Innovation on the operational side: transparency and metrics
Adam Cox reports
“There’s an old adage in operations that goes something along the lines of, you can’t manage what you can’t measure.”
That was Mike Fiscella, executive director of securities processing operations at Morgan Stanley, speaking at a round-table discussion on innovation at the latest ISITC gathering.
Metrics and transparency were two of the issues that came up repeatedly in that discussion, as executives offered their thoughts on ways to grapple with the challenge of getting the most out of an organisation’s resources.
Omar Medina, a director and regional head of client services at UBS, said one the best ways to bridge gaps was to focus on organisational transparency.
With multiple teams working together, there can be so many dependencies; add into the mix the way that so many firms are offshoring or near-shoring work.
“So you have multiple moving parts,” Medina said, noting that every shop will have its own initiatives, methodologies on views on what works best works for them.
“At the end of the day, since we have moved towards that direction, that’s been a key issue for us in terms of making sure that we are operating as one unit, that we’re not operating in silos so that this way we alleviate any ball-dropping and any risk associated with a trade.”
Fiscella said by looking for trends from an organisational perspective, firms can seek to optimise their operations.
“You might be aligned by function, you might be aligned by product,” he said. “You might see when you actually look at that data it might suggest a more optimal alignment … and then think about your organisation and figure out what works for your own shop to optimise it.”
Medina said UBS uses its cost operational performance initiative to identify clients where there are opportunities to reduce cost and reduce risk, noting that being able to make proper measurements was key.
“I think buy-side community, for the most part, have become more innovative and they truly understand now, how their business is being allocated, who their key partners are,” Medina said.
“To further enhance that, we are measuring where there are missed opportunities in terms of historical trend analysis, volume analysis, root cause analysis,” he said.
“We know for the buy side it is somewhat a little overwhelming and consuming in terms of seeing across all your relationships,” Medina said. “Depending on your shop, some folks may be dealing with upwards of close to 100 different broker dealers. It becomes very challenging to measure all of that.”
Steve Nanfan, director of client relationships at Credit Suisse, said that obviously not all buy side clients were on the same technologies. “Therefore I think internal dealers are now looking more at their risk and control metrics,” he said, noting this could mean examining issues such as cancel corrects or non-standard settlement. “The days perhaps of tailoring individual reports for clients on technologies are perhaps going away because I think the vendors are able to provide that information directly,” he added.
Still, the executives said barriers remain to automating processes.
“When shops come up with a savings opportunity, there very much is a bias – sometimes out of necessity – to take that saving because they moved a function from point A to B, or because they automated something,” Fiscella of Morgan Stanley said.
“I think the more optimal answer would be to take those savings and actually reinvest them, back into further driving automation opportunities, and looking to find more opportunities where the industry can collaborate around problems, and not just look to solve issues within their own walls. Because I think there’s a limit to what we each can solve within our own walls before you hit those barriers where you need a fundamental change in how the industry operates before you can really get to the next level of opportunity of saving.”
Medina said that from a broker dealer perspective, one of the biggest challenges was the need to always be agnostic. One may never want monopolisation, but at the same time the number of third party vendors to support various asset classes was “very abundant”, he said.
That can make life more challenging both for his firm and its clients. “Because they now need to pick and choose and then hence we need to adhere to it. Also, from a client perspective, not every single client chooses to adopt a third-party tool and they offer their own proprietary means of doing things. That poses challenges because now, how do we create bifurcated processes?”
Medina added: “I think that as we continue to move forward and take a good look at how we process so many things internally and across the stream, it is achieving a more stripped down version of things where we create less abundance of dependency on so many different applications.”
The panel members were finally asked to list their current areas of focus.
Nanfan said Credit Suisse was looking at its global booking model and achieving consistencies in some of the front-end applications to allow it from a legal entity booking process to be that much more efficient and share workloads across regions. Being able to follow the sun is always more difficult when a firm is working on different regional platforms, he said.
Granular metrics continues to be a hot topic, both with the regulators and internally, Nanfan said. And a third area of focus was around people. He said it was that much more imperative to identify individuals who have high potential and can add value.
For Medina of UBS, measuring practices was also a current focus. “We want to be able, again from a metrics perspective, to share with the clients a stripped version of that, so that we give them the perspective of, ‘Hey, here’s really what it costs to do business’,” he said.
He said he hoped this could give clients a different perspective when they asked about alternative ways of doing things. A second area of focus was the methodology of consolidating along processing.
“So it’s basically taking the IB, asset management, wealth management arms, bringing them together operationally, and looking internally where we could again create synergies,” he said, citing payments, confirmations and settlements as examples. “Do you really need three individual teams, three silos doing, for the most part, very similar processes? So how is that we could work together to stay above the Chinese wall, where there is no infringement?”
A third key initiative is to look at where work could be minimised. “As firms become more global, trading that’s happening globally, 24/7, it’s something for us to look at and challenge ourselves. How it is that we could support clients from every regional aspect, so we do continue to look at areas such as India but also looking at other areas such as China, and then also looking near-shore into Nashville, Tennessee, so how we could be very smart and place strategically … while never skipping a beat in terms of overall client support.”
Anthony Ilario, director of operations at Investment Technology Group (ITG), also emphasised the importance of transparency, particularly in terms of operational costs. That allowed him to control it. “But more importantly it gets to a point where, there’s not much we can do but I like to be transparent about it, the firm needs to know (what) our trading costs are.”
He said people would be surprised at how little is often known about trading costs. “Nobody has a clue how much a short selling trade costs after financing and all the things you have to do, and they realise that their true P&L is like $4 when their revenues were $50 on a trade. So these are things that I want the firm to see. I may not be able to control it, but I have to put it out there for transparency so people can see what’s happening,” he said.
Ilario said he also was going to try again to knock down operational silos. “I need people who understand -- they don’t have to be corporate action experts but they have to be able to speak the languages, so I’m going to try to break down those barriers,” he said.
Following the sun was another focus, although he said he wanted to try to do that without outsourcing as he was not a fan.
Fiscella said he wanted to understand “all the intricacies of where those costs accrue along the lifecycle of a trade, both internal and external”.
He also said he wanted to look at where Morgan Stanley could partner with the industry more around trying to come up with comprehensive solutions that look front to back at the whole process for new opportunities. He said that with the bar always changing and the move towards shorter settlement cycles, that trend was only going to continue.
“I think that those challenges really behove us to think about our strategies and say, are they the same strategies we’ve had, or are they new ones and is there a lot of redundant processing that we all do, internally, that may no longer be deemed as differentiating?”
Finally, he also was focused on people. “Training and developing our staff, making sure that we force through that culture of process improvement, really trying to identify those win-win opportunities to find functions that really lend themselves to automation that no one really is keen about doing anyway,” he said.
