Email Us
US: +1 339 469 0600
EMEA: +44 (0) 20 3006 6490

Balancing Act: Managing Budgets and Operating Costs Effectively

By Brian Phillips

Issue 98
February 2015

To operate any business successfully, you need a clear understanding of your operating costs and a plan for optimizing the efficiency of your spending. In an incredibly competitive market, investment managers are under pressure to increase profitability, improve services, minimize risk, deliver above average performance, and comply with the ever-expanding list of regulatory requirements. Effectively managing your operating costs can help you achieve all of these competing goals.

Cutter Associates recently completed detailed research into the strategies of buy-side firms for managing operating costs, and we found that they are carrying out their strategies through three practices: budgeting, reporting, and governance. While these are fundamental practices, investment managers are approaching them from a fresh perspective, and with renewed focus.

In 2008, investment managers had to cut operating costs just to keep their heads above water. Today, managing costs doesn’t necessarily mean cutting costs; it means finding ways to spend limited assets more effectively. This sentiment is widely shared among our member firms, and most are now positioned to invest in strategic initiatives that improve the business. As one member representative put it, “The goal of managing operating costs is to optimize the value of spending.”

Participants in our research also stressed that managing operating costs is not solely the responsibility of the operations department. All business areas are responsible, from the front office to the back office, and the revenue generating departments need to participate in the culture of cost awareness.

Budget Setting

Investment management firms have different ways of breaking down their budgets. Some look at categories, such as spending on data, travel, staffing, property, technology, and service providers. Others break down budgets by functions, such as front office, middle office, back office, enterprise, and sales. But most break down their budgets according to how they are organized and how they report on their financials, which means using a combination of categories and functions, such as front office staffing by region.

Fundamental to effectively managing operating costs is establishing, reviewing, and approving a formalized annual budget. Without one, it’s impossible to have a clear idea of where you are, or how to get where you want to be. Our research found that many firms are also establishing multi-year budgets, driven in part by multi-year projects and multi-year vendor contracts. Generally, the budgets for the first and second years are tightly managed, while budgets for the third and fourth years allow for more estimation. A multi-year budget can lead to improved communication within the organization and can simplify budget adjustments when unplanned expenses arise.

Firms with a multi-year budget know they are starting each budget cycle with a rolling, ever-improving view of the future, and typically feel more confident in their long term outlook. A number of firms are also cross-charging (allocating costs between departments) for expenses such as IT, central enterprise groups (Risk, Legal, and HR), and property. The firms conceded that cross-charging is a difficult and labor intensive task, and that finding appropriate allocation models is especially challenging. But they also felt that allocating costs to products and clients was worth the effort because it provided transparency into product expenses, client expenses, and profitability. This transparency can lead to more responsible spending by individual business units, and at a higher level, it can help steer business decisions.


In the last five years, investment management firms have increased the stringency and detail of their financial reports, and today few have significant problems with their accuracy or timeliness. Most firms now have strong reporting capabilities for cost measurement and tracking, and they can slice and dice data to see costs by categories, lines of business, region, product, and other factors. Stronger reporting capabilities enable budgeting and other decisions to be based on evidence rather than assumptions, and investment managers typically use monthly financial reports to foster discussions between senior management and business line managers. These discussions improve mutual understanding about trends and about budgeted versus actual amounts.


We can help…

Our CutterBenchmarking service provides firms with assessments of their investment processes, comparisons of their approach to their peers and to “best in class” capabilities, and actionable recommendations.

Formal metrics are essential to measuring and reporting operating costs, observing trends, and performing comparisons. The metrics used most frequently by our member firms include the following:

  • Budget versus actual
  • Costs by departments
  • Costs by suppliers
  • Project cost/benefit analysis
  • Product profitability

Operational cost metrics provide a clear view into the actual costs of doing business across products, individual business units, and the entire enterprise. When you compare sets of metrics repeated over time, or benchmark your metrics against those of your industry peers, you can get important insights into ways to improve your productivity, your use of resources, and your operational efficiency.


Governance is as important to managing operating costs as budgeting and reporting processes are. Good governance practices call for regular monitoring of what is being spent compared to the budget expectations, revealing differences and often their underlying causes. Our research found nearly every participating firm looking at reports of budgeted vs. actual costs, and discussing variances on at least a monthly or quarterly basis.

But governance is much more than reviewing reports. If spending is out of alignment, good governance demands the discipline and follow-through to act on the findings. The governance process should be cross-functional, involving representatives from senior management as well as leaders from the associated business units. The inconsistency of expectations between levels of management is one of the biggest challenges firms face when trying to manage costs. Cross-functional governance teams can help combat these misconceptions.


Although investment management firms have made great progress in managing their operating costs, it will never be a simple process. There will always be difficult decisions to make about meeting current versus future needs, handling unplanned expenses, and agreeing on appropriate cost targets. Nevertheless, staying on top of operating costs is critical to balancing spending and ultimately, to succeeding in the investment management space.


About the Author

Brian Phillips joined Cutter Associates in 2014 as a research analyst. He was a key contributor to the recent Research on Managing Operating Costs. Brian has seven years of experience in the investment management industry. Prior to joining Cutter, Brian served as an Assistant Relationship Manager with John Hancock Signature Services, managing processes related to defined benefit plans. Prior to this role, Brian served as a dealer liaison to broker dealer and national account partners. Earlier in his career, he worked at MFS Investment Management as a Dealer Services Representative.

Brian holds a B.A. in Business Administration from the Massachusetts College of Liberal Arts.