We know it's there, but in many cases the extent and complexity of manual pricing can be significantly under estimated.
If we choose to be complacent by ignoring the elephant in the room and maintaining the status quo, ever increasing volumes of manual pricing have the potential to consume asset management and fund administration pricing teams and, in turn, expose firms to huge risk.
Manual pricing volumes can easily surge unnoticed as the range of investments diversifies and complex price calculations or hard to value securities increase.
Pricing teams commonly have to absorb these increases with interim solutions to their processes as volumes rise. In many cases, these "band aid" solutions become the long-term process as time and technology resources prevent the development of scalable, automated solutions.
The disconcerting trend of using individually controlled, unmonitored manual processes and spreadsheets unduly exposes the firm to greater risk. Numerous areas of research has proven that this practice leaves firms potentially exposed to the negative effects associated with manual processes and insufficient controls. Unfortunately, identifying weaknesses in practices to senior management can be difficult with the risk of exposing individuals to questions of why such areas of weakness have not been previously noted and resolved.
One industry-wide mandate from senior management is to mitigate operational risk to protect the firm's reputation. But can firms achieve this mandate without resolving and reducing the challenges surrounding manual pricing? Not really. The best way to minimize manual pricing risk is to implement an efficient, scalable, long-term pricing solution that is that includes industry accepted best practices such as automation, supervisory oversight, and audit capabilities.
The first step to begin to minimize or eliminate the manual pricing burden is to acknowledge the significance of what these labor-intensive practices bring to an organization.
The significance boils down to risk. High risks from collection of data, recording of data and data input, as each one is vulnerable to error and can have grave impact. Incorrect net asset value production, damage to reputation and financial compensation for errors are clearly the more visible and high profile risks. Below this, however, is the hidden cost of man hours that are lost to the investigation, remediation and urgency that correcting such errors entails. Such workloads can contribute to a huge loss of time at all levels including senior resources which can lead to detrimental impacts on key business objectives.
There is one main theme as a solution to minimize manual risks: Automation. Automation is essential in reducing manual risks although it can be a difficult resource to gain buy-in for tasks that many deem as less critical. The risks of a NAV error should never be underestimated.
For exceptions or when the price collection cannot be fully automated, a dual data input facility, where two separate employees manually input prices with automatic comparison and exception notification should be the minimum process undertaken by an organization.
Collecting prices twice further reduces the risk of incorrect pricing. Also, adding an exception notification for remediation of a problem helps mitigate risk and eliminate vulnerable processes.
These solutions do, however, require technology resources, but only delivering this nearly papers over the cracks. There is still significant risk of the actual data collection process being incorrect and various other manual links in this chain broken without automation.
An alternative to building an automation solution internally is to work with a pricing systems partner. Automation removes the dependency of internal resource requirements and expertise to deal with any processing failures and allows for the service provider to take on the "dirty work" to alleviate unnecessary burdens.
An automated approach dedicated to dealing with the collection, upload, verification and validation of all manual pricing offers huge benefits. By removing the manual involvement in each of these areas and allowing for all manual prices to be centrally stored on a database, key areas of risk can be eradicated.
A service that has the ability to automate the recognition of prices received from email sources, facilitate data extraction, upload processes all while incorporating the flexibility of configuration rules to deal with format changes and data arrival from different sources further supports a managed service solution strategy.
Once an organization recognizes the "elephant in the room" and how much manual effort is dependent on their pricing practices, they take a significant step forward in deciding to eliminate their exposure to risk.
By removing the elephant you remove lack of scalability, barriers to business growth and migrate to a more efficient business process that promotes concentration of resources to achieving optimal quality and service to clients.
This allows more resources, more focus and more energy to be directed to driving a business forward by adding value rather than struggling against dated, resource intensive and vulnerable processes.
Trevor Beach is a director in the Asset Arena Pricing Services group at SunGard.