Should Investment Firms Separate Analytics & Reporting?



To answer the question, we need to differentiate between the two functions. Reporting involves organizing data into meaningful information to understand how each segment performs. Analytics uses these reports and the underlying data to draw meaningful insights into past performance and future opportunities. Based on the functions, one would be inclined to have separate analytics and reporting departments in an investment firm. We should, however, carefully examine the role played by these functions before segregating these functions into entirely different departments.

Why do investment firms need them?

Reporting can be used to summarize past performance in a more presentable form. While efforts are being made to enhance predictive capabilities, reporting is mainly about presenting facts. Moreover, since the information in a report is defined, much emphasis is placed on accuracy.

In contrast, the output of an analytics team is not set in stone. Analytics can be used to derive predictive models based on past performance. While these models are used for decision-making, it would be presumptuous to expect 100% accuracy. If reporting answers, “What did we do?” analytics targets, “What can be done?” While it is imperative for underlying data in reporting to be error-free, the scrutiny of data used for analytics is lesser.

Reports have an audit trail to capture information on when the information was generated and what data was used. However, analytics does not require such audit trails, and it is at the discretion of the management to create such analysis.

While both perform distinct functions, the need to establish synergies between the two departments cannot be discounted. For example, reporting personnel generally have IT or BI expertise with limited exposure to the business. On the other hand, people working in the analytics team would be well adapted to a statistical approach and may not use the most optimum method to extract raw data. While it would be difficult to align the interests of these departments, each can leverage the expertise of the other to ensure a more meaningful output.

Users and Target Audience

In most investment firms, a dedicated team is created for reporting activities. This team prepares reports for a wide range of audiences, including portfolio managers, senior management, regulators, and investors. The volume of information can be very high since some of these reports need to be generated daily. For example, daily reports may be produced for investment managers to track the exposure to a particular sector or asset class. Alternatively, there may be other reports like financial statements that are delivered every quarter. The users of reports can vary from CFOs to CIOs.

On the other hand, an investment firm would rarely spend significant resources to develop analytical outputs for the investment team. Since the analytics function is optional and requires a high expenditure, adequate resources are only created for generating information for CIOs and their team. This is also because CIOs dictate the investment process. The tasks performed lower in the hierarchy are primarily operational, and the need for cutting-edge analytics is minimal.

Even when the target audience and users seem to differ, investment firms want to make the most of these resources. One way is by integrating analytics with some of the reports. Take the example of an annual report’s Management Discussion & Analysis section. Earlier, the commentaries were simply a summary of the financial data available in the reports. However, with the help of advanced charting techniques and analytical capabilities, top-level management can identify opportunities and provide more meaningful insight into financial performance. In addition, combining analytical capabilities with the reported numbers allows managers to make a more reasonable forecast of revenue and income.

Shouldn’t the two merge?

Many believe creating a combined department for reporting and analytics is the best way forward. While it may seem to be a cost-effective approach to reducing redundancies, the unique nature of each task makes it impossible for complete integration. For example, let us take a hypothetical scenario in which a single person is responsible for producing reports and generating analytics based on a standard data set. However, the same person would need to access the same database to create these reports and perform analytics. While this may not seem challenging when a single person is involved, the system would experience sufficient load if several employees were involved. Separating the procedures for reporting and analytics is, therefore, crucial.

By creating a merged department, we also imply that a single person would specialize in reporting and analytics. It has been discussed earlier that each functionality requires a unique skill set. It would be impractical to expect the same person to develop reporting capabilities and, at the same time, conduct a deep dive into the numbers.

Another challenging factor would be the interference of reporting on analytics. Reporting is a requirement, whereas analytics is a value addition. Reporting will likely be prioritized if there is a constraint on time and budget. A merged department is likely to be burdened with reports for investment firms, always looking to cut down on costs. This would leave minimal resources for analytics, and it would be limited to an optional activity. Such an outcome can negatively affect the firm even though it has managed to cut its costs. Since the merged department would only generate reports, it would be left to the senior management or other target audience to interpret these reports. The time that could be spent on more meaningful activities would now have to be devoted to drawing inferences.

How should Reporting and Analytics co-exist?

One way to create the right platform would be to maintain their individuality. However, this should not prevent the firm from realizing a symbiotic relationship. Let us take the example of two other divisions in an investment firm: the Risk and Investment divisions. Both these departments work as a closed-loop system, and the effectiveness of one is dependent on the other. The data from the Investment division is fed into the Risk Systems, and the output is analyzed. The Risk team then communicates the riskiness of the investments to the people making these decisions. Likewise, the reporting and analytics team could build a similar relationship. The reporting team can refine the data for better analytical capabilities. The analytics team can advise the reporting team on how to generate information that would enhance decision-makers’ capabilities.

We have also discussed how analytics is incorporated into reports to aggregate information. This saves much time because managers would not have to investigate the reports and then consult with the analytics team for their output. In addition, this makes the process less prone to error because the analytics is based on the same data used by the reporting team. This also ensures consistency in the way the reporting team presents data and how the analytics team interprets it. Such a setup also lets each group focus on its core competencies.

Ideally, the reporting and analytics functions should be available for each department. For example, the risk division should have its reporting and analytics departments. Likewise, the HR department should develop these capabilities. This would ensure that a dedicated team is performing these tasks and would have the local expertise in the field. Having a shared resource system could introduce the complexity of prioritization for these teams. Moreover, it would pose another challenge as the systems used for storing, retrieving, or presenting data would differ across these departments. As a result, it is common practice to see each department have its budget allocated to these functions to cater to each function’s needs within the investment firm.

The two departments are increasing their dependency on each other across the supply chain of information generation. As the goals align, the reports are created for the analytics team to derive meaningful information. The business requirement for analytics would determine the content of these reports. While the departments are separate, they should be organized to align the interest of these groups with the strategies of the firm. The firm should also review the output of these teams periodically and modify it to meet the organization’s needs.

Key Takeaways

It is unlikely for analytics to replace reporting and vice-versa. The interfaces required to carry out these functions are different. While efforts are being made to synchronize these two activities, the current state of technologies would not allow complete integration. A utility like Hadoop will not replace a data mart owing to the functional difference between the two. Data marts continue to be effective in creating dashboards and BI reports. Machine learning tools continue to evolve, but the progress is towards analytics rather than reporting. As long as the evolution follows this trend, reporting and analytics will continue to exist as separate functions in investment firms.