Towards a Next-Generation Target Operating Model

Thomas Eikrem, Managing Director EMEA, Fencore

A CTO colleague of mine made the following remark last year: “We are moving away from, ‘If it works today, don’t break it’ to, ‘Just because it works today, it doesn’t mean it will work tomorrow.’”

Indeed, Investment management technology is changing fast, probably faster than ever before. The phrase, “The technology-enabled investment manager,” is used wildly and is becoming the standard rather than the exception.

However, despite the genuine interest in modern technology, alternative solutions, and a market-wide consensus that data and systems will reduce operational cost and generate alpha, the investment management community is ridden with legacy solutions. And they have been remarkably sticky – or at least until now. 

I see a lot of decision makers sitting on the fence, waiting for the early adopters and the risk takers to make the first moves. It’s a conversative approach in a conservative market, but asset managers, who do decide to wait, risk losing out in an increasingly competitive environment.

So, how does the investment management industry move from an appetite for change to real tangible, tech-enabled transformations?

We have a few ideas.

The battles of yesterday are not the same as the battles of tomorrow: If we look at some of the dominant solutions in the market most of them date back to the 1980s and 1990s. Of course there has been development, improvements, and upgrades, but the fundamental underlying technology remains unchanged – regardless of what their clever folks in marketing may say.

A good example is cloud technology. Obviously, given their age, none of the aforementioned stalwarts are cloud-native. They have been dragged, kicking and screaming, into the cloud, but without the benefits of originating from that environment.

Consequently, there are issues in terms of integration, interoperability, multi-tenancy, and dual cloud. We recently came across the rather creative expression “Re-born in the cloud”, but of course there is no such thing. My ZX Spectrum, anno 1981, now has somewhat of an (after)life in the cloud, but the old boy will never be cloud native.

If we turn back the clock 25 years, the battle was “The Integrated Solution” versus “Best-of-Breed.” A quarter of a century later, technology has moved on, and integration is no longer such a complex issue. We no longer live in a world of ancient formats and protocols, overnight batch jobs, and embedded, inferior data tools.

Interoperability and Integration

“Interoperability” is the flavour of the month and interestingly every vendor – even the most purist one-stop solutions – have, at least theoretically, embraced the concept. However, interoperability, unlike integration, has a philosophy and accepts that change is always present and requirements will always evolve.

Interoperability is also not a regression to Best-of-Breed. Interoperability acknowledges the value of data across the entire investment life cycle promoting consistent, real time data exchange, across all asset classes, unstructured and structured data, and public and private markets.

Finally, interoperability is not a long list of 100s of supplementary systems that you could potentially interface or integrate with.

Rethinking the Value of Data and Data Operating Models

The segregation between Front and Back Office data has been diminishing for decades since the introduction of IBOR (Investment Book of Records) as a concept. Swiftly both traditional, flush-and-fill Front Office solutions and Back Office, accounting based systems have claimed to be “the true IBOR”. Basically, Front Office applications went Front to Back, and the accounting systems ventured Back to Front.

An irreversible trend, however, is the use of investment accounting data in the decision-making process, portfolio modelling and strategy- and investment creation. This requires a fresh approach to data- and target operating model design, where the extended IBOR becomes the real-time “one source of truth” across time zones and jurisdictions, providing consistency and the foundation for all investments. To a slightly lesser extent, we see advanced analytics, risk measures and performance measurement and -attribution also finding their way into the same processes.

Target Operating Model Design: Core and Supplementary Systems

The traditional way of changing or refining your target operating model is as old and archaic as the legacy systems that continue to be dominant across the investment management community. Existing processes are documented to death, and the incumbent systems are benchmarked versus predominantly well-established alternatives. Most asset managers will reevaluate their Front Office solutions every 3-8 years, whilst investment- or fund accounting systems have an impressive longevity; we are talking decades in some situations. Change, even the process of deciding to change or not, has traditionally been slow moving and expensive.

However, the linearity of selection, transformation and change usually promoted by legacy consultancies is being questioned – and rightfully so. We believe that the next-generation target operating model for the technology-enabled asset managers is based on agile, core applications that are constantly enhanced, as per market requirements. Supplementary systems supporting specific fringe requirements will always exist. We also see innovation in transformation management, where consultancies accelerate system selections and implementation.

Additional Considerations

If interoperability and data consistency are the two fundamental components of the next-generation operating model, there are still complexities to consider. Globalisation still comes with local flavours, especially in the investment accounting space. Hence, the need for multiple frameworks and multi-books. For the truly global protagonists, there is also an organisational dimension: the consideration of where to base specific business functions based on cost, competences and the realities of 24/7 operations.

What’s Next?

60 years ago – exactly – Bob Dylan said, “The Times They Are A’Changin,’” and it’s amusing to observe that there are indeed systems still in place of the same age as Mr. Tambourine Man. Maybe he was ahead of his time, but the asset management industry can no longer rely on legacy solutions if they want to live up to their technology-enabled vision and growth aspirations.

Collaborating to Move the Industry Forward

This contribution to the FundGuard blog by Thomas Eikrem marks just the first of more thought leadership collaborations with Fencore and other collaborators. Our collective aim is to help the investment management community on its path to true digital transformation. Through blogs and roundtables we will explore new technologies, market trends and next generation operating models.

About Fencore

Fencore is a low code, cloud native data management system for the investment management industry, across public and private markets. To learn more, please contact Thomas Eikrem: Thomas.Eikrem@fencore.co, Mobile: +447799882802