Operating Model Strategy Webinar Series.

We held our second interactive webinar in November and the insights gained were fascinating. Although the webinar targeted the asset management sector, the issues raised were sector agnostic.

Outsourced service provision is central to the operation of almost all asset management firms. The basic rationale for outsourcing across all industries is that the benefits of scale outweigh the additional management costs of acquiring services from suppliers. Firms outsource all manner of services that would previously have been undertaken in-house from facilities services like office cleaning, through logistics, to call centres.

The task of managing outsource service providers is made easier through automated process management information and remote access to tracking systems. This makes the monitoring tasks far simpler, lessening the need for frequent site visits. At the same time, the ubiquitous use of email and mobile technology has further streamlined the process.

Thus, the outsourcer gains access to economies of scale. Significant sums can be invested in automation, with the cost recovered across an enlarged business. Global convergence of operating practices allows this scale to be leveraged even further. The enlarged global teams can then be rationalised to global centres of excellence, located in low cost areas delivering a 24 hour follow-the-sun capability.

The asset management industry is one of an increasing number of industries where the number of product providers continues to remain high. Distribution is increasingly concentrated through a small number of platforms. Operations are delivered by a small number of suppliers with global scale and reach. Consequently the industry’s structure makes it impossible to compete by building your own operations infrastructure. Outsourcing all major operations is therefore essential.

For example, most asset managers grudgingly admit that they get a good basic service from their suppliers. Nevertheless they feel there is an inability to implement change, and that the needs of the customer and business are disconnected from the operations. This causes a problem for firms. There are compelling reasons for using outsource providers, but in practice, firms are experiencing real problems accessing those benefits.

Hence, it is important to identify the reasons behind this and find a proven approach to ensure operations deliver brand and business objectives.

Firstly, it is important to clarify what we mean by Managing Outsource Operations. In this context, managing refers to establishing a control system. At the heart of this control system is a set of objectives, a sensing system to monitor if these objectives are being achieved, and a mechanism for taking action when objectives are not being achieved. Overlaid on this should be a mechanism for sensing changes in the environment which require the objectives to be recalibrated.

Managing operations is defined as "ensuring that operations are delivering to their stated objectives, and that these objectives are relevant to the brand and business strategy." This can be difficult because because of their complexity and multiple potential points of failure. Without active management each area will operate to its own priorities and the overall objectives will not be met. This can occurs on multiple dimensions, personal agendas may undermine firm objectives and long term strategic objectives may be ignored in the face of short-term pressures.

If an outsource provider has conflicting objects to the asset management firm, this can pose specific challenges to managing outsource operations. An example of this is when the outsourcer wants a predictable and stable operation whilst the product provider wants complete flexibility to react to market requirements. The product provider requires the ability to easily change supplier, whilst the supplier wants to lock in the product provider. The product provider wishes to pay less and the outsource provider wishes to charge more.

A structured approach is required for significant conflicts to be managed appropriately and all aspects of this problem to be addressed. This approach involves specific key management processes and characteristics that will ensure that they deliver as expected.

The management process can be broken into four process areas:

• service specification

• service monitoring

• issue management and resolution

• change control.

The capability maturity model will guarantee processes deliver as expected by defining a series of generic practices that must be considered; establish policy, produce a plan, provide resources, assign responsibility, train people, manage documents, identify and involve stakeholders, monitor and control the process, objectively evaluate adherence, and review status with higher management. These generic practices are often overlooked in the four process areas mentioned above.

Most contracts contain some kind of Service Level Agreement (SLE), but very few organisations articulate a policy to justify one. A key objective of the Service Specification is to maintain a current understanding of the services being delivered. This is essential to ensure the service delivery is in line with evolving market requirements, to understand the impact of change, and to enable migration to an alternative supplier. If this objective is not even explicitly stated, it is not unsurprising that resources are not committed to ensuring it is achieved. As a direct result, change becomes hard to effect, and a gulf of understanding opens up between the business and the operations.

When considering the steps in the change control process these are usually well defined and understood. However, there is rarely an explicit statement of the objectives of the change control process or a clearly defined responsibility for ensuring these objectives are met. Consequently adherence to these objectives is not monitored. Frequently, when the product provider is unhappy with the performance of this process, they find they have no adequate means of rectifying the situation. By contrast, if an objective is clearly stated (e.g. the launch of a new product within 30 days) then controls can be built into the contract to ensure conformity.

Finally, issue management and resolution is often a poorly documented process, and is only as good as the manager operating it. There is rarely an explicit plan, and documents are not filed centrally. As a result the operation can be compromised in the event of staff changes.

This clearly shows how this simple framework is very powerful. Benchmarking your processes against the model can help in easily identify and address areas of weakness.

The CMMI for services framework provides for a staged approach. The steps described thus far can secure processes to perform as expected for an organisation operating at maturity level 2. Once at this level, firms can opt to further leverage their processes, by moving to level 3, 4 or 5.

Key to this is a structured implementation. For a defined process scope, we can make an initial assessment against the level 2 requirements of the CMMI for services model. This will highlight weaknesses in the important processes. These weaknesses can be assessed for importance against your business goals, and improvement plans agreed. Following implementation of these improvement plans, the operation can be certified at level 2. The process can then be repeated for level 3 of the model. An alternative approach is to identify those process areas that are of concern. Targeted assessments can be made, and improvements made to these areas.

In practice, these two approaches are not contradictory. It is reasonable to pilot this approach to address key areas of concern to demonstrate the benefits. This can then extended to make sure the process area is operating at maturity level 2.This can then be extended out to cover the whole of the selected business scope, in this case the oversight processes. Below are a couple of examples of how this approach deployed in practice.

FusionExperience recently helped a leading asset manager to consolidate its back office operations to a single supplier. As part of this process we benchmarked their oversight processes against the CMMI framework. We ensured that CMMI compliant processes were enshrined in the contract, verifying the appropriate monitoring and controls were available. The transparent oversight processes have built scalability into their processes; this will enable the client to grow further. A much improved change control process will deliver this client the agility it needs to compete in the market.

FusionExperience also helped an outsource provider with a problem of reliably delivering change. This was a key issue that was beginning to threaten an important relationship. We pinpointed the key process weaknesses by undertaking a very brief and focussed review. An improvement plan was agreed that delivered a predictable change process that was responsive to the client. This achieved the desired aim of improving customer satisfaction. A helpful side-effect was that it reduced costs by reducing project overruns. Importantly, the experience provided a baseline for further improvements.

To sum up, Operations are important because it is through them that one delivers a business strategy today and in the future.

There are compelling reasons for product providers to outsource many of their function, but many firms have difficulty fully realising the promised benefits. Furthermore, mature oversight processes are required to access these benefits, and a structured approach is needed to ensure these are in place. This approach can yield significant benefits if adopted by an asset management firm in its oversight processes, or by an outsource service provider in its delivery processes. However, the greatest benefit of this approach is achieved when both product provider and outsource supplier work together.

The results of the discussion in this webinar were fascinating. And we hope you can join us for the next one: ‘Managing operations’ on Tuesday 14th of December.