Outsourcing Moves to the Middle Office

February 8, 2012

Ernst & Young recently published an excellent “Viewpoint” paper titled “Second Generation outsourcing in the asset management industry” (click here for access to the entire paper), which discusses how asset managers and service providers have changed based on hindsight and changing needs.  While the article focuses on the European marketplace, it reflects what we have heard from our clients and prospects globally. 

Though outsourcing over the past decade has become an integral part of many asset management firms’ strategies to control costs, implement regulatory and technology changes and manage continuing pressures on margins, many of the contracts and partnerships in place have failed to live up to expectations. The E&Y article suggests that as the market has matured, asset managers are finding that their current arrangements are not bringing them the cost savings and efficiencies originally promised.  As those contracts are coming up for renewal, asset management organizations are scrutinizing what they are getting from their arrangements and are putting more pressure on vendors to provide the services and service models asset managers need, and the vendors are complying. As service providers are expanding and changing their models, asset managers are starting to rethink their outsourcing strategies but, even with these new conditions, there is still caution about inherent risk in transitioning vendors.  

Service providers are reducing this risk by providing more migration choices.   Instead of the traditional “lift-out” scenarios, vendors are starting to offer more stand-alone options and services especially in the middle-office functions. By offering services in a “component” model, asset managers can move smaller pieces of their operations, helping to smooth the transition.   

PORTIA Outsourcing Services has always focused on the ability to provide “component outsourcing”, allowing our clients to choose what pieces of their business make most sense for them to outsource.  Our clients can start with areas such as performance measurement and/or reconciliation services, letting them transition middle-office functions without disrupting their entire operations.   We also provide customized service level agreements, allowing our clients to structure how our services work with their organization to reach their organizational goals and helping to reduce risk.

As service providers broaden their offerings there is opportunity for asset managers to take advantage of competing vendors and more favorable terms, but to do this asset managers need to be prepared.   The E&Y paper states that preparation by asset managers can help to reduce risk and shrink the barriers to transitioning.  To ease the process E&Y suggests that asset managers:                  

  • Monitor changing requirements of the business and keep the details of SLAs under constant review – to be able to articulate the service level you are expecting
  • Understand key differentiators among service providers up front – to accelerate the decision-making process and reduce overall cost
  • Be prepared to bundle middle-office functions with other outsourcing mandates – to encourage providers to offer more favorable terms

Finally, asset managers need to be confident that their vendor has a track record of success offering outsourcing solutions, a robust infrastructure and underlying products that are powerful and versatile.  Despite shrinking barriers, it is critical that outsourcing vendors can scale with growth in their clients’ businesses to ensure that a firm’s outsourcing vendor can meet their long-term needs.

How do you see barriers shrinking in the financial services outsourcing industry?  What are the key rules to transitioning between outsourcing vendors?

If you would like to learn more about outsourcing solutions and how to manager vendors to mitigate risk, we invite you to join us at the Knowledge Congress webinar  “Mitigating Outsourcing Risks in Banking and Finance”  on March 1st.  The attendance is free of charge courtesy of PORTIA.  Click here to learn more and register.

 -Daniel Schlossberg, Director of PORTIA Outsourcing Services

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