Somewhere there may be an ideal world in which everything happens how, when, where, and why it should happen. Have you ever been there? If you have, let me know where it is because I've spent all my life in the real world. In the real world things rarely happen how, when, where, and why they should happen.
All businesses are made up of multiple business functions, each of which has to operate at an optimal level of capability if the overall business is to be successful. Businesses that operate in the real world experience issues when a misalignment develops between the capabilities of the different business functions. For example, a business that has an excellent sales and marketing function but a weak product/service offering runs the risk of consistently failing to deliver on expectations set during the sales process. On the other hand, a business that has an excellent product/service but a weak business development function runs the risk of losing market share to competitors with inferior offerings.
This misalignment of business function capability is caused by imbalances in the drivers for business change that apply to different business functions, and in the internal priorities allocated to responding to those business drivers. As a result of these imbalances business change programs proceed at different speeds in different parts of the business. And so one or more business functions end up operating at a lower level of capability than other business functions.
In the real world this misalignment in business function capability is unavoidable, but if it is not managed it leads to Business Capability Drag. This is where a business function operating at a level of sub-optimal capability reduces the effectiveness of other business fun ctions that would otherwise operate at optimal capability levels. Thus reducing the effectiveness of the overall business.
When value-creating business functions are affected by Business Capability Drag, the business functions that are perceived as holding them back are put under intense pressure to “catch up” with the rest of the business. This usually results in a tactical approach designed to close the most serious gaps in capability, rather than a strategic approach designed to align the capability levels of the overall business with market practice. And this creates a recurring problem. It takes time to move the capability of a business function to a higher level, and while you are doing it the rest of the business is moving on. So, if all you do is move the capability of a business function to a level at which it should have been operating in the past, then you end up playing a continuous game of catch-up without ever getting the capability level to where it needs to be.
This phenomenon of Business Capability Drag is a particular issue in asset management organizations. This is because of the front office, middle office and back office mindset that has traditionally existed in our industry. Business functions in asset management organizations are compartmentalized and typically assigned to one of the three offices: front, middle and back. In itself that shouldn't be a major problem, but middle office and back office functions in asset management organizations have traditionally been viewed as business costs rather than business enablers. Consequently, they are rarely at the top of the priority list when the business change budget is allocated to strategic initiatives. And I am sure that many of you reading this are familiar with the perception that often exists in asset management organizations that the support provided to investment management teams by middle office and back office functions is never as good as it needs to be.
Business Capability Drag is the main reason why we see so much manual processing in asset management organizations, compared to other industry sectors. Middle office and back office functions are caught in a continuous cycle of catching up with the front office. While waiting for these functions to catch up and implement optimal business processes and system solutions, the business resorts to manual processing to plug the capability gap. But as catching up is a continuous process, the manual processing is never fully eradicated.
This issue has been exacerbated over the past five years by the focus on implementing regulatory change programs. With the change budget concentrated on supporting regulatory change, there has been insufficient focus on capability enhancement in the middle office and back office.
There are, however, signs that this is changing. Investors are now much more demanding in terms of their expectations of transparency and information about their investments. Asset management organizations are beginning to realize that middle office and back office functions are much more than business costs, they are business enablers because they can enrich the value delivered by investment teams. I believe that Business Capability Drag will become less of an issue in asset management organizations in the future, as the gap between the capability levels of front office, middle office and back office functions narrows, and middle office and back office functions play a more proactive role in the overall business.
But one thing I have learned about the asset management industry is that it is not homogeneous. Our industry is a complex one, with significant differences arising across geographies, type of organizations, and size of organizations. So, while there are some asset management organizations in which all business functions operate at the optimal level of capability, there are many in which they don’t. And while there are some in which capability gaps are being addressed as strategic initiatives, there are still many in which they are not.
Which type of organization do you work for?
In keeping with this theme, Peter Ellis will moderate an upcoming virtual roundtable hosted by BI-SAM. The webinar: How to Better Utilize Investment Performance Analytics to Demonstrate Alpha will be held on Sept. 30 at 11 a.m. ET/4 p.m. BST. Register today to join the discussion*.