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Operating Model Strategy

by Gordon Easden, practice head, FusionExperience

We held the first of our series of interactive webinars and the insights garnered into ‘Operating Model Strategy’ were fascinating. Although the webinar targeted the asset management sector, the issues raised were sector agnostic. Two key topics were covered and discussed. The first is understanding the need for an operations strategy and the second topic was considering the conditions for when companies should review their operating strategies.

When considering operating model strategy, two questions are clearly prominent on the participants’ minds, namely why to have one in the first place, and why or when it should be reviewed. Answering these two questions will identify the key elements that a good operations model must contain. Examining what happens if you don’t have an operating strategy can start to answer this, namely sub-optimisation, urgency winning over importance and inefficient allocation of resources. 

Without a holistic approach, decisions are made without considering the overall implications.

Examples include:

- If considered in isolation, the decision to launch a new product may add unwarranted complexity to the operating model, adding cost that erodes competitiveness.
- There can be a failure to leverage existing capabilities across different product sets or jurisdictions.

Crucially, over time the product and service set can become disjointed and have no meaning for the customer.

This has important implications for the contents of an operations strategy. It must deliver an efficient product launch process that considers the impact on the operations as a whole. Moreover it must have clear links to the service proposition, and to the brand strategy.

A second effect of not having a strategy is that urgency tends to win over importance.
One frequent manifestation of this is in managing outsource suppliers. For very good short term reasons, additional services are taken from existing suppliers, complicating the service model.
Retained oversight staff are reduced, cutting costs with no immediate effect on service levels.

Over time, however, knowledge of the operations is reduced, and this degrades the ability to execute change projects. This increase in complexity and the lack of knowledge severely constrains the ability to move to another supplier, with a consequent loss of power when contracts are renegotiated. As a result the competitiveness of the firm is reduced.  A good operations strategy can actually speed the product launch process, by providing a clear context within which decisions can be rapidly made.

A third effect of not having a strategy is that it results in the inefficient allocation of resources.
It is important to have the ability to make rapid decisions in response to market demands. However, the true value of any investment is seldom in the initial product launch that is required. It frequently comes from the re-use of the resultant capability across many products.
It is therefore important that the operations strategy articulates a shared and coherent view of the development roadmap, to provide a context for individual product decisions. Individual product launches and other change project decisions can be prioritised in line with the operations strategy.

Whilst this shows the pitfalls of not having a strategy, the work required to develop a good quality operations strategy can be daunting. In world where time is the scarcest resource, then spending time reviewing your strategy can be an expensive diversion.
This illustrates the importance of our second question: “When should you review your strategy?”
The simple and short answer is ‘When the world changes’. What do we mean by this? When the assumptions that a strategy is based on change, it should be reviewed.
A good operations strategy document must therefore make explicit the assumptions on which it is based. These assumptions should be systematically validated at least annually. A full review of the strategy is neccessary if (and only if) these assumptions are no longer valid.

Key assumptions underlying an operations strategy will include the business strategy. This should be examining if there is any change in target clients, distribution channels, or product set. In turn these decisions will be driven by changes in customer and competitor behaviour.
A second key assumption is the capability of the service providers. In recent years, the capability of the outsource providers has been transformed. The successful service providers have been extending their geographic reach, both by acquisition and by investing in global platforms. This investment has greatly increased automation, either by achieving ‘straight through processing’ without human intervention, or by the adoption of image and workflow or other automation tools. This greatly increases productivity. In addition, the consequent reduction in error rates greatly reduces the cost of rework. Finally, this automation allows the remaining work to be performed in global centres of excellence that can take advantage of economies of scale and low labour costs. Follow-the-sun processing allows many tasks to be performed overnight, with delivery to the customer prior to local start of day. For those service providers that have achieved this level of global integration, the next step is to add more services to their core offering.

All of this has very important consequences. Firstly, the consequent reduction in operating costs for the services provider means they are able to compete more aggressively on price. Secondly, these providers are desperate to add volume to their platforms to repay the large investments made. The increase of geographic scope and service scope provides opportunities for simplification of the operating model, improvements in the level of services, improvements in the ability to support new products, together with further reductions in cost.

A third assumption that can change is the regulatory environment. The level of regulatory change bearing down on the industry could fill a whole series of webinars all by itself. We have the Retail Distribution Review affecting distribution in the UK, UCITS IV enabling master-feeder structures and giving us the Key Investor Information Document.  This is without considering the AIFMD, or the effect of the abolition of the FSA. To help asset managers understand the impacts, we will shortly be publishing an overview of these changes on our website.
The results of the discussion in this webinar were fascinating. And we hope you can join us for the next two: ‘Successfully managing major change’ and ‘Getting the best out of your existing operations’.

Author: Gordon Easden, practice head, FusionExperience.

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