As the world continues to battle an international health crisis, this month we wanted to take a look at the topic of process resilience and what this means for alternative asset investors, managers and service providers.
What is process resilience?
Process resilience as a concept arose from software development, and it is a measure of the ability of any process to tolerate faults. Processes can be made fault tolerant by arranging a group of processes, with each member of that group being identical.
The key point here is to decentralise processes which involve a particular individual, and equip a group (or team) to be able to take over any task, at any time. It is this ability that gives an organisation “resilience” – to both external and internal factors.
We can use the same concept when it comes to key workflows for any organisation, but let’s examine some practical examples within an alternative asset manager or investor.
Key workflows for back office
There are several key workflows in the back office, but one of the most time critical ones is processing investor correspondence for calls and distributions. Those GP firms operating an inhouse function to handle these, may be vulnerable to interruptions such as strikes, illness or staff turnover. These firms with an inhouse function typically run a set of informal procedures (informal means = not written down in a codified manual) for data entry and approval. Where there are absences or other inability for assigned persons to do the work, a manager is normally expected to step into the breach. However, even in this simple example, if the manager is covering for the data entry person, then another person is required to step in for the authorisation process where the manager would normally act.
All this makes for a distinct lack of resilience in the process. One can imagine that it would only take one or two investor queries about a management fee calculation in a call notice before the process starts to really get tangled up. An even worse scenario can be imagined, especially in the current atmosphere and expectation of mass illness. Firms without redundancy, and who are highly dependent on individuals, cannot simply expect to be ok with a “work from home” authorisation – what if that person takes ill and needs hospitalisation? The point to bear in mind is that such work practices can come under enormous strain given even a limited set of stress points.
Contrast this with a firm that has outsourced this key workflow. The onus of responsibility for coping with interruptions shifts to the provider. These would be covered under a service level agreement (SLA) under which there would be remedies for late or non-performance of certain tasks. In addition, one can expect a service provider to have quality standards such as ISAE 3402 Type II certification, and documentation such as procedures manuals, business continuity plans and controlled IT environments so that code is released into an appropriate UAT environment and subjected to the usual testing procedures. Already, this type of agreement builds in more resilience than all but the biggest players in the market can manage with an inhouse function – because the outsourcing agreement brings with it clear remedies for situations which arise, whether these are out of the provider’s control or otherwise.
Outsourcing on its own is not a panacea – look under the bonnet
Outsourcing may have clear advantages as mentioned about, but are the protections in an SLA sufficient when faced with situations such as the current coronavirus? Outsourcing alone does not reduce the total quantum of manual labour involved in key fund workflows. For calculations such as carried interest, equalisations, distribution waterfalls – and even back to the calculation of call and distribution amounts per investor – are frequently done manually in this industry, whether by an inhouse team, or by an outsourced provider. Even for a provider with committed SLAs, if there is a preponderance of manual processes that are heavily dependent on certain people, these will still be strained by a general economic problem.
The firms which have adapted to have less manual work and more automation in routine processes will be able to adapt better to dislocations such as employee absenteeism. Such automation and technology needs to be paired with operational templates that define the process for serving the client. Acknowledging that while all members of the team are individuals in their own right, when it comes to a client engagement, each member needs to operate as if the team was a beehive – the processes are defined, the machines are doing calculations so that none of them need to live in a user spreadsheet, each team member can cover for anyone else, and extra resources can be assigned from other teams, having been trained in the same way as all others.
Providers that started life with technology imprinted in their DNA, will find that adapting to a more automated environment gets easier, with progressively more functionality and transparency, and higher levels of customer service because the interaction with the providers’ staff is at a higher, consultative level.
However, firms which started life with technology as an afterthought (the usual “beauty parade” mentality to pick an existing system, rather than thinking of technology holistically) will find it much harder to execute a programme of technological change whilst continuing to meet existing client mandate requirements, and satisfy investor demands for margin and multiples.
The impact of coronavirus
As I write this, the WHO has declared the Covid-19 disease caused by the novel coronavirus to be a pandemic, as the rapidity and communicability of the illness starts to test even the best facilities of the richest countries.
On a webinar I attended last week, it is clear that regulators will not countenance any relaxation of regulatory requirements despite the international health crisis concerning coronavirus. In fact, the UK FCA stated 2 weeks ago that they are stepping up their vigilance on firms’ contingency plans to ensure they can meet a range of scenarios.
A recent article for private equity suggests that fund reporting will come under strain, particularly for portfolio data, the collection of which is envisioned to be hampered by mass illness and employee absence. LPs also will increasingly demand exposure reporting for portfolio companies at higher risk of operational interruption due to coronavirus.
One impact highlighted in the article was improved co-operation between GPs and LPs. Although the trend for greater GP-LP interaction has been brewing for some time, the virus has in fact made the need for greater transparency even more urgent. Service providers, like Linnovate Partners, can play a crucial role in improving transparency, decreasing data friction, and adding a new level of resilience to the mission critical workflows of GPs and LPs.
At Linnovate Partners, we have had no reported cases of coronavirus in our teams, in any office. Partly, this is due to our active management of the situation – rather than wait for official direction, our policies prescribe for employees to “work from home” at the first sign of contagion. Work from home is not as simple as logging into email – all our systems are securely accessed on a unified wide area network (WAN), which replicates the physical presence of an office – right down to the hardware. Secondly, we actively encourage staff to report their health status daily during the pandemic – all staff are required to report a five symptom matrix on a daily basis. Thirdly, we don’t have work deliverables dependent on single persons. Every piece of work, at any stage of progress, can be worked on by a team member with the requisite rights. We take great care and pride that our teams are trained in exactly the same way.
Indeed, even under this cloud, we have managed to win 3 new mandates, with more coming this month. It is a tremendous vindication of our offering, and our business model that helps promote flexibility and resilience that even under great duress like the current situation, GPs are better able to manage their investments and meet the expectations of LPs, and LPs are better able to manage their exposures and data aggregation.