By Janet Du Chenne (With Apologies to ’50 Shades of Grey’ author EL James)
Ahead of Global Custodian’s Outsourcing Issue, the team has been out there speaking to the buy side about their needs and to service providers about what they are doing to fulfill those needs. Outsourcing has reached a new norm, following the aftermath of the financial crisis and the regulatory change that resulted from it. Buyers no longer want relationships where they are…err…bound to large-scale lift outs. Instead it is all about component-based services.
Outsourcing has moved beyond the first generation of middle and back office outsourcing and towards outsourcing components. You have the big global custodians with their huge platforms that will struggle to meet all clients’ needs and then those providers that can provide more component services to those clients. The issue of scale, the race toward outsourcing amidst more complexity, and the need for transparency and cost efficiency will be stretched in the years ahead. So what does the industry want?
1. Effective data management
Effective data management is influenced by emerging regulations, evolving investor demands as well as new products and investment strategies. New opportunities are arising from using technology to capture and to analyse information available through the web and social media.
Custodians can monetize the vast amounts of data they sit on “by visualizing and delivering analytics (e.g. risks, transaction volumes/values, currency exposures, emerging regulations, market infrastructure insights) via a digital dashboard,” says Markus Ruetimann, group COO, Schroder Investment Management.
Sometimes, says Ruetimann, Schroders’ clients want personalized reporting. For service providers this means going beyond the simple PDF format material and helping managers to build such a reporting model. Another area is “big data”. In the long run, those providers will play a significant role in gathering the data into one place and providing it in a consistent manner.
2. Performance measurement
One asset owner says where most custodians fall down on performance reporting is when a number is super out of whack, they don’t have the expertise to say why it’s out of whack. If that’s true, find a way to hire or partner with the right expertise so you can truly offer a value-added service.
3. Risk monitoring
Regulation has initiated a number of changes, including the transference of liabilities to depositories, the gradually reducing use of omnibus accounts in favour of segregated structures and much improved communication with investors with respect to the risk and reward of investments.
4. Operational Alpha
Operational alpha, while difficult to measure, is about “monetising” operational performance of both the in-house teams and the external providers. Ensuring that the right tools and the right data are made available so that the fund manager can focus on investment decisions rather than administrative matters is just one example.
5. Greater collaboration and control
One asset manager says its important that when they outsource to control the quality of the output. “At the end of the day, even where we outsource functions we must retain the ability to control what we get back. We do this by carrying out strict due diligence on a given topic, such as reviewing the reporting or collateral management process, and we make sure how these processes are defined in the initial agreement with the provider.”
It should be agreed upfront – via SLAs and KPIs – what the relationship is going to deliver and what fees will be charged. Making sure client service models are agreed are also steps towards transparency. Pension funds are displaying an interesting dynamic of how they can adopt an asset management mindset, presenting operational data and reporting requirements.
7. Bespoke platforms
This is becoming harder to achieve with vendors challenged by how to upgrade their technology and who pays for that. Providers with a strong single operating model with a global focus should win the business.
8. Value add
Compliance and KYC The creation of market-owned utilities in the space of AML, KYC, messaging (beyond SWIFT) and market data provision would be very useful.
9. Co-sourcing and nearshoring
No longer is the question whether or not a firm should leverage capabilities external to the organization; in the current buy side environment, utilizing a co-sourcing model to achieve cost savings within complex systems is a necessity.
Indeed, many large asset managers have applied a diversified sourcing strategy for many years.
Opportunities to expand the depth and breadth of a relationship might evolve in the space of sharing technology solutions in private iCloud and with respect to the curation of data.
10. Cost control
Rather than offering components of outsourcing, the buy side want to understand the costs better. With the uncertain economic climate, the buy side is ready to have a conversation about the risk they take on.
Read the full feature on outsourcing laid bare in the upcoming spring issue of Global Custodian magazine.