05 Apr 2019

The Impact of a Merger on the Back Office

Securities Services
To ensure a successful merger, it’s important that functions and workflows are mapped to a defined future state.


Bringing together two organizations inevitably means combining two operational teams. The amount of work involved depends on how much overlap there is between the two firms’ operations and how much each firm has outsourced. To ensure a successful merger, it’s important that functions and workflows are mapped to a defined future state.

Prioritize Your Operational Transitions

Prioritizing operational areas for transition will be different for each asset manager and highly dependent on their unique processes, related asset classes, and systems’ capabilities. However, more complex processes with a higher dependency on fixed infrastructure generally take longer to transition. Other complicated processes such as the Investment Book of Record (IBOR), accounting functions, and regulatory reporting that occur at fixed intervals may need to be addressed early on. Trade matching and settlement could come in later migration tranches. Front-office trading and execution processes can take relatively less time to integrate, owing to a greater likeliness that some common technology and platforms are shared between the consolidating firms.

Early in the consolidation process, firms are should prioritize reviewing operational considerations that will impact the front office on day one. For example, reviewing client agreements can uncover that the simple yet fundamental process of billing may differ between firms if one bills in arrears and the other in advance. Certain customer agreements may dictate extensive advance notice for these types of transitions, meaning firms will want to act quickly to enact these changes.

Other operational aspects can also follow in prioritization. Standalone components of the middle office can be consolidated incrementally, offering an opportunity to evaluate if the newly-formed firm should continue to retain specific middle-office functions, or should consider outsourcing them to a provider. Through this assessment, firms might find that while incumbent operational service providers were well-positioned to serve a single firm, they are not always able to adapt to the demands and growth strategy of the consolidated organization, necessitating consideration of new partners.

Consolidate Processes to Create Cost Efficiencies

Regardless of where an operational function fits into a prioritized timeline, firms are likely to benefit from focusing their efforts on identifying and centralizing duplicate horizontal functions that can be consolidated to create new cost efficiencies. Processes such as trade confirmations, corporate actions, and fund administration are good candidates for operational issues that can be moved to a single, firm-wide utility function. These efforts can also identify new candidates for automation technologies or straight-through processes, uncovering cost efficiencies and reducing manual errors in routine tasks.

Some operational functions may best be left running in parallel — this can be due to asset, product, or strategy differences between the firms merging. For example, Exchange-Traded Fund (ETF) servicing poses different operational requirements from traditional mutual funds. As IBOR fluctuates in the ETF share creation and redemption processes, the portfolio must be reconciled, accounted for, and priced more frequently. This may not be scalable—or even required—for other funds, and firms may not realize any real advantage of consolidating these operational functions.

Asset managers that are embarking on consolidating their businesses need the ability to think globally but also to act locally. A number of functions can be shared across the firm, but tasks that involve localized expertise—like navigating regulatory differences across jurisdictions—require extra consideration.
Brian Ovaert, Global Head Operations, Securities Services, Citi
Brian OvaertCo-Head Securities Services Operations & Technology, Securities Services, Citi

Think Global but Act Local

A thorough workstream mapping for all operational processes is essential to understand where consolidation could actually constrain productivity. However, while global governance and oversight for these functions can bring standardized approaches, regionalized experts are likely needed to tailor specific client responses and reporting. Local market regulations will drive nuances between certain processes. Many local regulators have outsourcing regimes that dictate what activity can be done out of the jurisdiction and what level of oversight is needed to monitor any outsourcing. Importantly, these regimes usually consider work done in firms’ other offices as outsourcing. As a result, firms will need to ensure that they have the right level of local substance as well as the appropriate outsourcing governance in place.

Key Questions to Consider

Operational failures can lead to gaps in client service, leaving transitioning clients at risk and potentially damaging the brand of a newly aligned firm. Here are three key issues executive leadership should consider:

  • Which operational functions can merge horizontally and be centralized between firms?
  • Which new products or services bring operational complexities?
  • Who will manage the transition of each workflow at both an executive and tactical level?
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