STP as First Step Toward True Innovation
September 8, 2003
What is it with straight-through processing? We've got all kinds of STP magazines, STP conferences and even STP consultants. But didn't the demise of the GSTP and the Global STP Association deliver the final word?
STP just won't go away - or anywhere, for that matter. We have proponents desperate to save STP from being overshadowed by T+1. Other players are quite simply burnt out on the idea. What's going on? Is STP important to our industry, or not?
First, the sell side is a true believer. Although custodians and brokers failed to persuade their customers to achieve STP, the sell side's faith in STP as a necessity is unshaken. They believe it will give them economies of scale and incremental returns on investment. Most importantly, they believe it will give them more direct control of customer operations and make it easier for them to outsource.
Nonetheless, the buy side is not convinced. They either say it's not their problem or that it's a good idea but not vital to business. Some even claim they have never heard of it. But, actually, STP is a synonym for automation, which can dramatically reduce costs and raise benefits. As surprising as it may sound, even the best-in-class buy-side firms sometimes lag the end-to-end efficiency of the top manufacturers and retailers by a decade or more.
Can you imagine if Dell's idea of "wired with suppliers" meant faxing orders over when inventory looked low?
Can you imagine if a GE vice president denied the importance of an entire supply chain and bellowed, "Six Sigma only applies to my supply link"?
Can you imagine if a Federal Express representative responded to a customer's request to trace a package by saying, "We'll call over to Nashville and ask the stock boys if the package is still in the warehouse, or whatever."
Essentially, a portfolio manager is giving the same devil-may-care attitude when they dismiss straight-through processing by saying, "I don't care what the heck happens to that trade once it's done. That's somebody else's problem."
Well, just as Dell, GE and FedEx revolutionized their businesses, the asset management industry's back office is moving forward in the customer's experience. Front- and back-office integration is the defining hallmark of the business icons of our age - and executives in our industry should care about this. Businesses that can achieve or deliver visibility and control of processing operations will be rewarded. STP is the key first step in this proposition.
The most excellent investment management firms have an attitude towards processing that accretes to their sustainable success. Nothing beats a top Morningstar rating. But most firms that have achieved STP have cost and information advantages whether the market is up or down. This enhances their ability to retain clients, to restructure and to benefit as relative investment performance inevitably varies.
What will the world look like when all trades are STP end-to-end? Will the buy side pay no commission or settlement charges? Will the sell side slash their technology budgets? No. Industry has the capacity to invest in technology and the will to invent, create and compete. STP as we call it today is the automation of a sequence of bookkeeping events defined long ago in the paper world. Once we get the information digitized from front to back, we will reorganize it, re-sequence it and invent some new way of doing business. Investors could be moving their own assets around the way our kids move music. Someone will try. We've only just begun.
However, don't count on achieving 100% STP in our lifetimes. We are inventive and most of our new ideas don't fit the old STP standards. And what's more, there are diminishing returns in pursuit of 100% STP.
It should be remembered that the business of investment management extends beyond the activities of securities selection, market timing, distribution, recordkeeping, compliance, customer service and product delivery. We can look at innovation outside our industry by such companies as Dell and Federal Express for a sense of our future. The leading firms of our age suggest that how an enterprise brings its parts together, including suppliers and customers, is a good first step towards innovation and that integration of these parts is well worth paying for.
My own firm enjoys the great pleasure of partnering with several investment management institutions that share this conviction. At the very least, it makes securities processing more fun. At the most, we help firms looking for an edge to get it.
-- Taylor S. Bodman is a partner with Brown Brothers Harriman. He can be reached at: email@example.com
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