What size does your firm want to be in the next 3 years? What products do you want to sell to what clients in what geographies? There are so many fundamental points that the top executives need to agree on so that the parameters for the change management program are set appropriately.

2. Assemble an “A-team” to manage change management. An integrated program like this can only be created and driven by a small group of senior managers with the necessary business and industry overview, leadership skills and authority to secure internal stakeholder buy-in to the program and drive through change. Sales & Distribution, Portfolio Management, Risk Management, Operations, Finance, Legal, Compliance and others, despite all their potentially conflicting priorities, have to support and implement the changes. This will not happen overnight. It will take time and a multi-year program to find the best ways to simultaneously meet customer needs, deliver regulatory compliance, lower costs, improve margins and grow revenue.

3. Ruthlessly prioritize a few key initiatives that can realistically get done and be measured. In the past, a firm might have 10 bright ideas for strategic projects and try to implement all of them simultaneously. Halfway through, market and priority changes would push the organization to drop five of them. The remaining five would run into problems because management didn’t sufficiently understand their budget constraints and the projects’ interdependencies. They would then be put on hold while the issues were sorted out and nothing would happen. This may be an exaggeration, but not much of one. Firms cannot afford this approach any more. Pick a few key changes a year and make them happen. Be sure also that these changes come with concrete deliverables, timelines and comprehensive monthly reporting. Any metrics you use need to be built from the bottom up, initiative by initiative, to create the top level key performance indicators (KPIs) for the firm. This will lock the whole program together and align detailed frontline changes with the desired strategic outcomes.

4. Look for links in your key initiatives to find cost-saving efficiencies. While it may be tempting to address challenges presented by investor demands, regulatory compliance and other areas in a “siloed,” one-at-a-time fashion, this approach simply won’t do given the enormity of the new realities asset managers must adjust to. Adopting an integrated approach will enable firms to achieve efficiencies by addressing common problems and opportunities across all different areas of the business. For instance, the government is requiring greater transparency of hedge funds at the same time as investors are. Why put in place – and pay for – redundant staff and systems if you can take advantage of the overlapping needs of these two stakeholders and gather and deliver the information one time? It is finding efficiencies like this that might not have been as easily noticed before as well as smarter ways to use existing resources that generate the bulk of savings that can be had from change management.

5. Get started now. Move quickly to get the edge. It may be necessary for your firm to spend more money and time up front to generate the long-term savings that are the goal of change management. It is best not to hesitate though. The sooner you address the problems, the sooner your firm can enjoy the benefits of the change.