How to Establish Benchmarks for Your Investment Management Operations

March 28, 2019 - Doug Moromisato

“You can’t manage what you don’t measure.” – Peter Drucker

Benchmarking for investment management operations is largely a battle waged internally.

Unless rival companies are publicly traded, there is otherwise little data available to compare operational performance with competitors.

So when an operational leader wants to know how well he/she is performing, they have to rely on their own stats while following trends that may translate to better performance.

Benchmarking is one of those ways to show where leaders in the organization stand; the numbers don’t lie.

Ways to Establish Operational Benchmarks

Look at Revenue Generated Per Employee

One way to benchmark operational efficiency is to take the firm’s annual revenue and divide it by the total number of employees. Calculate these numbers for previous years, and see if conclusions can be drawn.

For publicly traded companies that are competitors, the firm’s revenue and number of employees are also available for analysis.

While this metric is a broad indicator for how well a firm is doing overall, the revenue per employee formula has its limitations.

For one thing, the revenue per employee is a lagging indicator, meaning the numbers can only be known after company activity has taken place. Real-time analysis is less likely.

The other reason these numbers aren’t always reliable is because there may have been a surge in hiring one year, so the revenue per employee ratio will be quite low. Perhaps a year or two later, the new hires will prove their value (or not), resulting in more (or less) sales generation or better (or worse) investment performance. At that point, revenue per employee numbers will be more reflective of the company’s overall well-being.

And when looking at these numbers for public companies, one does not necessarily know the backstory.

Compare Operations with a Previous COO’s/Director’s

COOs and operations directors can gauge how well they’re doing, relatively speaking, by comparing themselves to their predecessors at current and previous organizations.

Whether they have been promoted from within or hired from the outside, operations leaders can inquire on the performance of those before them.

Reporting error rates, turnover rates, and costs are quantifiable, thus metrics on which to establish a benchmark.

There are also non-quantifiable considerations for benchmarking when assessing the previous operational regime:

Compare One’s Operations with Previous Time Periods

Sometimes what happens is a COO or operating director has been the original leader of operations since the firm’s founding, and they have no predecessor in the organization to compare to.

Instead, they must look at their own track record. Forget benchmarks to compare with others; they are competing with themselves.

They should seriously ask themselves if they really think they’re doing the best job they can.

They should also look back one year, two years, five years, or more and ask, “What’s changed?”

Some of these questions have answers with measurable results (costs, turnover rates, number of errors). In this case, a COO or operations director can look at past performance and set reasonable and quantifiable targets to improve on within a given time period.

Non-measurable aspects like more effective hiring and training programs, and having good communication skills, will positively affect the metrics. Operational costs, reporting errors, and turnover rates will all decrease.

Follow the Trends in the Financial Services Industry

Despite limited resources to compare one’s own operations with another specific firm, one solution is to view annual reports from the big consulting firms, in addition to content from other industry thought leaders.

Although these sources may not mention the actions of specific companies, the reports can include surveys that reflect the practices and sentiments of other investment firms.

In addition, the reports will have expert recommendations on how to run a better operation, especially during the pandemic. Whether it’s moving from a legacy system to a newer and cloud-based one or outsourcing the middle-offices and back-offices to reduce costs.

Perhaps organizational leaders are already following those recommendations, confirming their operations is on the right path. If not, then it’s a chance to improve and establish a benchmark on which to improve.

Benchmarking a Must

In order to establish benchmarks for investment management operations, COOs must consider revenue per employee ratios, compare themselves with previous leaders and time periods, and if they want to compare themselves with other firms, they can look at data for publicly traded companies as well as research the industry trends.

In essence, operational benchmarking is a race against a firm’s own self.

And as long as the COO does their job to contribute to higher margins and better middle- and back-office performance, then they are doing their job well.