Benefits of a Consolidated Middle Office

In an ever-evolving landscape of Asset Management, everyone is after better, faster, and more accurate data to enable quicker decision-making while reducing cost. However, legacy operating models and structures that have built up over time often leave firms juggling multiple Front Office Systems and with an overstretched Middle Office trying to piece together data from across the organization. Among respondents who have answered Alpha’s Global Operations Survey, 39% of the firms have expressed plans to change their approach for their Middle/Back Office functions.

The key question remains: How can Asset Management firms overcome these challenges while meeting the ever-increasing demands from Clients, Investors, and Regulators?

A consolidated Middle Office brings many advantages and opens opportunities for asset managers that they would not otherwise be able to explore.

1. Consolidated IBOR

The integrity and availability of data are critical for Asset Managers to drive better decision-making and help them stand out from their competitors. A single, consistent view of IBOR across strategies, asset classes, and jurisdictions can unlock next-generation Middle Office capabilities. 92% of Alpha Global Operations survey respondents recognize the importance of a documented strategy for investments data, and 64% of firms have already integrated real or near-real IBORs in their Front Office platforms (this rises to 84% for firms who are on an Enterprise Platform). Specific benefits include:

• Single source of data – consolidated and consistent view of all investments leads to more effective portfolio management using a holistic view of exposures
• Real-time view of data – empowers the Middle Office to respond more quickly to Front Office and Client queries and improves the accuracy of cash and exception management processes
• Enhanced data governance – standardized data and usage across the organization; ensures that the right data is made available to the right people and drives greater usage of data across the organization
• Enhanced reporting – both regulatory and client reporting will improve as a result of better data quality, consistent metric/calculation methodology, and custom report flexibility

2. Streamlined Operating Models

According to the Alpha Global Operations survey, 81% of firms planning a change in their provider models are doing so for Middle Office. Successful consolidation of Middle Office and associated operating benefits can be achieved in either an in-house or outsourced model.

• Standardization of processes – 71% of survey respondents cited the standardization of processes as the biggest benefit of consolidated Middle Office
• Elimination of duplicate tasks / replication of effort – eliminating the need to reconcile to different Middle and Back Office providers reduces internal effort, decreases cost, and accelerates critical start-of-day processes
• Enhanced controls and risk management – risk monitoring and compliance activities can be centralized to collate a comprehensive view across the organization and enhance controls through the adoption of global best practices

3. Simplified Outsourcing Model
   The outsourcing boundary continues to expand. Outsourcing of core Back Office functions – Fund Accounting, Custody, Transfer Agency – is long established; outsourcing global Middle Office is becoming more commonplace, and service providers are now investing in Front Office and Front Office-adjacent services. MO outsourcing tendency increases with firm size. Based on the Alpha Global Operations survey, 61% of large firms (AUM > $200bn) either partially or fully outsource their Middle Office functions.
   • Strategic partnership – Asset Managers are putting increasing emphasis on providers who are dedicated to supporting both present and future needs; TPAs are being selected with an increasing focus on strategic alignment, their capability to enable enterprise data solutions, the strength of their front-to-back servicing models, and their ability to service the client’s products, services and geographies
   • Lower marginal cost of operations and change – cost reduction opportunities can be found across both internal and vendor spending through system consolidation and in managing a single change agenda with one provider globally
   • Simplified oversight and governance – minimizing the burden of oversight with a single point of contact who understands your business allows firms to optimize and streamline the governance frameworks
   • Focus on value differentiators – adopting a streamlined outsourcing model reduces firm resources allocated to table-stake activities and processes, allowing for a sharper focus on firm-specific, value-add differentiators and innovation

4. Enterprise Platform
   Based on Alpha’s Global Operations Survey, 66% of firms either currently operate a full Enterprise Platform model (39%) or are considering moving to a full Enterprise Platform model in the next 0-3 years (27%). Perceived challenges and benefits of Enterprise Platforms remain conflicted; firms note the loss of some flexibility, but many see the benefit as achieving standardization.
   • Improve operational efficiency – the biggest driver for respondents interested in adopting an Enterprise Platform based on the Alpha Global Operations Survey (34%); consolidated data in a single system supports enhances efficiency of operational processes such as reconciliation, reporting, and compliance by reducing manual manipulation, minimizing human errors and enabling faster processing speed
   • Better risk management – reduction of manual processes and risk of error, improving operational risk landscape
   • Scalability and flexibility – designed to scale with the growth of asset managers, accommodating increasing volumes of data and transactions
   • Technology and innovation – tech or outsource vendors’ own platform updates incorporate the latest technological advancements, regulatory changes, and industry best practices, minimizing asset manager’s technical load while enabling direct access to cutting-edge tools and features that help asset managers stay competitive in a rapidly evolving market

Significant challenges need to be overcome, and addressing these challenges can often involve complex, multi-year programs.

• Multiple Order Management Systems (OMS) – many asset managers have a split OMS model depending on asset classes or jurisdictions, requiring them to manage multiple securities masters, data dictionaries, varying availability of data
• Very few ‘truly’ global service providers – especially for APAC and LATAM markets
• Gaps in specialist knowledge / service offerings – ‘Traditional’ outsourced Middle Office providers can have gaps either in capability, depth of knowledge, or both, particularly when it comes to Alternative asset classes; some service providers are exploring strategic partnerships with specialized TPAs to address these gaps
• Cultural alignment and regional differences – in an insourced model, consolidation will often involve merging teams and departments that may have varying working practices and cultural nuances. Building trust and preventing protectionism between regions are crucial – which is discussed in more detail in Alpha’s article: ‘Getting to a global outsourced middle office’
• Inability to meet requirements – with increasing standardization comes a risk that the operating model becomes static and less able to respond to business requirements, with 75% of respondents in an Alpha survey highlighting this as a key concern

Alpha FMC has a wealth of experience helping clients make sense of their outsourcing models across the Front, Middle, and Back Office. Our Operations Practice has a proven track record of successfully identifying and realizing benefits from global operating models quickly, pragmatically, and sustainably. If you would like to find out more about how Alpha can help, contact the team here.