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Investment Managers – Need For Operational Alpha & Operational Beta?

Asset managers continue to face challenges around fee compression, and are seeing an increasing trend towards the need for new low-cost products and growth in ESG and private markets.

Operational workflows that are not optimized for efficiency and the continued use of legacy technology will increase expenses for the firm and thus difficult to stay competitive for the long-term.

Optimized operational workflows using newer technology is one way to describe ‘Operational Alpha’ (OA) – a term often used by Northern Trust in the asset management area.

Options to improve operational efficiency may include outsourcing of most processes to service providers and potentially lose key differentiation among peers or to outsource non-core operational components and use newer technologies for just the core operational processes, including data management.

The goal should be to increase Operational Alpha against so called ‘Operational Beta’ (OB) – similar to market beta for securities. In the absence of standard data available for OB – firms can measure themselves every year against key factors affecting this beta, such as total tech spend vs AUM key factors, manual operational touch points, etc to help identify areas to increase operational alpha.

Maybe in the future, investors/regulators will require firms to report on operational alpha and beta to quantify firms’ operational risks.

Given that ‘DATA’ is one of keys to a firms long-term success in the new economy – Building a centralized Data Management framework, Standardizing Operational Processes and using a technical architecture that allows for ‘Pay Per Use’ operating model will be essential to increasing Operational Alpha and position the firm for long-term success.




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