Asset managers have outsourced middle- and back-office functions for nearly two decades, initially with mixed examples of success.
However, over recent years, the trend for outsourcing middle- and back-office functions has taken off, and more firms are confident that this will reduce operational risk and increase alpha.
Global Custodians Lianna Brinded spoke to Stuart Plane, managing director of Cadis, about the developing trend, the pros and cons of outsourcing and how he views the future for asset managers looking to outsource.
Q: How has the trend in outsourcing middle and back offices developed, since its first major creation 15-20 years ago?
A: Some 15 years ago the whole outsourcing theme for asset managers kicked off. Some early adopters tried and succeeded while others tried and failed. The industry was skeptical due to some of the large failures in the early years. Over last six to seven years, there has been consistent success in firms outsourcing their back office. As always with these things its a big step giving someone ownership and control of the back office. It takes time for the market and participants to understand what outsourcing means.
The first thing weve seen is that firms who outsourced early were considered trailblazers. Now its not quite cookie cutter, but the industry isnt far off. Its relatively easy now because there is a better understanding of the technology available and what the project will add to the business. Firms typically ask: What piece of technology do I need to own as an asset manager to generate alpha? The back office isnt crucial in generating alpha. The key piece for a successful outsource strategy is data ownership within the asset management firm does the firm that is outsourcing retain enough data and control over the data to successfully execute risk management & trading strategies?
Q: What would you say to critics that say outsourcing middle or back offices could increase operational risk and of course, is it really for everyone?
A: I think its up to the individual organization. Some of the organizations we work with are large sovereign wealth funds that are very sensitive about the positions they hold. They prefer to keep all of the information in house, and it is highly unlikely that they will outsource. Every organization is different. We have generally found that those organizations who have outsourced successfully, are very efficient and are able to rapidly react to changes in the market. Its all about generating alpha with minimal risk. What we are seeing is that outsourcing is generally successful and very effective.
Q: But have there been any more failures, and does this create a major challenge for other asset managers looking to outsource for the first time?
A: Well, there is some good news as failures are almost unheard of these days. Looking back over the last five years, there have been no major failures across the industry to our knowledge, and if there have been some smaller failures, they are the exception rather than the rule. What we have seen, through our own polls conducted in our client advisory group, is that over half of the asset managers had outsourced, most of which are large to medium asset management firms. Most of the asset managers that have not outsourced are now in the process of considering it.