Andrew Putwain: What is the status around service consolidation and what will its purpose be going forward?

Simba Mamboininga: Service consolidation is focused on creating synergies. For many businesses, this can be achieved through operational streamlining, by understanding your technology architecture, supporting your business model, and by understanding the suppliers that provide services to your business. For example, if you use multiple fund accountants, and they provide a very similar service, you could just consolidate into one fund accountant because you can negotiate a better fee tariff for your bigger book of business, and you will also save from not having to manage multiple relationships.

You can also achieve cost efficiencies and synergies by understanding your data. Investment managers who take time to understand how they are utilising their data, where it is coming from, where it is going, how they report it to their clients, will benefit immensely. This helps in defining the business model and the architecture that supports it.

"A big challenge for firms is how they can successfully decommission legacy platforms and move on to cloud-based solutions"

40 years ago, technology accounted for a smaller portion of spend and it was a lot less efficient, whereas today, the spend has gone up, but also technology is doing a lot more. One of the challenges the industry has is ensuring that any new technology solutions layered on top of legacy technology solutions, do achieve the desired effect, and are fit for the future. Usually, such an approach can be costly and ineffective.

A big challenge for firms is how they can successfully decommission legacy platforms and move on to cloud-based solutions that empower and strengthen their operational capabilities. Such an approach is likely to result in fewer services and suppliers being used.

Andrew: How has it changed and risen/fallen throughout the pandemic?

Simba: Covid-19 was an accelerator for technology adoption. The industry was already on a journey to integrate more technology solutions primarily to address cost pressures, inefficient legacy systems, and better service clients.

There were some challenges at the outset of the pandemic, ranging from firms trying to figure out if they had the right bandwidth to support their businesses to staff being unsure if homeworking would go well, but Covid did change how the industry worked, and there is a lot more trust on homeworking arrangements. Increasingly, firms are thinking about what else technology can do to free up resources.

"There might also be some reluctance on moving away from existing technology due to fear of the unknown particularly when it’s felt that quantifying the time and resources required to move away from legacy solutions is difficult"

The boom in ESG products was also catapulted by Covid as many investors started looking at the world through a different lens. Investment managers continue to be faced by fee pressures, and there is an appetite to provide clients with a better service, also to match what other participants are doing in the market. Many firms are challenged with integrating all these technology components into their business within a short space of time so good planning is critical if firms are to achieve the desired outcomes.

There might also be some reluctance on moving away from existing technology due to fear of the unknown particularly when it’s felt that quantifying the time and resources required to move away from legacy solutions is difficult. In such cases, business leaders will need to reflect on how they want their business to work, the customer experience they would like to deliver, and if their proposed business model is fit for the future. A reflection on these key commercial areas should guide firms into making sound decisions.

There is also a massive shift in the client expectation and demographics, in 10 years time, we will have today’s young people as a key client group in the industry so from a client perspective, there is a need to think about what their expectations will be. That is what corporates should be thinking about, making sure they put themselves in a good place to continually capture the market. You can’t anticipate every expectation, but it is worth researching and understanding the market, all client groups included.

"Service consolidation is for everyone; it just depends on what services you are buying externally"

In acquiring or integrating any new technology, it’s critical that firms conduct have a thorough due diligence process and have the right resources capable of supporting such transformative initiatives.

Andrew: Is service consolidation only beneficial for a small number of firms rather than a lot of companies?

Simba: Service consolidation is for everyone; it just depends on what services you are buying externally.

The crux is - do you understand how your information works, how everything fits together - when you have this understanding, it is easier to identify what services you require or how you can efficiently acquire services.

This also presents an opportunity from a service provider perspective. When you have a set of data, it is possible that by adding 10% more data to what you currently have, you can provide one or two other services that will be of value to your clients. Of course, a cost-benefit analysis will be worthwhile.

Andrew: Is ESG causing changes to operational strategies for funds around consolidation?

Simba: There are some significant challenges in sourcing ESG data. Some managers buy ESG data from ratings agencies and some also use proxies due to information access issues. The industry needs to define its comfort levels around the different approaches. The accountability for any information integrated into investment decision making rests with the fund manager. Investment managers need therefore to be comfortable with their ESG frameworks.

"Environmental factors were of huge concern and rightfully so, but social and governance issues were not awarded the appropriate attention"

There has been a lot of acquisitions of ESG data solutions over the last few years, making it easier for managers to purchase broader services from fewer providers although I will add that significant data issues remain.

Before the war in Ukraine, environmental factors were of huge concern and rightfully so, but social and governance issues were not awarded the appropriate attention. The war in Ukraine has put a spotlight on social issues and there is now a strong appreciation of how social factors can manifest into financial returns for portfolios.

We are yet to fully understand how the industry will approach such issues going forward. Let's see what happens.

 

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