KPIs of Irish fund servicers improve amid lower costs and better labour market

BRIAN JACKSON and CIARA O'BRIEN say that Key Performance Indicators (KPIs) are improving for Irish fund servicing due to adjustments downwards to the cost base coupled with significant improvements in productivity

It certainly hasn’t been plain sailing for the funds industry over the last number of years. Events such as the failure of Lehman Brothers, the Madoff scandal and the impacts of the global financial crisis served as a reminder of just how important the right skills and experience are in mitigating such risks.

Our recent whitepaper 'The Irish Funds Industry: Redefining competitiveness' found that there are reasons for optimism for the Irish funds industry and it may well prove to be one of the shining stars in the Irish economy for years to come. The whitepaper looks at key factors contributing to the competitiveness of the Irish Funds Industry.

Improved competitiveness
Supernormal growth in the Irish economy in recent years led to cost and staff retention pressures for fund services companies in Ireland. Due to the significant readjustment in the Irish economy and a lowering of operating costs this trend has now reversed.

The Irish funds industry has seen significant benefits from increased cost competitiveness while at the same time clients are benefiting from a higher and more consistent level of service delivery due to enhancements in the operating models of fund service providers.

The increase in competiveness for the Irish funds industry has come at a time when demand for fund servicing has reached an all time high. Statistics published by the Irish Funds Industry Association show that at the end of 2010, total assets under administration for Irish domiciled funds reached Euro 964bn which is higher than at any other point in the past and represents an increase of 29 percent from 2009 (2009: Euro 748bn). Total assets under administration in Ireland (domiciled and non-domiciled) reached Euro 1,880bn at the end of 2010 which is up from Euro 1,400bn at the end of 2009. Ireland now services 43 percent of the assets held in the world’s hedge funds.

In this article we look at the findings of our recent whitepaper which considers some of the key cost drivers that affect fund servicing companies, including staff costs, rental costs, and some of the key drivers of staff productivity. The positive trends which are highlighted in this article are some of the key messages that we, as members of the Irish funds industry, should seek to promote.

Why Ireland for funds?
The funds industry, which now employs in excess of 11,000 people, has long been one of the major success stories in the Irish economy. This success has been driven by a number of key factors which include:

• A wealth of experience and expertise in servicing all fund types
• A wide variety of choice in the service providers available
• An attractive tax regime for both the funds and service providers
• An approachable regulator and a well developed regulatory environment
• Favourable tax treatment/tax treaties
• 12.5 percent corporation tax rate - all major political parties are firmly committed to maintaining this corporation tax rate
• Strong government commitment to the funds industry

The Irish funds industry has seen significant benefits from increased cost competitiveness while at the same time clients are benefiting from a higher and more consistent level of service delivery due to enhancements in the operating models of fund service providers.

The increase in competiveness for the Irish funds industry has come at a time when demand for fund servicing has reached an all time high. Statistics published by the Irish Funds Industry Association show that at the end of 2010, total assets under administration for Irish domiciled funds reached Euro 964bn which is higher than at any other point in the past and represents an increase of 29 percent from 2009 (2009: Euro 748bn). Total assets under administration in Ireland (domiciled and non-domiciled) reached Euro 1,880bn at the end of 2010 which is up from Euro 1,400bn at the end of 2009. Ireland now services 43 percent of the assets held in the world’s hedge funds.

In 2007 cost containment and productivity were identified as the key business challenges facing the fund administration business in Ireland according to the Deloitte Irish Fund Administration Survey. Strong economic growth year on year created significant pressure on operating costs particularly in relation to property and labour costs.
Since the second half of 2008 Ireland has seen a sharp reversal in this inflationary trend with the cost of living falling by 6 percent between October 2008 and October 2010.

Salary costs are returning to 2006 levels
While in the short term labour costs can be more ‘sticky’ as salaries take longer to settle to a natural level than other costs, there is clear evidence that salary levels throughout Ireland have fallen back to around 2006 levels.

This has been echoed in the funds industry where we have seen salary reductions in the region of 7 percent to 10 percent, as can be seen from the following illustration:

Lower staff turnover has had a positive impact on cost, productivity and client service
While the reductions in the labour costs have been significant, the potential for increased productivity is likely to be of far greater benefit to the industry as a whole.

Many service providers in Ireland had been grappling with increasing levels of staff turnover. According to the Irish Fund Industry Association employment and staffing survey in 2007 attrition levels were running close to 30 percent. This created a real cost drag for the funds industry as significant resources were being expended on the replacement of leavers.

In 2007, the Deloitte Irish Fund Administration survey estimated that the annual cost of managing these attrition levels was up to 15 percent of total staff costs (employee acquisition costs, training costs etc). High staff turnover also had a significant impact on the ability of service providers to maintain the high service levels for clients.

With a substantial improvement in staff retention levels today there are a number of key benefits which include:

• Senior management now have more time to focus on managing the business and focusing on client service.
• Improved staff productivity and responsiveness
• Reduced training costs and lost productivity in respect of new recruits
• Immediate cost savings on recruitment expenses

Recruiting the best
In the current environment there are greater opportunities for the funds industry to attract the brightest and best candidates at graduate level and beyond.

Over the last decade Ireland has operated at close to full employment. This meant that the funds industry was competing with a number of other buoyant domestic industries for talented staff. In the current climate the funds industry is better placed to attract a greater proportion of the top graduates. This is also contributing to the increased productivity within the sector.

Similar benefits can be seen at more experienced levels where as for example, we are seeing a larger number of qualified accountants being attracted into the funds industry and overall the quality and availability of experienced staff has increased over the last number of years.

Attractive commercial rental terms and costs have created a ‘tenant’s market’
In addition to staff related expenses the cost of occupying commercial property has reduced significantly throughout Ireland and the lease terms being offered are now significantly more attractive.

By way of illustration, commercial rental costs in Dublin reached in the order of €65 per square ft in the latter half of 2008, according to reports published by CBRE. This represented a premium of approximately 65 per cent in comparison to other equivalent European cities. Since the peak, Dublin rents have fallen in the region of 45 per cent to €35 per square ft, primarily driven by an oversupply of commercial property in the Irish market.

During 2010 legislation was introduced in Ireland that provides that all new leases signed after March 2010 must contain a provision that rents can be reviewed both upwards and downwards on review of the lease. This is in contrast to some other European locations where rents tend to be reviewed upwards only.

The current market conditions have created a ‘tenant’s market’ whereby there are significant opportunities for increased flexibility in negotiating the terms of lease contracts including the term of the lease, rent holidays, break options and other incentives.

For many organisations who are assigned to an existing lease, the benefits may not accrue immediately. However, for those who may be in the process of expanding or those who are approaching a negotiation point in the lease there are significant opportunities to obtain prime office sites at significantly reduced prices.

Recent adjustments to the cost base coupled with significant improvements in productivity have reinforced Ireland’s attractiveness as the leading centre for the administration and custody of global assets.

The Deloitte whitepaper identified that lower staff turnover and higher productivity are contributing to a marked improvement in most key performance indicators of Irish fund servicing companies.

The benefits are likely to be enjoyed by both the fund administration companies operating here and their clients alike.
In short, increased cost competitiveness and enhancements in the operating model have created unique opportunities for fund administration companies in Ireland and the funds they serve around the world.

Brian Jackson is a manager in Deloitte's investment management group and Ciara O'Brien is a manager in Deloitte's consulting group.

This article appeared in the April 2011 issue of Finance Dublin. ©2011 Fintel Publications Ltd.