WHY IT CAN HELP FUND MANAGEMENT MERGERS BE MORE THAN THE SUM OF THEIR PARTS
Tony Virdi, Vice President and Head of Banking and Financial Services in the UK & Ireland, Cognizant
In the golden years of the asset management industry, profits only ever rose year by year. Now that the industry’s revenues are much less certain, with the indisputable increase in regulation and compliance within the sector, previously “certain” profits will be impacted. This means that mergers such as the one between Aberdeen Asset Management and Scottish Widows are likely to be a regular occurrence in future.
Mid-size players without the critical mass of the large firms, or the defined market niches of the small ones, will seek to consolidate the infrastructure, technology and operational costs associated with regulatory compliance for budgetary and efficiency gains. More rules often mean more systems and processes to comply with the new regulations, leading to more infrastructures: economies of scale dictate that larger organisations are typically better placed and more able to absorb the costs.
However, a wholly cost-centric approach to mergers in the sector would be a rather narrow view of the process. Mergers are an inevitable response to increasing costs; however, this should not lead to less innovation or, over time, fewer business opportunities in the sector. Bringing together two separate businesses must create a result that is more than the sum of their parts, with the respective weaknesses reduced and specific strengths bolstered. Not only should the new company run better than its constituent parts, but managers should use the opportunity afforded by the merger to run their businesses differently by providing greater innovation and customer value.
When two businesses have very distinct, well-established cultures that is often easier said than done; however, we believe that the effective use of IT is key to moving the merger process forward successfully.
With the Retail Intermediary Review having had a terminal impact on the levels of commission that managers charge on fund transactions, and with the “DIY” investment option proving increasingly attractive to more savvy yet cautious, recession-hit customers, transparency remains a key concern for larger fund managers looking to build customer trust and retention. Whilst a less opaque business model has resulted in the loss of some revenue, it also offers opportunities for managers to build a better relationship with their customers.
The IT changes associated with a merger can be a powerful aid to promote this transparency. For example, the ease with which data can be accessed by staff looking to answer customer queries, or to proactively inform their clients about new opportunities, should be front of mind. This is not always easy to achieve when dealing with what are not always the most up-to-date back-end systems that a merger may deliver. Even though most firms have upgraded their front-end interfaces, the integration layer is sometimes so complex as to be completely unscaleable. This can be an impediment to transparency, but a merger is an opportunity to upgrade underlying architectures, not only to make sure there is a seamless migration of data during the merger, but to enable staff to provide a more valuable and seamless customer experience afterwards. By freeing up some budget due to merger savings, there should also be an investment in innovation that targets improved customer value propositions and enhances competitive advantage.
Increasingly the digital channel, which can provide both the opportunity to boost revenue (through cross and up-selling), as well as boosting customer trust (by showing how a particular pot of money is doing at any one time, and why) is at the forefront of activity. A more agile, flexible architecture, allowing a user-friendly front-end platform with faster access to data, is a vital first step in making this type of interface a reality. Fund managers are aware of the changes sweeping through the financial services industry, and the move away from branch and telephone-based banking to online and mobile platforms is as relevant to this sector as it is to the big retail banks. Everything needs to be more relevant and faster for every client – for example portfolio reports should no longer take 20 days to produce; they should take around five days to meet customer expectations.
While fund managers – and particularly the smaller, more niche players – may not have the resources and expertise to develop the digital assets needed to provide this sort of service, the consultancy services and products available mean that the barriers to entry are coming down as long as regulatory requirements can be catered for. What is certain is that there is an opportunity for asset managers to bolster profit margins that have been under threat for the last five years and, in some cases, for far longer than that.
How a company combats regulatory threats can be a reflection of how risk, customer trust and technology are viewed within the organisation’s culture. A merger is an opportunity to promote the positive aspects of this within both companies involved, and this ought to be reflected in how the merger of IT systems is conducted. The first consideration should always be to minimise any impact on the customer and a robust change management process, coupled with an approach that makes the customer the top priority, should ensure that this is possible.
With regulatory authorities worldwide taking a proactive and much more zealous approach to their work, and the financial industry now a highly politicised sector, it is prudent to take a cautious approach to regulations at a national and pan-national (e.g. EU) level. It is important to take this into account when matching a merged technology and business process infrastructure against the business plan for the newly merged entity. However, this need not result in a cumbersome, intrusive, or ‘over-engineered’ compliance programme. New compliance management platforms, and integrated, automated analytics technology, can ensure regulatory peace of mind while still streamlining the business.