The Australian superannuation industry has been placed under tremendous pressure from a variety of directions. In recent years it has suffered countless government inquiries into fees charged to members. As guardians of national wealth, some of this attention is expected. In response, industry funds now have an opportunity to prepare for the future and end the fees debate by transforming their operating models to be as flexible and efficient as possible.
The industry is in a phase where costs have been pushed up dramatically. The expectation is that they will continue to rise given that the pension stage of a super fund’s cycle is far more complex than the accumulation stage.
The political and regulatory conditions mean that funds can hardly address these rising complexity-related costs at the expense of existing members. The solution will have to be substantial: mere tweaking around the edges will not be enough to meet rising costs, maintain capacity, and cut fees substantially (by say, 10 basis points).
The traditional model of cost-cutting has typically revolved around outsourcing and squeezing suppliers. But these two tactics alone are unlikely to cut the mustard given the scale of the challenge funds face. For a start, outsourcing is no longer the panacea it was once considered to be due to the new-found regulatory focus on oversight. And there is a hard limit in terms of how much can be saved via this route. Similarly, one can only squeeze one’s suppliers so far, and this comes with the downside risk of harming the quality of these services – not an acceptable risk in the current regulatory and member environment.
Rather than looking outwards at suppliers and outsourcers, super funds need to look inwards at the efficiency of their business processes and whether they are still adequate for the size of the operation in question and if they are able to cater for new products.
Technology will be key. Automation of processes has the potential to dramatically cut costs without – and this is crucial – reducing capacity or harming performance and service levels. When done correctly, automation can cut costs while increasing capacity, performance, and service levels. Valuable human resources need to be freed to manage the future instead of working on manually redundant and repetitive tasks.
The problem is that the entire funds industry – and industry funds by extension – has been plagued by endless spreadsheets and cumbersome, inefficient, manual processes from top to bottom. While this may suit (or at least not be a major barrier for) smaller funds in their infancy, it has created real difficulties in terms of scalability as funds have grown to their (in some cases) current gargantuan sizes. As volume expands faster than surface area, so too have inefficiencies multiplied a rate disproportionate to growth in AUM.
Technology and automation can help give organisations autonomy over their operating model and the removal of redundant manual task instantly increases efficiency. It gives the super fund visibility and control over their data. New products are essentially the manipulation and management of data. Control the data and you control your destiny. Finally the right technology approach will allow you to modify the operating model without having to reinvest in the infrastructure.
Automation also carries benefits for funds looking to acquire scale. As things stand, the myriad of inefficient, spreadsheet-centric processes across the industry renders most funds relatively opaque, making it difficult to assess the strategic value of proposed deals. Combined with the sheer difficulty of integrating inefficient, idiosyncratic manual processes, this is a huge barrier to consolidation at present.
The technology argument has long been used by outsourcers as a justification for their business model. ‘You need us’, the line runs, ‘only we can deliver the efficiencies you need as only we have the technology to achieve this. It would be too expensive for you to implement the technology in-house’. While this argument may have applied ten years ago, it no longer holds water. The cost of running technology has fallen dramatically and the operational impact has increased. No longer do organisations require floors full of blinking, flashing hardware and expensive support staff. Managed hosted services come at a fraction of the cost.
There are many analogies that could be drawn here that underscore the need to recognise the moment for change. Technology can bring efficiency while increasing capacity and quality. We are now at the point where the technology exists for operations to become more efficient and cannot be ignored for those funds wishing to control their destiny.
Enrique Gonzalez is regional product manager APAC at Milestone Group