In this interview for the Goji Operational Leaders series, we speak to Dan Sharp, a Partner at Sionic, the global management consultancy which specialises in financial services. Having worked in the investments industry for over 16 years, he has gained both practitioner and consulting experience. He specialises in transforming operating models and outsourcing projects, both of which he discusses in this interview.

Given your experience in transforming and outsourcing your clients’ middle offices, what challenges have you encountered and how have you tackled them?

One major challenge is around centralising activities. I’ve frequently noted that middle office investment operations activities aren’t clearly defined and sitting in one team, with pockets either in operations, potentially with portfolio managers, or in other operations teams within the business. It’s imperative to identify the full scope of middle office activities and make sure they are in a clearly defined place.

Alongside that is the completeness of activities. Particularly when they’re decentralised and a bit fragmented, gaps can emerge.

Then there is the clarity of functional boundaries. As you go through the value chain, this often proves to be a challenge. In terms of outsourcing, it is really important to get clarity early in the process, both internally at the asset manager but also with service providers. If not, you risk challenges arising later in the process. It’s particularly true in private markets, where operating models might be less mature, that you might have less clarity on functional boundaries. A good way to mitigate this risk is through lots of engagement with potential suppliers and making sure that this engagement, whether it’s workshops, meetings or calls, is translated into clear outputs and documentation. It then becomes something to refer back to as you go through the process.

When you are considering the transformation of operating models, especially in regards to scalability as private markets continue to grow, what are the frequent issues that you and your clients keep seeing and how are you navigating these?

The first is getting the right people doing the right things. It’s important to make sure that activities are clearly defined and that they have been appropriately allocated to the right people. Without this, it ends up being very inefficient both in terms of the duplication of activities and communication, and the amount of time spent chasing things around an organisation.

The second, perhaps unsurprisingly, would be data. There are challenges around data governance, ownership of data, and making sure it’s available where and when it needs to be. This manifests itself in terms of impact on front office decision making, analytics, and then also the various reporting that is required now to clients, regulators and trustees for asset owners.

In terms of navigating these challenges, a good start is getting the right level of focus internally. A lot of firms, particularly in private markets, have been on an aggressive growth journey over the past few years and so there is a need to step back and look at whether the firm is set up the right way now, given how the business has evolved and where it’s headed. Having the right level of sponsorship up to board level is important. Then, finally, understanding what’s out there in the market, in terms of service providers and technology solutions. Given the commonality of challenges in private markets, solutions are evolving all the time alongside new offerings coming to market. 

Continuing on the theme of data, what are private fund managers doing to contend with the increasing demand for data from investors and regulators? Where are they lagging?

Firms are definitely doing something about it; we are seeing that across the piece. It’s a tricky thing to get right, and we see a couple of different approaches. Some firms are looking at wrapping it into a broader operating model review, so thinking holistically: how do we want to run the business? How does data fit into that? There you start to potentially look at things like some of the emerging front-to-back solutions which wrap in technology services and data together. 

Equally, we have seen a number of other firms that are more focused first on the other elements of an operating model, so getting their technology architecture and organisational design right, and settling on the right outsource boundaries and the right service provider. Then once that platform is mature, they begin looking at a subsequent data project in the context of all those other strategic operating model elements.

In terms of where it’s lagging, the requirements are fundamentally different to public markets. You can’t just go out and source a lot of this data from publicly available sources. As a result, we are seeing new data providers and solutions come to market as well as partnerships between service providers, tech companies, and those providing data. In general, there is a trend towards consolidation and harmonisation across all the various elements, but that’s challenging given the kind of complexity and variability in the underlying data itself.

Data can definitely be a differentiator for managers at an operational level. In some firms, when they get a specific requirement for a piece of analysis from clients and they don’t have the right technology and data solutions, that response is taking days or weeks of people working in Excel. Those kinds of requirements are becoming more frequent and so the ability to minimise time spent responding in a bespoke and manual way means employees can be better focused on value-add activities. Furthermore, if you have that more flexible access to data, then that’s a platform to do more analytics and ultimately improve performance.

“Data can definitely be a differentiator for managers at an operational level.”

Are you seeing fund and asset managers actively seeking out fintechs to solve specific operational challenges? Is technology the answer to these challenges?

Whether firms are actively seeking fintechs or not, it’s difficult to say. However what we are seeing is that they are looking for specific point solutions for certain challenges, and in many cases they may well be what people term as fintech solutions. Certainly in private markets compared to public, we see more of that best of breed approach, having multiple point solutions for different asset classes or different functions, albeit that is against that backdrop of that broader trend to harmonisation and consolidation that I mentioned earlier. The reality is that some of these areas are so specialist that if you go for a broadest of breed approach, you do potentially end up making compromises.

In terms of technology being the answer, I think it’s a very significant component. It will be very difficult, if not impossible, to solve some of these challenges without it. It’s not just the technology though, it’s also about how it’s successfully deployed. It’s about making sure it’s rolled out in the most effective way, integrated and embedded into the organisation.

Compared to other areas of financial services, where are private market firms at in terms of their digital transformation?

I think it’s fair to say when you look at the asset management industry as a whole, it’s lagging behind certain other sectors, partly because of legacy technology and also various other issues. Then within that, private markets are probably less evolved than the public side of the asset management sector. 

There’s been so much growth. There have been many firms that probably didn’t have much private market exposure five, ten, fifteen years ago but it’s now 20-50% of AuM. When firms look at that compared to public markets, they’re starting to try to solve what we talked about before: scalability and robustness. A lot of that comes back to deployment of technology and ability to take out some of that manual processing.

The other side of it, when we think about digitalisation and technology, is the client-facing front-end. When you look at the direction of travel more broadly, in terms of the ability for clients to self-serve data; perform their own analytics; cut data in different ways; and not necessarily rely on periodic preformatted reports defined by the manager, there’s still some way to go, especially on the retail side. However even on the institutional side, firms want data, and the flexibility they want is increasing. There’s more to do from a technology perspective to facilitate this.

Finally, what are your predictions for industry trends in the next year and the future beyond? 

Many of the things we have discussed are evolving all the time and we will continue to see that. A lot of firms are actively trying to make a step change in terms of their operational maturity and make sure that they have scalable, robust operating models to continue this phase of growth. Increasing requirements for data are also not going to go away. We’ve barely talked about ESG but clearly that’s a very relevant megatrend within the industry. It’s not optional, it’s mandatory. When you look at that alongside changing client requirements and potentially changing client base along with regulatory requirements, those data challenges are not going anywhere. Then more broadly in the industry, I think we’re going to see continued consolidation of both asset managers but also, as we have seen, service providers to them.

That leads on to my last point, which is the evolution of the service provider landscape, be it from an outsourced services or a technology point of view. Given all of these themes, we are going to continue to see new solutions coming to market and it will be really interesting to see them being actively deployed. With all this focus on these challenges, the industry will look quite different in a few years.