The New “Middle-Age” (Middle Office That Is)

May 30, 2012

In their recent blog, “Middle Office for The Middle” Citisoft discusses the trend of middle office outsourcing for mid-sized asset managers (“…those with approximately $20B-$100B AUM”).   The blog was interesting in that it brings out the growing importance of the middle office and mirrors what we are hearing from the global asset management community. Traditionally, the middle and back office operations of asset managers have been grouped together and viewed as the “operational arm” of the business.  But this view is changing as the middle office becomes a more strategic part of the organization, reporting to executives beyond operations, such as Chief Investment Officers and Chief Risk Officers.

We see various reasons for the growing trend; from increased scrutiny of regulations and demand for more accuracy, transparency and customized reporting to the intense focus on investment performance analysis, custodial reconciliation and cash flow management.   The traditional tasks performed by the middle office are becoming the key points for gathering information and making strategic decisions. (see related blog “Where does the Performance Measurement Team Belong?”) But, as the middle office plays an increasingly important role, it is also coming under more scrutiny to ensure it is working as effectively and efficiently as possible.

It is this scrutiny that leads us back to the trends discussed in the Citisoft blog.   One way asset managers are looking to increase the efficiency of the middle office is through outsourcing.   Outsourcing back office operations has been an accepted trend with steady growth over the past decade, but middle office outsourcing has had a slower uptake.   Some of this can be attributed to the traditional service providers not initially offering customizable middle office solutions for key functions such as performance reporting, reconciliations and reporting on complex assets.  But now many of the custodial outsourcing vendors have teamed up with niche service providers to handle the middle office functions.  And technology service providers have been addressing the need by bringing together the appropriate systems, managing them in their data centers and putting services and experienced personnel around them.  

An example of this is SS&C PORTIA’s Outsourcing Services.  We provide a full array of solutions and services for middle office functions.  Our clients can work with us in a “conversion model” where our personnel run the systems needed and the client’s middle office takes the data, analyzes it and disperses it throughout the organization to drive decision making.  This reduces the IT footprint at the asset manager and lets them keep control of key functions that are critical to their business.  We also offer full outsourcing services, where our staff becomes an extension of the asset manager’s organization, performing some or all of the middle office functions such as; performance and attribution reporting, custodial reconciliations, corporate actions processing, reporting, etc., allowing the company to reorganize its resources to focus on revenue generating functions and other core competencies.

We see the middle office continuing to reshape and grow as a value-add organization within the asset management workflow.  We also see this time as an opportunity for asset management firms to review and possibly redesign their operations in a way that positions them for long-term growth and differentiation.  As this trend progresses, it will push service providers to continue to evolve as well, enhancing their systems, services and deal structures to fit the needs of the growing market.

If you would like to learn more about the trends of the middle office, here are some articles I found interesting:  Global Trends in Investment Operations Sourcing (Cognizant) and Industry Perspectives:  Middle Office Outsourcing: Evaluation Suitability (Citisoft).

–          Techee Cheung, Business Development Director – Asia, SS&C PORTIA

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