Demands for scale and partnerships will drive further outsourcing deals

An inability to achieve scale quickly enough in-house and the need for a strategic partner are driving asset owners and insurers to outsource investment operations.
By Paul Walsh
Increased demands for scale and strategic partners will drive asset owners and insurers to outsource their investment operations, according to research from State Street.

A recent survey of 507 global asset managers and owners revealed around a quarter of pension funds and insurers plan to further increase their outsourcing operations.

An inability to achieve scale quickly enough in-house was cited by 36% of respondents as an important factor driving outsourcing decisions.

Other factors driving outsourcing operations include “the need for a strategic partner” to foster long-term growth as well as a need to focus “in-house resources on value-adding activities” cited by 35% and 32% respectively.

In addition, 27% of respondents believe external providers can perform the function better than they can while 22% feel outsourcing can help their institution access additional talent and expertise.

Other results show investment managers plan to make the most significant increase in outsourcing and fund accounting, investment operations and distribution support.

State Street’s findings follow a number of outsourcing deals and commentary in recent months.

BNY Mellon revealed in April it expected to see more outsourcing deals from asset and alternative managers as a result of new pressures on buy-side business models.

“We think the asset servicing business which is going to benefit from secular trends which are putting pressure on asset managers to transform their operating models and to outsource more of their solutions,” said Brian Shea, CEO of BNY Mellon’s Investment Services business in the bank’s Q1 earnings call.

Banks and buy-side firms are being forced to refocus their core and non-core business operations, particularly given the high costs of maintaining and managing IT infrastructures.

This refocus on business operations is driving outsourcing deals to third-party vendors, such as custodians and technology providers.

“Gradually banks and buy-side firms are having debates about what are core and non-core services,” said Peter Farley, senior marketing strategist at Misys, speaking to Global Custodian earlier this year.

“There is a lot of IT costs tied up in back-office operations and a lot of it needs to be streamlined and made more efficient.”