Unlocking Value: Assessing Returns on Operating Model Modernization Programs

Recent headlines have highlighted the rising costs and challenges faced by firms that opt to modernize their operating models through investment in new platforms. But are they truly reaping the rewards of their substantial investment dollars?

To answer this question, let’s delve into why asset managers embark on this transformative journey in the first place. We’ll break it down into the following key sections:

1. Necessity of Operating Model Modernization: Understanding why organizations must update their existing operating models.
2. Desired Benefits: Exploring the advantages that organizations aim to achieve.
3. The Implementation Experience: Why are firms struggling to deliver these programs?
4. How You Can Improve Your Chances of Success: Strategies to improve the likelihood of success while adhering to budget constraints.

By examining these facets, we can gain valuable insights into the impact of operating model modernization on firms’ bottom lines.

Necessity of Operating Model Modernization

The reasons that drive asset managers to review their operating models have been extensively documented. However, several clients that Cutter collaborates with face no alternative other than undertaking a complete transformation of their models. Their existing models are simply unsustainable in their current state.

Technology

Legacy applications present substantial challenges. The management and maintenance of outdated software incur high costs, exacerbated by the scarcity of expertise required for system upkeep and upgrades. Some of our clients rely on applications developed over 25 years ago, making the task of enhancing them to embrace modern technologies like cloud computing virtually impossible. Furthermore, these older systems are more susceptible to security threats, because they were not originally designed to withstand today’s prevalent security risks.

Inability to Scale

Legacy solutions suffer from inflexibility and have difficulty adapting to evolving business requirements. Enhancing their performance significantly becomes a formidable challenge. Consequently, organizations find it hard to scale their operations effectively to handle increased business volumes. Manual processes, dependent on human intervention, hinder scalability due to their inherent slowness and being prone to error. The absence of automated workflows places undue pressure on individuals, forcing them to work with sub-standard processes, often resulting in employee dissatisfaction and high resource turnover or burnout.

Cost

Cost drivers serve as the primary motivation for asset managers to reevaluate their operating models and explore strategies like outsourcing.

In practice, many asset managers continue to maintain unsustainable models due to legacy applications, outdated architecture, and the high resource costs associated with maintaining such systems.

Furthermore, asset managers face an opportunity cost when they cannot capitalize on emerging opportunities, accommodate increased business volumes, and leverage modern technologies like Software as a Service (SaaS).

For firms experiencing these issues, it is an absolute must to transform their operating models to maintain their existing business and stimulate growth.

Desired Benefits

Asset managers are looking for the following key benefits to support their existing business and build a platform for growth:

Introduce a Sustainable Cost Model

• Modernizing the operating model allows asset managers to establish a sustainable cost structure.
• By optimizing processes, leveraging technology, and streamlining workflows and resources, they can achieve long-term cost savings.

Provide a Technical Architecture for Scalability

• A modern technical architecture ensures scalability, allowing asset managers to handle growth efficiently.

Quickly Respond to Market Opportunities

• Agility is crucial in today’s dynamic markets. Modern operating models enable asset managers to swiftly respond to market shifts.
• Whether seizing investment opportunities or adapting to regulatory changes, it’s essential that firms build an operating model that they can enhance and scale.

Control of Data Without Overhead

• Modernization can provide better data management, with the correct focus. Asset managers can access, analyze, and utilize data efficiently.
• Firms can gain control over data quality, without the administrative overhead of managing intricate details.

Flexibility to Support Changing Business Strategies

• Business strategies evolve over time. A modern operating model can be adapted and enhanced to accommodate these changes.
• Whether entering new markets, launching innovative products, or adjusting investment approaches, the ability to quickly adapt your operating model is key.

Provide a Competitive Advantage

• Asset managers that embrace modernization can potentially gain a competitive edge by ensuring they continually adapt their operating models to match changing business strategies and requirements.
• By forming a solid base operating model, firms can then enhance that model to further improve investment processes.

Migrating away from restrictive models empowers asset managers with cost efficiency, agility, data control, and a competitive position in the market.

The Implementation Experience

At this stage, asset management executives typically have robust business cases and are ready to embark on their journey to implement a new operating model. However, why do so many firms encounter delays and frustration during this process? To understand the challenges they face, we spoke with several clients that have either completed or are in the midst of a major transformation of their operating models.

The journey of modernizing an operating model for an asset manager is fraught with challenges, many of which stem from a lack of thorough implementation planning. Often, firms underestimate the complexity of the change, leading to unforeseen obstacles and delays.

It’s crucial to have effective program governance, yet it is frequently hampered by poorly defined roles and responsibilities among the various parties involved. This lack of clarity can result in miscommunication and inefficiencies.

Moreover, the absence of well-defined milestones to review deliverables against the plan can be detrimental. Without these checkpoints, teams may become overly rigid, adhering to the initial plan without the flexibility to adapt to new insights or changing circumstances. This rigidity can make them “slaves to the plan,” unable to re-plan realistically as needed.

Firms also often underestimate resource impact. Demands on personnel, both in terms of time and expertise, can be significant, leading to burnout and reduced productivity.

Additionally, for models that include an outsourcing element, asset managers frequently overlook the requirements for defining an effective oversight model. Clients cited this area as a common issue.

In summary, the implementation efforts experienced by our clients highlight the importance of comprehensive planning, clear governance structures, realistic milestone setting, and adequate resource allocation from the very start of the program. Addressing these areas proactively can significantly enhance the chances of a successful operating model modernization program.

How You Can Improve Your Chances of Success

Based on lessons learned, our clients have advised that if they could undertake the program again, they would focus on these key points:

Stakeholder Management

Ensure that senior stakeholders are fully engaged and supportive of the new program. Foster strong relationships with suppliers and other third parties to avoid a “them-and -us” dynamic.

Complexity and Flexibility

Recognize that this is a complex, multi-year program. Plans will need to adapt as requirements evolve or become clearer. Implement a transparent and robust change management process and avoid assigning blame for changes. Ensure you document all changes and clearly understand and accept their impacts.

Resource Management

Your in-house resources are invaluable because they know your business best. Retain your top talent and acknowledge their significant contribution to the program’s success.

The implementation process is demanding and can be exhausting for your team. Prevent burnout by managing staff well-being, back-filling positions from the start (with appropriate training), and being prepared to adjust your resource plan as needed.

Clearly define roles and responsibilities for every project role to manage expectations effectively.

Initial Planning

Avoid rushing into implementation. Set yourself up for success by spending adequate time planning your phases and resource requirements. Be realistic about what your organization can achieve, considering the ongoing business-as-usual activities that must continue alongside the implementation program.

Continuous Monitoring

Programs often have review points or gateway review points scheduled. However, firms often overlook these reviews or see them as an administrative exercise rather than an opportunity to reflect and re-plan where necessary. Your firm should not ignore the benefit of independent reviews ─ either internal or external. Independent reviews should form part of a continuous monitoring process to help maximise the chances of success.

While asset management firms are investing in new operating models for sound business reasons, the implementation of these models has proven to be more complex, costly, and burdensome than initially anticipated. By learning from past implementation efforts, asset managers can mitigate these challenges and ensure a smoother, less painful transition in their programs and get a better and quicker return on their investment.

If you would like to discuss any aspects of this article, please contact us at [email protected].