GC Friday Interview: Brian Collings, CEO of Torstone Technology, on Outsourcing

Throughout the financial services industry, cost pressures have accelerated the trend of outsourcing, particularly for functions that might be considered to fall outside of a firm’s core competency. However, finding the right level of outsourcing has been a challenge. Brian Collings, chairman and CEO of Torstone Technology, says that advancements in technology have made it possible for firms to outsource the infrastructure while maintaining control of operations, thus creating a better balance.
By Jake Safane(2147484770)
Throughout the financial services industry, cost pressures have accelerated the trend of outsourcing, particularly for functions that might be considered to fall outside of a firm’s core competency. However, finding the right level of outsourcing has been a challenge. Brian Collings, chairman and CEO of Torstone Technology, says that advancements in technology have made it possible for firms to outsource the infrastructure while maintaining control of operations, thus creating a better balance. Torstone’s flagship platform, Inferno, provides the technology for firms to manage their post-trade processing and is aimed at sell-side firms, though Collings says that as regulation increases the transparency requirements on the buy side, he now sees potential with mid- and large-size buy-side firms.

GC: What types of firms have been outsourcing the most, and what functions do they typically outsource?

BC: We’ve had a couple of mid-tier brokers, who had outsourced the whole of their operations, but have found that they can save costs by bringing the operations function back in-house, but leave the technology and infrastructure outsourced. Even though they brought the back-office processing back in-house, they did not need to hire any additional staff, because our straight-through-processing is so very highly tuned to their business. Another one of our recent clients, a mid-tier broker, just went live this week.

All tiers of firms outsource some part of their value chain, and most are looking to outsource more, but the key question is what’s in and what’s out; what’s core and what’s non-core.

GC: How do firms find the right balance between what to keep in-house and what to outsource?

BC: For the sell side, it very much depends on the size. Every firm is different in terms of size, geography, complexity of products traded and maturity of the organization. It’s a natural progression, for example, when a business starts up, or moves into a new product area, the quickest way to start the new business is to find a ready-made outsourced solution. For the initial low volumes of the business, it is more cost effective than building a large team to support that business.

Over time, as the business volume grows, the support team becomes familiar with the product and the processing required. The organization also wants to service its clients directly, so it will develop the expertise in-house to monitor the outsourced function and support its clients directly. At some point in the business life-cycle, though, it starts to become more cost effective to look at what functions to bring back in-house. With the right technology, this can be done with no additional resources, since the expertise is already in-house.

We’ve seen firms outsource the physical infrastructure, and now we’re seeing them outsourcing the processing. I think going forward, even the processing will go up the value chain to look at their risk management, even research, in fact, anything that’s not client-facing has potential to be outsourced. But I also see the technology is moving just as fast in terms of the complexity of what can be automated. That’s why I see a very interesting balance in what will be outsourced. As the technology improves, more of that outsourced processing can be brought back in-house.

Hotsourcing is a term we’ve been using to talk about this process of selecting the right mixture of what to outsource and what to keep in-house. This can be an incremental approach rather than a big-bang, keeping the operational risk of change to a minimum. Another example is where a client has started with just our reconciliation module, which puts a strong framework in place in to help incremental change happen in a fully controlled manner.

GC: For the functions that firms outsource, what are the benefits in doing so?

BC: The key drivers for outsourcing are to reduce cost and/or supplement expertise in the support areas of a business. However, other benefits are vital to keep in mind; control and agility are essential, not only to provide your client with a quality service, but also to keep the regulators happy.

For many organizations, outsourcing the technology but keeping the operational expertise in-house provides many of these benefits. Outsourcing the technology keeps the cost per transaction down, particularly for high volume products, while the control and quality is in the hands of your experts.

Right now, the environment is still very much cost-focused, but another key reason I’ve seen for bringing operations back in-house is quality. The market is so sensitive to failures; clients can move from one broker to another very easily. Although the front office is vital in terms of the business relationship, the quality of what your back office is delivering is also very important these days, and some of the outsourcing relationships haven’t gone so well in terms of providing a high-quality service.

For the lower volume but more complex product types, like OTC derivatives, fully outsourcing the operational processes is popular for the mid-tier organizations, but I see this changing over time as technology provides more sophisticated automation for complex products.

GC: What’s likely to happen in the next few years in terms of how much firms will outsource? Will it be significantly different from the current landscape?

BC: Outsourcing, generally to lower-cost labor markets, has been a trend over the last decade, but I believe this will change in character going forward. There are limits to what processing you can move to a lower-cost labor market, and these markets are already becoming more expensive.

The next level of cost saving will need to come from more efficient and flexible underlying back-office systems; systems that can adapt quickly to the market changes and provide faster time-to-market for new business initiatives.

There is the obvious influencing factor of regulation. Regulation is also driving the need to be nimble, and many of those legacy back-office systems are not. The transparency required by the regulators is driving a requirement for timelier processing but also for in-house knowledge of the underlying data quality and data completeness. The days of running part of your business on spreadsheets are gone.

«