Will my service provider be there for me during challenging times?

Mike McCabe, global head of business development, product and marketing at MUFG Investor Services, asks should the pandemic change the way fund shops evaluate their providers and what qualities have been made more important due to the global shift?
By Mike McCabe

Sponsored by MUFG Investor Services

By Mike McCabe, Managing Director, Global Head of Business Development, Product and Marketing at MUFG Investor Services 

The ongoing COVID-19 pandemic has highlighted the need for reliable service providers, but quality has sometimes been overlooked for affordability or convenience.

The most radical restructuring of the workplace in our time is already underway. The majority of global employees who are able to do their jobs with a computer, phone and internet connection are now working from their own homes. Despite what appears to be a seamless transition for many businesses, some have seen varying degrees of productivity change. Those who took the necessary steps to plan ahead have seen productivity remain stable or increase, while those who lagged behind are seeing a decrease in output. Now more than ever, businesses have to ensure they have taken the necessary steps to guarantee that their systems and processes are resilient and robust for an extended period of remote working. The first thing they must do is assess the operational effectiveness of their service providers.

Businesses that outsource their workforces are seeing additional costs from today’s environment, employing remote workers with underdeveloped infrastructure at home that can increase the likelihood of workflow interruption, jeopardising an effective work from home model. Over the years, MUFG has focused on on-shoring or near-shoring operations, rather than offshoring. Prioritising quality and reliability whilst avoiding low-cost locations has been a core component of our success. As the COVID-19 crisis has unfolded, many companies have seen the dangers involved in locating essential functions in low-cost but potentially less dependable locations. Whilst immediate cost savings can seem attractive when times are normal, excessive dependence on these locations can be damaging, especially when they experience the types of disruption brought about by COVID-19.

The locations with infrastructures best equipped to handle a mass move to home working – countries such as Sweden, the UK, Singapore, Luxembourg and Ireland – all share the same robustness and resilience of key platforms. Those businesses which had elected to run their operations out of countries such as India, for example, were faced with unique challenges. The Indian example is interesting in particular because of the high percentage of the world’s business population who outsource their services there. As of the second week of April, a third of India’s IT workers were still going into work as they did not have the infrastructure to carry out their roles from their homes.

Investment managers will need to consider a wide range of factors as they perform due diligence and consider the price they will be willing to pay for assurance of stability and robustness from their service provider partners. The asset management industry has moved away from the affordability contest. Managers are increasingly looking for servicing firms that they can engage with on a supportive and multifaceted level, rather than just buying one size fits all services.  In a similar vein, we are also likely to see referrals between managers become more common when choosing a provider. Referees will be able to attest to the resilience and service output of their providers during a crisis, which will be an attractive trait for others in the industry looking for a similar service in future.

For managers and funds going through the due diligence process, the following checklist provides an outline of the factors and questions they should consider, as well as some examples of what they look like at a best practice provider.

Stress tests:

  • Operational challenges from COVID-19 such as inconsistent broadband connectivity and network capacity can put front- and middle-office services at risk and could affect settlements of trades and positions
  • Access interruptions on client portals and portfolio management systems can delay client reporting

Reaction times to Business Continuity Plans (BCPs) and outages strategies

  • How quickly is the service provider workforce able to perform duties remotely?
  • Is there any disruption to trading positions, reconciliations and capital calls during the transition?
  • Will the service level remain the same and will clients have access to same team?
  • Is there a clear Business Continuity Plan in place?
  • Where are critical servers located and how quickly do they kick in?
  • Are servers cloud based?

IT Security

  • How is sensitive client data protected when transferred to home broadband services?

Operation Locations

  • Does the provider operate in “onshore” locations that have reliable infrastructure to maintain a seamless transition to new locations?

As managers step up their due diligence process, requests for service providers’ BCP plans will increase. It’s essential for firms to have a fully tested BCP that is subject to regular simulations and measured for resiliency. The crises we face in the future will be unprecedented in their severity and duration, requiring BCP plans that are both thorough and nimble enough to react. Here are some of the points that providers should consider when implementing a successful BCP plan.

  • Plan well ahead and continuously test and challenge the plan
  • Look for unknown/worst case scenarios to test for
  • Minimize disruption to workforce and clients
  • Business continuity must be seamless
  • Workforce adaptability to remote work
  • Transparency and communication with clients during event
  • Engaging employees and strong support from management
  • Well diversified product/services range.

The global COVID-19 pandemic has acted as a catalyst to a trend that was already starting to evolve in the fund management world. As service provider workforces around the globe were forced into a several months of remote working from their homes, fund managers have gained a unique insight into the resilience of their middle- and back-office operations. Those who have selected providers based solely on cost savings have paid their price in other ways during this time of crisis – chiefly through inefficiency and business interruption. 

The disruptions experienced is some parts of the world where home working was made impossible by a lack of appropriate infrastructure will spur fund managers to think differently about the location of their service providers in the future. We will continue to see an increase in on-shoring and near-shoring practices to guarantee resilience and reliability. Moving forward from COVID-19 towards the next crisis, we will see an accelerated shift in the way that funds select their service provider partners. The qualities of service, reliability and operational effectiveness will become the characteristics of choice.