Back-Office Outsourcing Likely to Rise Substantially Over the Next Five Years

The pace of back-office outsourcing is likely to accelerate quickly over the next five years as regulation and increased costs make it more difficult for firms to meet these needs on their own, according to Equiniti, a U.K. share registrar and financial services outsourcing specialist.

In a survey of U.K. wealth managers, Equiniti found that 70% of respondents think all firms will look to outsource some or all of their processing requirements over the next five years. Equiniti came out with a platform in July that pools custody and back-office services to capture this demand. Outsourcing the back office can reduce costs by 25-30%, according to Mark Taylor, managing director of Equiniti Investment Services, which provides solutions for corporate clients.

While many brokers and wealth managers have tried to differentiate themselves through their back office, says Taylor, “the back office is likely to become a commodity, and on that basis it will not be a differentiator. What they will need to be focusing upon to differentiate their business [is the]…performance that they give to the customers, differentiated by the quality of the relationship and the interaction [with] customers.”

However, most firms are not ready to fully outsource, and the breakdown of different outsourced functions varies greatly. For example, Equiniti found that 50% of custody is already outsourced and another 12% of firms would consider it. On the other hand, only 26% would even consider outsourcing CRM.

“It’s very much fragmented in terms of their approach to outsourcing,” says Taylor. Part of the problem, he says, is that there aren’t enough choices in providers of outsourcing for small- to medium-sized firms; 20% of wealth managers surveyed said that they have not outsourced due to a lack of solutions. Another reason, “probably one of the biggest,” says Taylor, is that they are concerned with a “loss of control.”

As Taylor explains, it will take time to prove that outsourcing the back office works, and firms want to make sure they still have clear access to that information. “This is not a short term development,” he says. “This is a fundamental shift in terms of the way that this is going to evolve. You’re probably looking at at least three to five years for this to work its way through the marketplace.”

Equiniti will follow up on this survey next year to see if attitudes and processes have changed.