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Article12 Jul 2021

The Challenges and Opportunities of Merging Operations

A major challenge of any asset manager merger is combining the front-office operations and back-office functions to create an operating model that can support the firms' ambitions.

In 2017, Standard Life and Aberdeen Asset Management agreed to merge, creating the largest listed UK asset manager with £660 billion asset under management.
Mike Tumilty, Global Chief Operating Officer at abrdn, discusses the challenges he faced bringing the two firms' operations together and shares insight on what firms approaching a merger should consider when combining operations.
 

What was your first step in approaching the merger?

Before we could even think about the future we needed to understand of the current state of both organizations. So, due diligence was critical. We were fortunate that because this was a corporate transaction we had a wealth of information, which gave us a clear view of the various operational and technical infrastructures.

It turned out that we had a laundry list of one or more of everything. For example, there were several different instances of the same systems, three different middle office providers, and multiple custodians. We had the additional challenge of a third technical infrastructure from a previous merger that hadn’t been consolidated yet. So, we were really merging two companies but three operating models.  

Once we had the complete picture of the current state, the next step was to create our blueprint for what the future state should look like. We looked at this holistically across both organizations and used a strawman approach to work through the multiplicity of the operations and technical infrastructures, to come up with a best of breed approach. We also looked to identify application and services that were set to be rendered obsolete, to avoid further investment in those areas.

The blueprint was critical because it laid out the full scope of the project, from front to middle to back office, and allowed us to get a clearer picture of how to move from A to B with our project teams while trying not to drop the proverbial ball along the way.

When creating your target operating model, how did you draw the line on what should be outsourced and what should be kept in-house?

Finding the right balance between insourcing and outsourcing is a challenge for everyone in the industry, regardless of consolidation. In our case, both organizations were already heavily reliant on outsourcing but we were more conservative. For example, Aberdeen had outsourced performance measurement but historically we hadn’t done so. However, after conversations with the outsourced providers, we re-evaluated things and ultimately got comfortable with outsourcing performance measurement. So, the merger was a catalyst for us to reconsider where we drew the line on insource vs outsource.

I think that it’s important when going through a merger that people keep an open mind on things like outsourcing, so they can get the best outcomes for their firm.

Once you had your target operating model in place, how did you approach the project?

Once we had our blueprint, we knew where we wanted to go and it became a matter of figuring out to how to get there. In order to go on this transformation journey, we developed a robust plan and governance structure. We also decided to employ consultants to help us set unbiased, precise selection criteria requirements for third party providers.  The consultants helped to remove inherent bias individuals may have towards their legacy providers and ensure that decision were made against a clear criteria, which was driven by the target operating model.

Even with consultants, it’s still an emotional process because there are going to be winners and losers. You need to work hard to maintain your relationships with your service providers throughout the process.  During the rationalization your service providers are going to be key partners and it’s important not to alienate them.

Avoiding disruptions and understanding the risks that needed to be minimized were key to driving the plan. We needed to ensure we could continue to support the business with minimal disruption. It’s a bit like trying to change a tyre on a moving bus. For us, we started with the services that would have the least impact to the portfolio managers and moved further up the chain as the project progressed. It was also important to have a clear separation of who would be responsible for the daily operations from those dedicated to driving the transformation efforts. This will help to avoid double or triple hatting people for multiple roles. It’s really important to have this definition of roles, otherwise you will run people into the ground.

How important is the human element in a project like this?  

The human element is an immensely important component of the process. One of the benefits of the merger was the consolidation of a well-established resource pool in the operational and technology space. However, that comes with its own challenges because, similar to services providers, a merger ultimately means a consolidation of staff. You have to be very brave and have difficult conversations with people about how their roles may not exist at the end of the journey.

At the onset of the project, it’s important not to focus on cost cutting but retaining experienced professionals for longer periods to mobilize the transformation. There’s a temptation to be macho and to try to cut cost right away, to show you’re making progress. For me, it’s a false economy to cut too soon and to try to work without the right level of expertise. I think you should have a higher run rate at the beginning, which will lead to success and create synergies at the back end. We made the decision early on to retain people for longer and I think this helped to contribute to our overall success.

What advice would you give to someone undertaking a merger?

Doing the legwork in the beginning is invaluable then it’s about being clear in your own head about your design thinking and being able to articulate that into a plan with clear milestones. Stakeholder engagement is also really important. In a project like this there are going to be a myriad of stakeholders both internally, like your senior management and the front office, and externally, like boards and regulators. You need to be clear about who are the stakeholders and how you are going to communicate with them and explain when there are the invariable bumps in the road. Finally, as I said, people play a major role in the success the project that you need to make sure they are properly engaged and supported. At the end of the day, while the amount of work shouldn’t be underestimated, a merger can be an opportunity to creating the right operating model that can support the business going forward. 

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