Louise Rowland looks at the return of outsourcing.
We’ve been here before: growing numbers of financial firms calling on outsource providers to help them meet the challenges of the marketplace. However, today’s picture is different from five or six years ago, when cost reduction was a matter of life-and-death for many firms who lifted out their entire back office to third party administrators offshore just to stay afloat.
Offshoring is still a significant part of the picture but, with the market now healthy again, outsourcing is no longer just about saving money. Moving to a variable rather than fixed cost structure is, of course, a powerful incentive for companies seeking cost efficiencies in their operating model. Yet many firms are also now relying on the expertise of third parties to help them negotiate the growing thicket of regulation facing the financial services industry. In many cases, a large well-established outsourcer will have better security and compliance measures in place than the client itself.
Then there’s the role outsource providers can play in helping firms grow their business. It’s all about being leaner, meaner, smarter and more intelligent. By off-loading non-core activities, clients are able to focus on innovation and exploiting new markets, whether that’s developing an existing product, moving into a new asset class or entering a different geographical area. Outsourcing companies possess the technological knowledge and skills to help drive this process. Taking advantage of a scalable service allows firms to get to market much more quickly.
Changes for the better
“The COO of a bank is facing increasing calls from the front office to lower the costs per unit, as well as the demand to innovate and deal with regulatory pressure, all against a background of reduced margins and trading costs,” says Tom Carey, President, Global Technology and Outsourcing, EMEA and Asia at Broadridge (Above). “Banks can’t make all this work by themselves alone and are coming to the realisation they need to adapt. This is an opportunity to respond and transform themselves.”
Underpinning this transformation are the rapid developments in technology, particularly with the arrival of the Cloud, which allows infinite amounts of data to be stored securely off-site. Nothing could be further from the image of large teams of back office staff number-crunching in a dimly-lit basement.
The great hand-over
The UK is ahead of the game in outsourcing and, perhaps not surprisingly, buyside firms tend to be further down the adoption curve. Most smaller and mid-sized asset managers don’t have the budget or the appetite to maintain a large IT infrastructure in house and have been outsourcing process-intensive back office activities for years, including custody and fund accounting, settlement, record maintenance, confirmation and clearance and regulatory compliance.
There’s also been a steady move up the value chain, with many middle office functions now out with third parties, such as trade matching and books of records. Dave Reynolds, principal at Investit (Above), says, “People are moving their middle office functions less on a cost basis now, but because they’re after best practice, flexibility, knowledge and skills. Providers are bolting on additional services such as client reporting, performance measurement and collateral management, so that we’re seeing an expansion of the outsourcing landscape in terms of depth.”
Different firms, inevitably, have different comfort levels. For some, handing-over a single component of their business and retaining the rest of the workflow is change enough. Others, particularly hedge funds or boutique firms, are happy with a full outsourcing package as it allows them to focus entirely on their core activities.
Sharing the load
It’s all about ceding a degree of control, something that traditionally doesn’t come as easily to the sellside. Yet that’s also changing. There are no more sacred cows in a climate where it’s all about costs and balance sheets, tough regulatory pressures and a hunger for market differentiation. So while some sellside firms might want to keep, say, data aggregation in-house, they are increasingly relaxed about outsourcing other pockets of their operations, such as EMIR legislation.
One striking innovation is the emergence of the utility model for internal data management practice. Banks have always operated mini silos of data for numerous clients – a cumbersome, duplicative and expensive way of working, given these are mostly commoditised activities. Many are now exploring mutualised solutions in the form of industry standard reference data utility models, set to improve data quality, mitigate risk and reduce costs, in some cases by hundreds of millions of dollars per bank.
“It’s a dramatic shift in mindset,” says Steve Grob, director of group strategy, Fidessa. “We’re starting to see an increasing number of banks and broker dealers leave their guns outside the door and collaborate on infrastructure where it is purely duplicative and adds no competitive advantage.”
Daniel Simpson, managing director and head of enterprise software, Markit EDM (Above), prefers the term ‘managed service model’ to ‘utility model’. “It’s not a one-size fits-all-solution, but bespoke according to individual firm’s needs. There’s lots of commonality in terms of scrubbing and integrating data but clients also want bespoke output. That’s where the value lies. Many people have tried to build utilities in the past and failed. The time is now.”
Partners to rely on
So what makes a trusted outsourcing partner? It’s all about providing the right comfort level, says John Lehner, head of BNY Mellon’s outsourcing business and president and CEO of Eagle Investment Systems. “When we engage with clients, they want to validate how we conform to their requirements in terms of operational readiness, stability and data security. In the past, you might have been providing a single piece of the front, middle or back office picture. Now the client’s decision to partner up with you rests on what you are doing to deliver a fully integrated service ecosystem or platform. Our offering has to be preconfigured to integrate with other people’s solutions.”
Large custodians have long been offering peace of mind, adds Toby Glaysher, head of global fund services, EMEA, Northern Trust: “Overall, outsourcing is a good thing from a risk perspective. It’s better for asset managers, say, to outsource work to specialists with the technology, scale, global participation and business continuity that we can offer. With trillions of dollars of assets under administration, we bring lots of capability and ‘oomph’ so that de-risks the asset management industry.”
The question of risk feeds into the whole area of regulation. The spotlight has never been more intense on areas such as data retention and data keeping, with regulators requesting large amounts of granular information. Once again, this is where outsourcing comes into its own. Many firms don’t have the internal infrastructure to meet this level of compliance – far more cost effective to use a third party than make a major investment in new IT systems. Outsourcing also gives banks the opportunity to measure unit costs far more easily.
Compliance remains a two-way process, however. All client firms retain a fiduciary responsibility and the FCA is calling for stringent measures on oversight and resilience, including a robust exit plan and contingency arrangements should things go wrong. For some asset managers, this level of monitoring even calls into question the decision to outsource activities in the first place.
Something for everyone
‘Running your mess for less’ has been replaced by a realisation that outsourcing can deliver sophisticated business benefits. This is a permanent change, say most participants. Undertaking it on a large scale is not for everyone, particularly on the sellside, where many firms prefer to work with their own platform rather than embarking on the complex, lengthy process of migrating to a provider’s platform.
Nevertheless, outsourcing is here to say. The City has always been adept at adapting; this is a way of working that offers numerous advantages, however participants pick and mix from the banquet of solutions on offer.
© BestExecution 2014