The outsourcing solutions available to investment managers have evolved in recent years, driven by experience and innovation, to offer a wide range of options that blur traditional lines of responsibility. As in any industry, outsourcing in investment management initially focused on easily defined support services. While payroll and call centre services can be taken on by generalist outsourcing providers, specialists such as large custodian banks have also ‘lifted out’ entire back-office operations of investment management clients – often including the transfer of staff too – as well as developing niche products that handle specific workflows and processes, including reporting and valuation requirements.</p> But the style and complexity of service offerings available to investment managers today is quite different from the traditional view of outsourcing. Today’s outsourcing firms are focusing on providing more sophisticated services in the middle and back office, and it is the development of these high-level outsourced services that will be explored in the Investment Management forum at Sibos 2014 in Boston.</p> “Asset managers need to think about which critical functions differentiate their offering, and which don’t,” says Richard Taggart, head of middle office outsourcing, North America at State Street’s Investment Manager Services business. “Those functions that don’t give a competitive advantage could benefit from improved cost and operational efficiency by being outsourced.”</p> Common areas that buy-side firms are looking to outsource include trade processing, collateral management and enterprise data management. Some needs, such as collateral management, are being driven by regulatory changes, while others are being increasingly seen simply as non-core, commoditised operations that can be handled by a third party.</p> “The industry has matured to the point that outsourcing is viable and a lot of deals are being done as a result,” Taggart adds, “Some are doing it simply to save money but others are looking at how it can add value to their business in other ways.”</p> Many firms are beginning to realise that non-competitive core functions, such as processing, settlement and regulatory reporting can be done more effectively when taking advantage of the economies of scale that outsourcing arrangements can allow.</p> Markus Reutimann, group COO of Schroder Investment Management, echoes this sentiment. “Labour arbitrage is no longer solely about price, but about effective and lasting sourcing of skills and experience – particularly in information technology and data mining,” he says.</p> Commoditising the office</h4> One firm that has a long history of outsourcing its post-trade functions is US-based fixed income investment manager PIMCO. The firm has been outsourcing many of its functions since 2000 and continues to look for new opportunities to outsource its operations. Evidence of PIMCO’s commitment to outsourcing non-core activities can be seen in its headcount figures: almost a third of its 2,400 staff (737) are investment professionals, a significantly higher proportion than a number of its peers.</p> “The goal of outsourcing our post-trade is twofold,” explains Cynthia Meyn, executive vice president and senior operations manager at PIMCO. “Firstly, it enables us to focus on our core competency, which is generating returns for our clients. Secondly, it enables us to realise greater efficiencies through the commoditisation of the work.”</p> Meyn highlights the posting of futures margin, a post-trade activity that is essential, but simply offers no competitive benefit to PIMCO, as an example of how the industry as a whole can benefit from commoditising – and outsourcing – processes. “For many functions, there is little point in having a proprietary system. By employing a vendor to perform certain work for us, every customer they add will actually help to improve the efficiency of the operation for everyone using that service,” she adds.</p> In this way, although the vendors remain competitive, outsourced functions act almost like a utility with profit-making businesses, where the whole user community is able to benefit from either further cost reductions or a higher level of service.</p> The professional service</strong></p> Based on examples of undeniable bad practice across the finance sector, outsourcing has been tainted somewhat with a view that processes are too often simply offshored in an attempt to make them as cheap as possible with little regard for the quality of service offered.</p> Many multinationals – within the finance sector and beyond – have attracted criticism for outsourcing customer service functions to call centres far removed from their customers, which, through lack of direct connection to the business, may be unable to deal with more complex queries.</p> But today’s outsourcing services for asset managers are in many cases proving to be quite the opposite. For example, a small boutique asset manager may not have a post-trade team, or even a dedicated trader, and will either rely on the portfolio manager or support staff to deal with such tasks. Such an approach introduces a number of elements of risk, particularly as volumes increase, due to the underlying complexities of market structure that only a professional trader should be expected to handle.</p> Similarly, niche asset managers are likely to conduct middle- and back-office functions in a highly manual way using Excel spreadsheets, for example, or even fax communication because of the perceived expense of using specialist solutions. As well as operational risks, the problem with not scaling up your processes in line with your business growth is the impact on high-added value staff, i.e. the portfolio manager who isn’t able to spend her time making sound investments, which can hurt returns and the bottom line.</p> Branching out</strong></p> As for the future, Taggart believes the growing burden of data management requirements in an increasingly regulated environment makes this area a likely candidate for outsourcing by investment managers.</p> “There is a much greater focus from regulators and within businesses on data governance and management, to ensure data integrity, timeliness and security,” he says. “The sheer volume and breadth of data, coupled with the real need to better integrate risk and return analytics, makes this an expensive proposition that many will not want to take on alone.”</p> For Meyn, the focus will be on opportunities to standardise and outsource processes in other asset classes at the point vendors are able to offer these services. “As work on some of the more niche asset classes becomes standardised, then we will look at the advantages we can gain by using the greater scale that our vendor can offer us,” she adds.</p> PIMCO is also keen to further leverage outsourcing globally, such as utilising vendor resources in Asia to be able to perform vital functions in time zones where it does not have a significant presence.</p> </p> </p> </p> </p>