Fund Administration in Europe.

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Fund Administration in Europe.
Deloitte Touche House Thursday, 4 December 2008
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Agenda.IntroductionRonan Nolan Head of
Investment Management Practice2008 Survey
ResultsBrian Forrester Partner, Investment
Management Managing in a DownturnDerek
Moriarty Partner, Financial Services QA
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Fund Administration in Europe.2008 Survey
ResultsBrian Forrester, Partner, Investment
Management 4 December 2008
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Contents

• About the Survey
• The Credit Crunch
• Future Marketplace
• Challenges and Issues
• Final Thoughts

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Why was the survey conducted?

• In 2006 and 2007 Deloitte carried out a survey of
  the Fund Administration community in Ireland, in
  order to obtain an understanding of the key
  business issues facing the industry
• This year, the survey was extended to include
  fund administrators in Luxembourg and the Channel
  islands (Jersey, Guernsey and the Isle of Man)
• The results have been reported on a Europe wide
  basis, with jurisdictional differences being
  highlighted where appropriate
• The survey was carried out in November 2008

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Who participated in the survey?

• We had responses from 63 companies providing fund
  administration services across Europe
• The respondent Fund Administrators currently
  service nearly 4 trillion of assets which we
  believe represents approximately 70 of the total
  industry in those countries
• Summary of various sources
• Comments contained in the findings and analysis
  that follows have not been attributed to survey
  participants to maintain confidentiality
• Not all participants answered all questions
• No part of this report may be reproduced or
  distributed without the prior written permission
  of Deloitte Touche

1485bn
3873bn
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Asset profile of respondents

• It is difficult to obtain consistent data on
  assets under administration (AUA) in each
  country, and the table opposite reflects the mix
  of assets between alternative and traditional
  assets as confirmed by respondents
• This demonstrates clearly that the Channel
  Islands administration companies focus almost
  exclusively on alternative asset classes
• Luxembourg and Ireland have a large base in
  traditional assets, although alternative assets
  have been growing in both. The responses from
  Ireland in particular conflict with data provided
  by the IFIA which suggests alternative assets
  account for approximately 60 of the total

Source IFIA Statistics September 2008
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Alternative assets mix

• The mix of alternative assets shows a clear
  distinction between jurisdiction
• The vast majority of AUA in Ireland are in hedge
  funds and fund of funds
• In Luxembourg the main asset class is fund of
  funds, and overall there is a greater mix of
  product
• The Isle of Man also has a good mix of product,
  whilst Guernsey and Jersey are dominated by
  Private Equity and Property Assets
• The mix of product has evolved over time and is a
  combination of the nature of expertise available
  and the local investment products

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Contents

• About the Survey
• The Credit Crunch
• Future Marketplace
• Challenges Issues
• Final Thoughts

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What a difference a year makes

• In October 2007 we asked administrators in
  Ireland Do you believe the credit crunch will
  have a material impact on your business in the
  short term and long term. Responses were as
  follows-
• 12 months on it is clear that the impact of the
  credit crunch has indeed been significant. The
  administrators who responded in 2007 were not
  alone in their prediction last year, and the pace
  and impact of the credit crunch has been far more
  severe than most could have anticipated

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Direct Impact

• We asked participants how the impact of the
  credit crunch has been felt
• By a clear margin the most significant impact
  has been the reduction in AUA which impacts
  directly on fees earned
• This is also impacted by the No. 4 issue of a
  reduction in new funds launching
• There has been a move towards liquid investments
  in money market funds which typically earn lower
  basis point fees
• Margins already under pressure due to rising
  costs are now being squeezed even further
• Managing liquidity issues (redemption gates, lock
  ups, sidepockets) is the number 2 issue. This
  can be very time consuming
• The approach to investment valuation is also a
  significant issue

No.1
No.2
No.3
No.4
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Reduction in New Hires

• 83 of respondents noted that their head count
  plans had changed
• For an industry that has traditionally been a
  heavy recruiter of graduates and experienced
  resources, these statistics will be of concern in
  the wider community as a recessionary period is
  entered
• Not only is there a significant decrease in
  expected hires, 14 of the 63 respondents stated
  that they were looking at redundancy and
  redeployment programmes. This is spread across
  all jurisdictions
• It is clear that industry will have to find
  different ways to service clients without adding
  head count

16.9
83.1
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Contents

• About the Survey
• The Credit Crunch
• Future Marketplace
• Challenges Issues
• Final Thoughts

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The Future Marketplace
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Outlook for Growth

• In 2008, 65 of respondents expect their revenue
  to fall or grow by less than 10
• In 2009 this increases to 70
• This compares with the predictions of the 2007
  Ireland survey where 75 expected growth greater
  than 20 in 2008 and 2009
• However, 72 of respondents expect revenue growth
  in 2008 and 76 expect growth in 2009 which shows
  a certain resilience in the industry in the face
  of significant challenges

12.9
37.1
21.4
28.6
12.7
16.9
46.5
23.9
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Business Confidence

• We asked respondents whether they were positive
  or negative over their outlook for their business
  over the short and longer term
• In the short term 44 of respondents had a
  pessimistic view
• On a 2 year view however 83 of respondents have
  an optimistic view
• This timeframe is consistent with most
  commentators

25.4
43.7
31.0
1.4
15.5
83.1
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Contents

• About the Survey
• The Credit Crunch
• Future Marketplace
• Challenges Issues
• Final Thoughts

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Update on key issues arising from 2007 Ireland
survey

• We asked respondents to consider whether the key
  findings from the 2007 Ireland survey were likely
  to be more or less of an issue in 2008
• 84 of respondents said that cost containment
  would be more of an issue
• 67 felt that maintaining service quality was
  more of an issue
• Only 29 felt that managing internal expansion
  will be more significant
• IT enhancements remains a key issue to keep pace
  with the industry

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Margin Pressure Key Issues arising 2008
Market Forces
Margin Pressures
Reduced Income
High Fixed Costs
Maintain Service Quality
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The Need for Change

• The landscape is changing and businesses need to
  move with the times
• Re-evaluate service offerings and align
  operations with client needs
• Review individual client margins. Assets dont
  always equal profit
• Strategic client de-selection
• Resources
• Productivity Improvement opportunity to
  implement changes on the long finger
• 71 already implemented process standardisation
• 46 in the process of implementing improved work
  practices
• They say you should invest in a downturn..

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Expected Cost Savings

• 63 of respondents expect annual costs savings in
  the region of 6-15
• In the current market of falling assets is this
  enough to maintain profitability?
• Need to balance short term cost reduction with
  the expected upturn in 2 years

Short Term
Long Term
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The People Agenda

• It is interesting to note that despite the
  downturn experienced hire recruitment remains the
  number one HR challenge. Good people are still
  hard to find!
• Strategic hiring
• This is closely followed by retention, although
  attrition levels expected to fall
• Increasing compensation is still an important
  challenge, although less so that in previous
  years
• 14 respondents noted redundancy and redeployment
  as a key issue

No.1
No.2
No.3
No.4
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Outlook for Attrition Levels

• The industry has suffered from high levels of
  staff turnover in recent years
• 85 of respondents expect attrition levels to
  stay the same or reduce in 2008, rising to 87 in
  2009
• Reduced attrition should allow for higher levels
  of productivity
• Every cloud has a silver lining!

14.7
52.9
32.4
13.1
44.3
42.6
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Outlook for Offshoring/Outsourcing

• Both outsourcing and offshoring are expected to
  increase in the future
• Evolution towards Global Operating Model
• 78 of respondents have already started
  offshoring
• Main driver for outsourcing is to deliver cost
  savings
• Procurement not strategic mindset
• 70 of organisations who have outsourced
  operations believe they could be achieving more
  from their outsourcing arrangements

4.3
50.7
44.9
7.5
55.2
37.3
Source Strategic Outsourcing for Success,
Deloitte 2008
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Use of systems

• The use of specialist 3rd party systems are
  prevalent across the industry
• 85 of respondents use a third party fund
  accounting platform
• 67 of respondents intend to make significant
  system improvements in the next year

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Contents

• About the Survey
• The Credit Crunch
• Future Marketplace
• Challenges and Issues
• Final Thoughts

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Final Thoughts

• The market place is different to 12 months ago.
  The impact of the credit crunch was far more
  severe than predicted, and the future for the
  fund administration industry is uncertain. All
  European jurisdictions are feeling the pinch and
  short term sentiment is negative.
• In recent years the alternative asset classes
  have grown faster than traditional asset classes
  a situation that is predicted to reverse.
  Administrators who have invested in people and
  systems to support growth in the alternative
  space may need to re-assess.
• Falling revenues have led to significant pressure
  on margins which in turn is requiring a
  significant focus on cost. Headcount is under
  pressure, and a number of redundancy programs
  have been announced. This is likely to increase
  in the short term.
• Falling revenue does not always lead to a falling
  workload, and the reduced workforce will need to
  maintain the same service levels as previously.
  This will require administrators to look at
  process improvements to increase operating
  efficiency.
• A number of operational projects have been
  deferred in recent years owing to client demands.
  The downturn may allow administrators to
  undertake some of the improvements that are
  necessary, and be better positioned when the
  upturn comes.
• But..on a 2 year horizon administrators are
  positive about their prospects, which suggests
  the above challenges can be overcome.

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Fund Administration in Europe.Managing in a
DownturnDerek Moriarty, Partner, Financial
Services4th December 2008
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Recap The Future Marketplace?
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Need to balance strategic with tactical
initiatives
The Nature of Enterprise Effectiveness
Tactical Improvements
Strategic Redefinition
Operational Efficiency

• Platform rationalisation

Streamlining the Cost Base

• Business Scope (market / customer choices)

• Off shoring

Creating a low cost Operating Model

• Reengineering

• Location rationalisation

Increasing benefits sustainability

• Leverage lower cost locations
• Remove bespoke services (unless cost to serve can
  be justified)

Quick Wins

• Simplify standard processes
• Reduce error rates (six sigma Lean techniques)

• Process improvements,
• ( e.g. activity reduction)

• Strategic sourcing
• (e.g. outsource IT development)
• Reduce headcount and increase span of control

• Policies procedures
• (e.g. corporate expense reduction)
• Known inefficiencies / low value tasks
• Recruitment freeze
• External spend review

Increasing implementation time costs
Key Success Factors

• Establish the cost base
• Apply rigorous process
• Balance timing and scale of benefits

• Ensure senior management commitment
• Engage the business
• Generate savings initiatives (use a variety of
  techniques identify more saving than the target)

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Outline Approach
Phase 1 Establish Baseline and Size Opportunities
Phase 2 Define Improvement Recommendations and
Develop High-level Action Plans
Phase 3 Implement Action Plans
High-level Action Plans for Key Areas
Recommendations for Prioritised Opportunities
Opportunity Assessment
Performance Mgmt, Metrics Tools
Baseline Cost Model
Quantified Savings and Costs
Confirmed Change Management Plan
Service Delivery Model Analysis
Prioritised Opportunities
Immediate Improvement Opportunities
Project Launch Workshop
Opportunity Gating Process
Executive Dashboard
Savings Tracker
Detailed Implementation Action Plans
Benchmarking
Phase 1
Phase 2
Phase 3
- Opportunity assessment - Opportunity
prioritisation - Launch quick win opportunities
(no regrets) - Anticipated benefits and
costs to achieve - Resource requirements
- Change management and stakeholder alignment
plans - Detailed action plans for
implementation
- Baseline observations - Service delivery
model observations - Benchmarking (internal /
external) - Immediate cost savings
opportunities - Customer retention pipeline
management
Key Output
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