October 2020

5 Ways To Improve Back Office Operational Efficiency in 2021

We spoke with leaders in the operational space on what they’re focusing on, from operational resiliency to data-driven decision making, to keep the gears turning, in the new normal of distributed working.

By Chris Peacock, Head of Marketing

We are undoubtedly living in uncertain times. With a second surge in the Coronavirus crisis hitting many global financial centres, institutions need to stay one step ahead.

At Duco, we regularly speak with some of the world’s largest financial firms about their operational pain points – particularly in terms of data accuracy and integrity. What’s clear is that, while robust business continuity plans (BCPs) are in place, the focus is on making sure distributed working can be efficient over the longer term. Possibly indefinitely.

Here are five major trends that the operational leaders in banks and asset managers are looking at to help them survive and thrive in the new normal.

  1. Focus on operational resilience

Operational resilience has been on the radar for regulators and policymakers for a while now. In late 2019, the Financial Conduct Authority (FCA) and Bank of England jointly opened a consultation on building operational resilience for financial institutions. They said:

“Delivering operational resilience requires firms to take decisive and effective actions, for example by replacing outdated or weak infrastructure, increasing systems’ capacity or addressing key person dependencies.”

In the current environment, robust operational resilience is arguably just as important as financial resilience. Accenture, in fact, say they are one and the same in their latest whitepaper.

From a technology point of view, the operational leaders we speak to are tackling this from a number of angles. Crucially they are looking to move quickly from old on-premise technology to flexible cloud-based systems. These are easier to access for distributed teams, do not require onsite maintenance, are far more scalable, and tend to be much easier to manage from a governance perspective.  All key concerns for operational resilience.

Removing manual work is also an important driver.  Again, firms are bringing in flexible technology, able to automate manual processes fast, rather than relying on a patchwork of legacy systems and spreadsheets. 

Firms that are able to adopt this technology quickly will be able to better withstand major disruptive events – as well as increasing operational efficiency.

  1. Harnessing machine learning

Machine learning is already having a significant impact on financial services institutions, and that trend is set to increase. According to the latest Bank of England and FCA report, over 60% of respondents are already using machine learning in some form. The main areas of use are:

  • Anti-money laundering (AML) 
  • Fraud detection
  • Customer-facing applications (eg customer services and marketing)
  • Credit risk management
  • Trade pricing and execution
  • Insurance pricing and underwriting

There is also huge potential for machine learning to automate repetitive, back-office operational processes. Looking at trade reconciliation, for example, firms often need to resort to spreadsheets or manual work due to a lack of industry data standards and poor data quality.

Without the proper tools, institutions struggle to put all reconciliations onto an automated system. However, with the intelligent use of machine learning, operational leaders can now more easily spot trends in data, enabling their teams to identify areas of poor data quality (and fix them). Machine learning also means firms can more easily apply industry best practices, so business processes can be set up and automated dramatically quicker than ever before.

This is certainly an area to watch, with innovation and improvements to existing solutions happening all the time.

  1. Regulatory agility

According to the 2020 Thompson Reuters Cost of Compliance report, businesses had to deal with 56,624 regulatory alerts in 2019, from more than 1000 regulatory bodies, averaging 217 updates a day. This is up from just ten a day in 2004. No wonder that “Keeping up with regulatory change” was cited as the number one challenge for compliance departments in the coming year.

Trade reporting changes are one of the biggest concerns for back offices. While some regulatory changes have been delayed due to the coronavirus crisis, there is evidence that these are picking up again.

SFTR requirements in Europe have come into force in a staged deployment since April, while the CFTC in the US have also recently finalised new rules for swap data reporting.

The difficulties that come from regulatory change are often down to data. Compiling and consolidating data from many areas of the business is a complex job, particularly considering the different types and formats that the data appears in.

Ensuring data accuracy and integrity throughout the reporting lifecycle is key. Whenever there’s a new regulatory change, operations and IT departments need to work together to build reconciliations to validate the data as it moves through the organisation. As we’ve seen with a few high-profile fines from the FCA recently, the cost of getting this wrong can be high.

Getting data controls in place with inflexible technology takes a huge amount of time and resources.  So, firms are actively looking for ways they can adapt more quickly to change – both in terms of bringing the data together for the reports themselves and ensuring data accuracy going forward.

Once again firms are looking to cloud-based solutions to help here, across areas such as data preparation, data intelligence, automated reporting platforms and data integrity.

  1. Sustainable cost cutting

Unfortunately, in the current environment, the need to cut costs is a reality for most operations departments. This was the case even before the pandemic, but now some are predicting that costs will need to come down by up to 40%.

Using intelligent technology to drive operational efficiency is the only really sustainable way to do this. Legacy on-premise systems and slow, repeatable manual processes are the main areas where firms can make a dramatic difference, by switching to more intelligent modern platforms.

This will not only help to create more efficient, leaner operations, it can also create a sustainable and scalable environment to support further innovation.

While modernising the technological infrastructure will have been on the “to do” list of many operations departments for a while, the current global situation means firms are looking to act now or risk getting left behind.

  1. Big data driven decision making

The amount and complexity of data flooding into operations departments is increasing all the time. However, most of it isn’t used effectively. According to the Harvard Business Review: “On average, less than 50% of structured data is used in making decisions – and less than 1% of an organization’s unstructured data is analysed or used at all.”

Clearly those firms that are able to harness all this data, and generate insights from it, will gain a significant competitive advantage. We have been speaking to buy side firms, for example, who have been able to both automate all their broker reconciliations, and then compile the reconciliation data together into one big data platform.

From there, it’s possible to create comprehensive reports that show which brokers are causing the greatest number of reconciliation breaks and therefore the most operational pain.  They can also see what types of exceptions are the most difficult to solve, or even which investigation teams are the most efficient at resolving the issues.

This is just one example of what we’re seeing in the market, but it’s clear that there’s a great deal of potential here. Firms are looking at how they can turn the massive influx of data to their advantage, rather than it becoming an ever-increasing operational burden.