4 Cost-Cutting Keys for Investment Firms
March 16, 2009
In the face of shrinking assets and shaken investor confidence, investment management firms have seen declining management and performance fees. That has put dramatic pressure on earnings, given that the fund industry is largely a fixed-cost business. How can investment managers shed costs quickly without trading away too much in terms of risk and future growth potential?
Firms looking to save money usually start with low-hanging fruit such as travel budgets, color printing and holiday parties. Headcount is reduced, often through a “peanut butter” approach that spreads the pain evenly across departments. But these actions rarely provide more than a fig leaf for executives who have to explain poor results to increasingly anxious shareholders.
Real change is harder. It demands clear thinking across the business and requires challenging long-cherished notions. Smart cost-reduction relies upon four “levers” that, individually or collectively, can generate significant, sustainable results.
Optimizing Business Processes
While process reengineering has been around for years, a renewed focus on streamlining how work gets done and by whom can still yield benefits. For investment managers, the focus is typically on the middle and back office, where a significant portion of headcount sits. But firms should look at all their processes, including research, investor relations, portfolio management, trading, sales and distribution, and ask some simple questions: How can I minimize low-value activities? Can I redistribute work in more efficient ways? Can I make better use of technology? Can I simplify processes and reduce errors? For example, post-trade reconciliation with brokers and custodians is a leading candidate for centralization and streamlining at investment management firms.
Deloitte has seen growing interest in outsourcing middle- and back-office functions. Service providers--mainly large custodian banks--have been building their capabilities in this area for several years, and have the ability to run many of these functions on behalf of investment management clients. Firms considering this option need to understand the benefits and tradeoffs and be flexible in thinking about the footprint and method of service delivery. These are complex, multi-year partnerships that require different management “muscles” than many firms have developed.
Simplifying the Organization
Every organization is more complex than it needs to be. Firms seeking to simplify their organizations can look at span-of-control, management layers, utilization and productivity of staff, as well as adjusting locations and consolidating pools of similar work.
For most investment firms, compensation is by far the largest cost. Thinking about ways to restructure or defer compensation, align payments to future growth and move work to lower-cost resources can quickly yield large savings.
And don’t overlook opportunities to simplify the business itself. Analyze distribution channels, funds, and client processes, and consider merging or shutting off unprofitable parts of the organization.
Rationalizing Assets, Infrastructure
IT remains one of the highest non-compensation expenses at many firms and can be addressed in a variety of ways. Careful control of technology investments and re-pricing of services to the market can produce rapid results. In our experience, a savings of 40 percent to 60 percent for network infrastructure alone is possible. Going further, simplification of the IT environment, use of virtual infrastructure and outsourcing of technology functions can provide additional savings within 6 to 12 months, or even sooner.
Real estate is an often-overlooked opportunity. Firms can aggressively manage vacant space and revisit their facilities portfolio in a relatively short timeframe, while pursuing alternative workplace strategies and looking more strategically at lower-cost locations over the medium to longer term. Intelligent facilities management can lead to a 20 percent to 50 percent performance improvement in this category.
