One of the worst kept secrets in the investment management outsourcing world assumed an official personality today with the news that Schroders had decided to abandon the project of outsourcing its operations to JP Morgan. The UK investment operations services currently provided by the bank to Schroders are being transferred back to the fund manager. JPMorgan is making a payment to Schroders of £20 million.
The outsourcing deal, which dates back to 2000, was known to be years behind schedule, and had become a source of friction between the custodian and the fund manager. It came under rigorous scrutiny after Markus Ruetimann, the former head of technology and portfolio services at UBS Asset Management in London, took over as head of IT, operations and facilities at Schroders last year.
The essential mistake, it seems, was the attempt by Morgan to use the outsourcing contract to pay for the construction of an outsourcing platform that could then be used to secure other third party contracts. In an official announcement published today, Morgan says that “after a rigorous review, the firms concluded that their individual operating models are no longer sufficiently aligned to continue the investment operations outsourcing project effectively.”
Though the bank says the decision to terminate the project was “mutual,” and that it will continue to supply Schroders with custody and accounting services, it is hard to believe that Morgan would not have done everything in its power to avert such an embarrassing outcome.
The fact that parts of the platform built for Schroders are already being used by other clients and that Morgan has made a better fist of several outsourcing transactions – notably Morley, RLAM and BGI – will be scant consolation for the failure of such a flagship deal. It is hard to interpret this news as anything other than a major setback for Morgan, and perhaps for the fund management outsourcing industry as a whole.
“We value our long-standing relationship with Schroders and we will continue to work together to add value to both firms,” said Michael Clark, head of JP Morgan Worldwide Securities Services, in a statement. “This mutual decision positions JP Morgan’s business for long-term growth through a relentless focus on delivering value to clients.”
Schroders confirms that the cancellation of the project will not affect other business Morgan has with the firm. The fund manager says the staff currently operating the various platforms will transfer back to Schroders by the end of the third quarter of this year. The firm adds that “clients will not be affected by these changes.”
However, Schroders says its fund management costs are expected to increase from the fourth quarter of 2005 by approximately £2.5 million a quarter. The £20 million one-off payment from JPMorgan, which will be reflected in the revenue statement for the first half of this year, will offset this initially. “Management expects this increase in costs to be absorbed over the next two years within the group’s continuing programme for controlling operational and non-compensation costs as the business grows,” said Schroders in a statement to the London Stock Exchange.