The better the question
Can a holistic approach to cost transformation deliver greater long-term benefits?
Tackling cost drivers individually risks missing the big picture.
A global asset manager was embarking on an initiative to unlock sustainable cost efficiencies. This included removing cost, adding flexibility by shifting to a more variable cost model, and achieving greater scalability. Alongside these objectives, the asset manager wanted to enhance cost control and incentivize better behaviors around spend.
The asset manager was concerned that it had an operating margin lower than the relevant peer average of 32%. While the company had previously undertaken some actions to address its operating margin, there was more left to do if it was to deliver on commitments it had made to stakeholders to improve efficiency. A more strategic approach was required, one that achieved the immediate cost transformation objectives and positioned the manager for growth.
EY has deep experience conducting strategic cost transformation projects within the wealth and asset management industry in support of end-to-end transformation programs. “Many wealth and asset managers were already engaged in transformation initiatives before the pandemic, but these initiatives were often narrowly defined and focused on tactical cost reduction,” says Reema Kotecha, Director, EY Wealth & Asset Management. “The level of disruption from COVID-19 increases the need for firms to think more strategically in order to emerge as winners.”
With 30,000 wealth and asset management practitioners globally, EY has extensive knowledge of the industry. Our approach combines both benchmarking and practical implementation experience and draws on insights from our different practices: strategy and transactions; business, technology and people consulting; tax and assurance. Through a combination of skillsets, we help companies understand cost drivers and strategic, structural and tactical cost transformation opportunities across their value chain. In implementation, we build accountability for each line item of the business case and focus on benefits tracking.
EY supported the asset manager with all three stages of its strategic cost transformation program. The first phase identified opportunities and built a business case outlining the likely benefits; the second phase conducted program set-up and detailed implementation planning; and the final phase implemented the chosen initiatives from early wins to more strategic and structural change.
The better the answer
Tackling the organization’s pain points
Our key recommendations included exiting geographies, using intelligent and digital technologies in the distribution, investment and operations functions, and optimizing a core technology platform replacement.
In the first phase of this project, we set out to develop a thorough understanding of the business and its strategic objectives, to ensure we developed solutions that were aligned and didn’t conflict with any existing projects. We carried out an exercise to baseline costs and understand the key cost drivers, including full-time employees, real estate, technology, data, and outsourcing arrangements, making sure we were able to attribute these costs to each function and process of the operating model.
We benchmarked the asset manager with competitors both to establish its relative efficiency and to gain insights on good operating model practice for cost transformation. We then ran a series of workshops with key client stakeholders from the Exco through to business unit owners and process owners to establish where the challenges and opportunities were. This process shone a spotlight on problem areas: subscale, low-profitability locations delivering non-core services; duplication of core functions within the same region; and high-cost/labor-intensive processes with unnecessary variations creating unacceptable operational risk. Alongside this, we identified areas with non-optimal customer satisfaction, for example, in time-to-market around onboarding and meeting of service level agreements, and processes with low levels of employee engagement, for example, where employees were conducting non value-adding activity.
Based on this analysis, and using EY assessment tools and our global industry professionals, we developed a set of opportunities that could create significant cost transformation including:
- Exiting smaller locations and consolidating activities into regional hubs
- Making greater use of existing digital platforms to engage with new and existing customers
- Standardizing products and services
- Optimizing around a recent core platform upgrade
- Supporting the investment process with artificial intelligence
- Creating regional centers of excellence for trading, operations and lines of defense functions such as compliance, risk and audit
- Consolidating outsourcing providers
- Optimizing processes and using intelligent technologies in operations
Based on the business case, a small number of complementary initiatives were selected for implementation:
- Exiting geographical locations: The client had a sub-scale division in two geographies, with a high fixed-cost base due to local regulatory requirements. We supported the exit of these geographies, driving out real estate, staff, and legal entity cost efficiencies, enabling the client to redeploy capital into other growth areas. We supported the operational carve-out of the division from the overall global asset manager and assisted with each step of the divestment process.
- Digital distribution: The client had implemented digital platforms across core client segments, but was not exploiting these fully, instead of channeling activity through the sales workforce. Through a combination of improving the user interfaces and nudging changes in client behaviors, the company was able to free up headcount in the distribution function.
- Using artificial intelligence in the investment process: New technologies were used to scrape alternative data, alongside scanning and processing existing research data, to help increase the overall breadth and depth of data used to form ideas and make decisions. This enabled the re-focusing of research and performance analysts into more value-adding activities, increased the speed of decision-making overall, and supported greater scalability.
- Optimizing the front office platform: The client had recently implemented a leading front and middle office platform. We supported optimizing the front office platform by standardizing the investment risk operating model and enabling this to be better serviced by the front office platform functionality. We utilized EY assets to automate around this leading front-office platform, reducing headcount and associated tasks. Finally, the client had an in-house accounting system that had been in place for a number of years. The functionality of this accounting platform had been extended into the middle office and we were able to remove costs by decommissioning one instance of this accounting platform that was no longer required.
- Optimizing processes and using intelligent technologies in the operations functions: The client had many manual, high-volume processes, some of which were subject to unacceptable operational risk. We automated the reconciliations, the operational trade set-up process, and the account set-up process. Alongside implementing the automation, we created a center of excellence to manage the new virtual workforce, and trained staff on new ways of working with this workforce. This introduction of intelligent technologies reduced the cost associated with risk events and the cost of staff, as well as enabling enhanced quality and scalability.
“Throughout the entire implementation of these initiatives we kept a relentless focus on benefits realization,” explains Alex Birkin, Global Wealth & Asset Management Consulting Leader. “This was achieved by embedding a finance role in the program, measuring and signing off the benefits at every stage with the accountable owner, and making sure all our decisions were data-driven. This approach allowed us to deliver on what we’d identified in that initial phase of the project. It’s a component where many of these initiatives typically struggle to deliver.”
The better the world works
Leaner, fitter and more resilient
The company can now focus on mission-critical activities and invest in growth.
Since completing the strategic cost transformation, the asset manager has realized a number of significant benefits. It has created a more variable cost base, strengthened its ability to respond to fluctuating market demand, and is able to scale more efficiently to meet future growth. Absolute costs have been reduced, improving the ability to meet near-term stakeholder commitments. Furthermore, rigorous cost control by the finance function means cost savings are ongoing.
Processes work much more smoothly, too. Automation across the front office and operations has increased efficiencies and customer satisfaction, as well as freeing up the human workforce to concentrate on high-value activities. Now that the burden of duplicative processes has been removed, the company can devote its energies to vital activities such as delivering high-quality customer service and developing new products and services. It can also launch new investment strategies at scale.
“Thanks to this strategic cost transformation, the business is now able to focus on mission-critical activities,” says Mike Lee, Global Leader, EY Wealth & Asset Management. “It has built cost control into its DNA, generating investment capital that it can reinvest in growth.”