As a consequence of these arrangements, Schroders’ asset management costs are expected to increase from the fourth quarter of 2005 by around £2.5m (€3.6m) per quarter. Against this, Schroders is receiving a one-off payment of around £20m from JPMorgan, which will be reflected in the income statement in the first half of 2005. Management at Schroders expect 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.
UK investment operations services provided since 2000 by JPMorgan to Schroders on its operating platforms are to be transferred to Schroders.
The mutual decision, however, on this project does not affect any other aspects of the long-standing relationship shared by JPMorgan and Schroders. JPMorgan will continue in its existing relationship to support the Schroders franchise for custody, accounting and other ancillary services.
A conciliatory statement from JPMorgan Worldwide Securities Services talked about how the firm values its “long-standing relationship with Schroders” and how they “will continue to work together to add value.” A Schroders statement said that staff operating the platforms will be transferred in-house by the end of the third quarter of 2005, and that Schroders’ clients will be “unaffected by these changes.”
While it may be a relief to both parties that the relationship was dissolved, research from the Bank of New York paints a more positive picture of fund managers who have outsourced their middle or back office operations. Of 21 European fund houses, with combined assets of $2,100bn which bit the outsourcing bullet since January 1999, most enjoyed an appreciation of more than 10 per cent in the share price of their parent company. And the momentum of deals is also increasing.
Dr Deborah Pretty, principal of Oxford Metrica and co-author of the study titled ‘Delivering Value from Outsourcing’, noted that although costs may be contained in an outsourcing project, direct cost reduction is not the main driver of value. Long-term commitment and stability of the custodian were considered as the two most important attributes in the decision to outsource, ahead of the financial benefits in third place.
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.
RA
See outsourcing feature, page 34
