Adapting with Component Outsourcing

The financial crisis has prompted a number of asset managers to outsource at least part of their operations to save money and focus on their core competencies. Fund managers are taking a cautious approach to changing their operating model and are deciding to test the waters with one or two functions before moving to outsourcing all of their operations. With the potential allure of cost-savings, outsourcing does come with some potential risk factors. It is still the fund manager’s reputation on the line and liabilities for errors cannot be transferred to the external provider. But, regardless of these potential risks, component outsourcing will start to become an established future trend as more asset managers are choosing to focus on their core competencies of managing money and client relationships.

Component outsourcing is the allocation of specific operations to a trusted third-party to enable operational efficiency and can help boost an asset manager’s bottom line. The shift has been a move from a fixed cost structure to a variable cost structure that rises and falls with assets or transaction volumes.

The “re-evaluation” of middle-to-back-office functions is a direct result of the recent financial crisis and has shifted the way asset managers look at their investment operations. Those functions that are perceived to be a commodity are highly automated and are most likely to be outsourced. In this new financial landscape, partnering with the right firm will be critical and will drive the success of outsourced initiatives. With component outsourcing, the asset manager can focus on higher-value activities while transferring the commodity functions to experts who can do them more efficiently and economically.

The main objective of component outsourcing is to reduce costs, improve operational efficiency and keep technology current, whilst enabling the asset manager to focus on their core competencies. According to Finix, a management consulting company specializing in technology and operations for the financial services industry, while most initial analysis and proposals estimate a cost savings of 25-40% from investment management outsourcing, a 15% realized savings is considered a success.

Return on investment (ROI) is a key consideration when asset managers evaluate whether or not to outsource their middle-to-back-office operations. The traditional ROI equation is based on the subtraction of net costs from net benefits. Component outsourcing will lead to improved top-line and bottom-line performance while reducing operating inputs. The savings derive from the amount of time spent on the component outsourced, the time spent on managing the system and the data.

Solution providers that deliver outsourced services lower the asset managers’ technical and operational overhead costs by focusing on IT advances and product innovation. Not only do solution providers maintain the latest in technology, they also provide a "virtual team". If implemented correctly, outsourcing is less costly than an in-house application. However, as more functions are outsourced, the risk factors increase. In the same way that several custody and accounting services have matured and become commoditized products, middle and back office functions are also evolving. Many functions are already highly automated like reconciliation and performance reporting. These provide real opportunity for “value-add” outsourcing. Many asset managers start the process with a focus on a specific area and then add additional services and increase the scope of the arrangement.

Component outsourcing offers better alignment between cost structures and revenues, and a greater ability to keep pace with changing regulations, business demands and markets. In some situations, it allows asset managers to trial outsourcing in stages to increase their comfort levels while providing access to innovative technology in the middle to back office that an asset manager does not need to buy or maintain. Many asset mangers are more comfortable with outsourcing a single component of their operations to drive increased focus on their clients and managing assets.

By outsourcing infrastructure and services, costs relating to installation, integration, maintenance and support can be significantly reduced. Hosting has also become a popular way to reduce overhead costs as it allows asset managers to select a software provider and then hand over the daily operational tasks to the provider. It also means having a solid business continuity plan since everything can be available via the firm’s intranet.

The areas to outsource can be identified by answering the following question: which functions are considered strategic and which functions are considered commoditized?

Strategic considerations are the middle-to-back-office functions that require high levels over oversight and are considered to be competitive differentiators for an asset manager. There is typically a high level of risk associated with any loss of service, and usually involve proprietary processing.

Choosing a partner who is able to provide the scalability and the flexibility needed is a challenge. A vendor must have a global presence and be able to adapt as their business evolves over time. An outsourcer is also a partner of the asset manger - as both parties evolve, so must the relationship.

The criteria for choosing the right partner is the ability to; deliver economies of scale, form a true partnership, provide proven technology, supply a reliable transition plan, operate with low staff turnover and offer a fair pricing model.

Looking ahead

The drive for outsourcing has come from a host of strategic, financial, operational and technological changes. The downturn has added pressure to markets and outsourcing has proven to be an effective tool to supply relief. Component outsourcing has provided asset mangers with the ability to focus more on core competencies of managing money and fostering client relationships while cutting cost and improving workflow. More asset managers are turning to this next wave of outsourcing as a source of flexibility in developing their businesses. 

Christy Bremner is Global Head of PORTIA at Thomson Reuters, where she is responsible for the firm's enterprise-wide investment accounting system. Thomson Reuters PORTIA is used by more than 300 investment managers in 45 countries managing assets worth more than US $15 trillion.
 
Prior to the formation of Thomson Reuters, Mrs. Bremner held a number of senior positions within Thomson Financial spanning business development, strategy, product development and operational management. 

Before joining Thomson Financial, Mrs. Bremner led the institutional services division of Trust Company of America, which at the time was the second largest trust company in Colorado.  She managed an outsourced suite of services to financial advisors and registered investment advisors.

Mrs. Bremner holds a Bachelor of Science degree in Business Administration from the Wittemore School of Business and Economics at the University of New Hampshire and a Master of Science in Finance degree from the Bentley College Graduate School of Business.