Innovation on the operational side: addressing today’s challenges
Adam Cox reports
There’s no question that back and middle office operations everywhere are being asked to cope with tight resources. At the latest ISITC conference, several senior executives came together in a panel session to talk about their experiences and how they could squeeze out efficiencies with less.
Mike Fiscella, executive director of securities processing operations at Morgan Stanley, said the good news was that innovation was not dead. “But I guess some of the bad news is that the desire to do projects that have … a long-term ROI is dead.”
Fiscella said that has probably been the theme for the past few years. “You need to get innovative if not creative,” he said. The secret, he suggested, was thinking about how to “layer in” benefits, especially as firms were looking for maximum payback in year one.
As an example, he said, say a firm were looking at a new efficiency project which it arguably might have a difficult time getting funded. “So don’t put it forward as an efficiency project alone. It’s about, how do you layer in those benefits, how do you layer in control benefits. It might be tied to non-discretionary work in your shop, be it driven by regulation, driven by audit findings.”
Anthony Ilario, director of operations at Investment Technology Group (ITG), said innovation was probably more important now than ever. “The trick to it is, how do you get it done?”
He suggested two areas. One was standards on the operational side. Gone were the days when would-be traders could be shunted off to operations to learn the craft before going onto the front office.
“You can’t do that anymore. We need trained professionals. We need our staff to be all in. I can’t have a bunch of people looking to become traders because I need them to think about the firm. I need them to think about the direction of the department, and you need to empower them so that they feel that they have actually a voice.”
Ilario said that another key issue was communicating with staff and the need to eliminate the “30,000-feet” conversations. “These are the guys who are in at seven, they’re out at seven, they’re talking to the clients all day. They look at millions of shares each day. These guys know and have some pretty good ideas. So I think we’ve got to stalk the staff.”
Omar Medina, a director and regional head of client services at UBS, suggested the key was in focusing on how regulatory drivers were forcing change. Now that there was more standardisation, with more regulatory processes to consider, it wasn’t so easy to try to comply with every single client’s needs.
“There needs to be more of the ability for internal infrastructure teams to talk to one another, to share best practices,” he said. “I think transparency and being able more to prioritise initiatives is a key component towards success.”
Medina added that there was hardly an abundance of resources and that anyone involved with Dodd Frank over the past year knew exactly what he meant.
Steve Nanfan, director of client relationships at Credit Suisse, said leadership was the key criterion to innovation.
“It’s around setting an appropriate context of strategy, being able to empower individuals in your team and develop and identify individuals in your team who want to drive some of these initiatives forward,” he told the conference.
Nanfan cited an example where his firm went “back to basics” to identify the skill sets within teams and drilled down on the functionality that was being managed. This was all part of an effort to look for “capturers of change” in these areas. He said that as a manager one needed to find the individuals who wanted to drive reform and then one needed to empower them.
This could be the case in terms of looking at managing mapping tables, configuration tables, tier commissions, or even just basic things like where there were exceptions, he said.
“I think we then got to a point where … individuals were able to bring this sort of change to the table and move the organisation forward, and as you get those basics right so you then can focus on clients and what clients want, and actually it helps to influence certain clients’ behaviour, to make the process more efficient. Again, I think it comes back to people, having a real strong control around the functions that you manage on the day to day.”
Ultimately, because the exceptions were being reduced, there was less to manage on a day-to-day basis. “And these guys then became more involved in longer-term strategic projects as opposed to just fire-fighting in the trenches on a day-to-day basis,” he said.
Medina of UBS, who had experience on the buy-side as well, noted that the intricacies of the sell-side weren’t necessarily always appreciated. “We’re not revenue generators; we’re revenue protectors,” he said. “We’re constantly in a position of mitigating the cost of doing business, and also the risks associated with doing that business. So one of the constant things we always ask ourselves is, how do we measure that cost reduction, how do we measure that risk? And internally at UBS, we’ve developed a concept of ‘cost of operational performance’, and really it’s a mechanism of how we look across all multi-asset classes and see how it is we’re engaging with the top tier global strategic partners,” he said.
But the question remains, how do firms actually create the efficiencies needed?
Ilario of ITG offered a metaphor, in terms of the need to impose structure on how they do business with clients.
“I’ve got four kids. I’d love to go to a restaurant and say, ‘Four hamburgers and I’m paying 10 bucks for it’. It doesn’t work that way. They tell me how much I pay for the hamburger. If I want it, I’ll get the hamburgers. It’s the same thing here. I control the commission, not the client,” he said.
Ilario was quick say that they work with, not against, the client. “We took their commission schedule and put it on our own system. This way I don’t need to rely on them anymore. I have the commission schedule, and when their allocation comes in, it’ll automatically book with the commission schedule that we’ve worked out together. So there’s no more back and forth, it’s efficient, the trades are booked, the guys are not spending time sending us emails, and they’re not leaving trades in suspense, which is always a problem for many reasons,” he said.
Fiscella of Morgan Stanley suggested the key to understanding efficiencies was ensuring a firm was using measuring the right thing.
“So if you look at the activities your teams are doing, and you look across groups, you start to see a commonality if you get those broken down to the right level of granularity,” he said.
“So an example might be, you ask your teams how much time you spend maintaining reference data. And they’ll point you over to the new accounts group and they’ll say, ‘Oh, we have X people in that group and that’s our reference data group’, and then you actually look at the metrics and you see reference data’s being maintained in little pieces all over the firm. “
At that point, he said, a company can look at whether it makes sense to centralise and tackle an issue more strategically.
