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Simplification: What Is It, and Why Does it Matter?

By removing barriers, integrating applications and eliminating redundancies, simplification makes internal operations less complex and more efficient.

That complexity—which is being driven by a host of factors like the growing use of private markets and the introduction of new digital assets—is acting as a catalyst for operational inefficiencies. Those inefficiencies in turn are driving unnecessary costs. As a result, firms able to keep complexity creep at bay by simplifying and modernizing their internal operations are creating competitive advantages. Going forward, however, simplification won’t be an advantage—it will be a necessity and a strategic imperative.

The operational infrastructure of the typical financial services firm is an amalgamation of hundreds of business applications, each typically developed to meet a specific need at a specific point in time. Often, the front-, middle-, and back-office systems that make up this infrastructure are not the end result of any comprehensive design, but rather the product of mergers and acquisitions completed over the course of decades, or uncoordinated integrations undertaken as applications were replaced or updated.

It’s not hard to see how these fragmentated systems can undermine efficiency. In fact, we all probably have some direct experience with poorly designed or poorly connected business applications that suck time out of our days and just generally make our jobs harder. What is sometimes less apparent is how system fragmentation and increasing complexity can affect broader business structure and performance.

Financial services firms have traditionally managed asset classes and geographies in discrete business units. This model emerged in large part because asset classes and regions were run on independent platforms designed to match their unique characteristics, requirements, and regulations. As execution and trade processing moved from manual to digitized processes, firms developed entire technology ecosystems devoted to meeting the needs of these individual products and regions.

Firms lived with this complexity because their broader enterprises had organically structured themselves to account for the fragmentation, and the technical capabilities required for consolidation were too expensive to contemplate. That is changing. Today, firms are being challenged to do more with less across the entire trade lifecycle, whether on the trading desk or in the settlements function. At the same time, volumes and volatility continue to increase. To reach the pace and scale required to navigate this new environment will require significant efficiency enhancements. Enhancement of that level will be impossible to achieve without some level of system consolidation. 

Strategic concerns are also pushing toward consolidation. Financial services firms are responding to some of the changes in global markets and investor demand by breaking down silos in products and services in offerings to clients. The shift to a multi-asset orientation is an important part of current business and investment strategies—and it’s bumping up against the constraints of internal work processes and technology platforms built for the earlier, fragmented model.

The prime brokerage business provides a clear illustration of the problem. Many prime brokers have transitioned to multi-asset, multi-geography models. But even as desks and staff consolidate their coverage, the systems that support these activities remain separate. As a result, many traders must use different systems to manage orders and execute trades, and operations staff find themselves interacting with multiple and separate middle-office and back-office infrastructures.

That fragmentation has obvious implications for internal efficiency and costs. However, it is also having a real impact on clients. A buy-side firm that uses a “multi-asset” desk for a basket of equities, fixed income and futures trades probably expects seamless multi-asset service. Instead, clients often start receiving affirmations and other trade communications from different systems in different formats. This type of disjointed service can degrade client service and the client experience.

That’s where simplification comes in. Simplification is—simply—the process of streamlining systems. By removing barriers, integrating applications and eliminating redundancies, simplification makes internal operations less complex and more efficient. This can lower costs, speed processes, decrease error rates and improve client service. It can also enhance business performance. Reducing complexity makes both people and systems more fungible. That gives firms much wider leeway to allocate resources and create strategies that meet client needs, drive revenue growth and preserve or even expand margins. Simplification will become even more important in coming years because the process has the potential to enhance data collection, facilitating both data analysis and increasingly advanced artificial intelligence solutions.

Simplification can work on two vectors: horizontally and vertically. Vertical simplification means streamlining and integrating applications across the entire lifecycle, from front- to middle- to back-office, from trade execution to settlement. Horizontal simplification means consolidating processes and systems across asset classes and geographies. That might mean moving from 10 or 20 existing order management systems to one OMS for the entire enterprise.

Of course, none of this is easy. Integrating these systems and streamlining these functions is an incredibly complex challenge. That’s why simplification is almost always connected to “modernization,” or the adoption of sophisticated technology solutions and advanced design that reduce the execution risk of the projects. That’s also why simplification is increasingly viewed through the lens of evolution, rather than revolution, with the transformation achieved through a series of steps, rather than through a single event.

In this series, we take a deeper look at how companies can use simplification to enhance business performance. In our next edition, we’ll explore the concepts of horizontal and vertical simplification, examining the techniques and strategies financial service firms are using to simplify across these two vectors, and attempting to quantify the benefits they are achieving. Next, we’ll explore the concept of modernization: How are companies upgrading their systems and processes in order to successfully simplify? In our final piece, we will turn to data, and discuss why simplification will be a key strategic priority for financial service firms in the new era of data analytics and artificial intelligence.

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