Outsourcing back and middle-office activities adds more than 10% to the shareholder value of European asset managers, according to a study conducted by independent strategic adviser Oxford Metrica, commissioned by The Bank of New York.
The full report, “Delivering Value from Outsourcing by European Asset Managers,” analyzed the movements in the share prices of 21 European fund management companies, with combined assets of $2.1 trillion, following the announcement of an outsourcing deal. It found that the share price increased as a result of investor expectation of improved manager performance. This positive impact appears to be unaffected by the type of outsourcing model adopted or the size of the deal, according to Oxford Metrica. The findings also showed that although costs may be contained in an outsourcing project, direct cost reduction is not the main driver of value.
The key motivator cited behind a successful outsourcing deal was the desire and ability of asset managers to demonstrate understanding of costs and their drivers, and to distinguish between core and non-core activities. By outsourcing genuinely non-core investment activities, managers have more time to focus on key business issues: investment performance, investment strategy and asset allocation.
The characteristics outsourcing service providers considered most important were long-term commitment and stability. The majority of asset managers involved in the research believe that their operational risk would ultimately reduce from outsourcing.
Daron Pearce, head of client management for fund managers, The Bank of New York, said, “By enabling managers to move away from administrative duties, they can focus on their main goal – generating performance. We expect the trend to outsource will continue as the marketplace becomes increasingly competitive and crowded.”
Dr Rory Knight, chairman, Oxford Metrica, said, “The considerations crucial for asset managers wanting to outsource are strategy and value – not a simple cost reduction, as much of the market may believe. The ability of asset managers to understand the drivers behind cost is clearly the critical success factor in a major outsourcing deal. Outsourcing should enable a company to focus on its core activities and future growth. Providers need to not only bear this in mind at all times, but also consider the positive message that a properly conducted outsourcing deal conveys about the management of a company.”