Outsourcing Data Management and Performance Measurement to Minimize Operational Risk

Jamie Verrengia
Senior Vice President
DST Global Solutions

Guest Contributor: Jamie Verrengia, Senior Vice President at DST Global Solutions & Arthur Fryar, Global Product Manager – Investment Performance, Attribution & Data Management Solutions, DST Global Solutions

The importance of a firm’s performance measurement team, from the output they produce, to their ability to interpret results, is growing at a rapid pace under today’s intensifying regulatory environment and crowded, competitive landscape. For many, the performance measurement department has evolved into the central “hub” of their organization; where mission critical data management, analysis and performance reporting takes place.  This “hub” is not only responsible for translating investment data into meaningful results but also synchronizing and aggregating data coming from various sources.  There is enormous pressure to preserve data integrity at the source, crunch performance calculations and generate reports to ensure that the investment operation is consistent with mandates and respond to an endless queue of ad hoc requests.  Without trusted data and a data management process that supports process efficiency as an underpinning, the performance measurement operation can spend countless hours trapped aggregating and auditing data from many disparate sources. The optimal solution is to have access to an environment where the data view is comprehensive, homogenous and holistic to meet the internal and external demands for oversight of the investment process. Efficient and intelligent aggregation, coupled with dynamic access to data, can ensure the best use of time, resources and systems and significantly reduce the risks and cost inherent in many existing processes. In today’s resource strained environment, it may be time to consider outsourcing a performance system that can marry critical data management processes with larger performance measurement and reporting requirements.

The role and responsibility of the middle office

Arthur Fryar
Global Product Manager
DST Global Solutions

Performance measurement has long been synonymous with the term “middle office”. When looking at an investment firm and the trading, management and investment process, the criticality of having a sound and efficient “middle” is glaring. The performance area has long been the go-to place for any type of request that even remotely involves a rate of return. From the front to back office, compliance, client reporting, dedicated risk departments, external third party processes and internal requests, each is an input and/or output in one form or another to the performance measurement and analytics figures being produced by the performance team. And while the performance team may sit in “middle” of the investment process, the data they manufacture is often not consumed until the “end”, manifested as a rate of return and other analytic figures in client reports, manager compensation and fee calculation, marketing material and fact sheets to name a few. For these reasons, requests for clarification and additional detail regarding any of the previously mentioned channels will most often come directly to the performance area. These types of requests typically involve much more than basic performance data, or will involve performance data held and/or managed outside of the firm’s performance system. Effective, efficient and integrated access to externally managed portfolios, custodian feeds, countless forms of market data, and many other disparate data source are all requirements of today’s middle office and performance teams.

Operational risk

The requests for aggregated views of all these disparate data sources typically come solely into the performance area as the return or other analytic figures is often the catalyst for a request in the first place. Inevitably, spreadsheets come into play and now the performance team is collecting all the requisite data and formatting the results in Excel for delivery back to the requesting party. Data aggregation in the middle office is a function of consolidating and bringing together multiple disparate data sources, and then presenting them back to the user in a logical view, via a single access point. The risks associated with the manual handling of data, and depending on a vehicle such as a spreadsheet for the maintenance and delivery of critical, sensitive, and expensive investment information is staggering. While spreadsheets are powerful at manipulating and storing data, they are incredibly vulnerable in the areas of security, scalability, process, control and accountability. And when the results being aggregated in a spreadsheet or other “off-line” format are used regulatory reporting or compliance monitoring, the risks are exponentially magnified.

The solution – data aggregation and performance measurement in the same environment

Realizing that the middle office, and more specifically the performance team, is required to function as a “hub” – aggregating data and responding to multiple requests from a variety of sources – it makes sense that the platform that is producing their investment performance results should also be the same platform that’s capable of presenting these results back to the requesting user. If performance teams are going to have to collate and organize data beyond pure performance results, then they should be using a single tool to do it. Extracting the performance information and then performing the aggregation outside of the performance system simply introduces an additional layer of complexity (and risk) that isn’t necessary.  The solution to avoiding such operational risk may ultimately lie in outsourcing technology that not only provides key performance measurement analytics but is also capable of supporting operational and investment analysis activities beyond just generating returns, and into the world of real data validation.  It’s not a stretch to require that a performance measurement system offer the capacity to digest, aggregate and process data the same way that the performance teams do. After all, a “hub” should have the infrastructure, flexibility and scalability to support the evolving needs of the organization.

Hear more from DST Global Solutions at FTF’s Performance Measurement New York conference on March 13, 2013.  In addition to being a bronze sponsor at the conference, DST Global Solution will present on “Outsourcing Performance Measurement and Risk Management”.