When the news broke that JP Morgan had abandoned its five-year struggle to implement an outsourcing deal with Schroders and was paying back £20m (€30m), there was something of a sharp intake in breath in the sector. This was not because the news was unexpected – it had seemed for some time the venture was doomed and the only people unaware of that were those doing the outsourcing – but what did the news mean to the industry overall?
“We’ve been aware of a growing discontent about outsourcing but people will make mischief out of the JPMorgan/Schroder thing too,” says Peter Ellis, principal at Investit. “I don’t think outsourcing is in its death throes.”
The doom-mongers had already been saying outsourcing was not working. They had pointed fingers at Scottish Widows Investment Partnership (Swip) asking why would it put up its outsourcing contract with State Street for bids at the first opportunity? Now we know that Swip has re-signed with State Street, a matter of smart horse-trading rather than abandoning the horse as a transport means.
At the core of the speculation lies the traditional custodians’ ability to provide the technology the asset manager sought and a growing voice that specialist software houses could do a better job.
“We think that multi-sourcing will transform strategies and that an evolving plug-and-play market for investment managers will develop,” says Richard Walker, managing director, financial services technology consulting at BearingPoint.
He says that custodians had gradually bundled services onto their old systems and as a new investment manager joined, they found they had to comply with the limitations of the rigid legacy system. “Effectively fund managers are giving up one legacy system for another,” says Mr Walker.
The JPMorgan upper corporate lip might still be quivering at the Schroders’ news, but admitting failure is still not on the cards. “I wouldn’t say we failed,” says Mark Austin, vice-president and head of strategy for JPMorgan Investor Services in Europe, Middle East and Africa. “We had just gone in different directions as institutions.”
While Schroders says that all it wanted to say about outsourcing could be found in its two-month old press release on the subject, Mr Austin did point to flaws in the process of keeping up with the changes in business direction taken by Schroders. “We knew there were changes afoot but we didn’t realise their implications,” he explains.
He accepts that both JPMorgan and the whole industry would draw lessons from the failed contract, but it was stupid to see it forcing JP Morgan out of the business. “Outsourcing is still a young industry and this was another step in its evolution,” he says and points to the recognised success of the Morley contract.
Complex technology
But away from the complexity of the business process analysis which obviously went wrong, like having a single development team, the issue of technology did raise its ugly head. Morley used an already developed system, the HiPortfolio platform from DST. The complexities of Schroders saw JP Morgan try to develop a new system called Symphony.
Considering Schroders is the only sizeable asset management house that retains custodial operations in-house, there seems to have been added problems. “But no the problems had nothing to do with technology,” maintains Mr Austin.
There are also technology questions over the Bank of New York’s (BNY) relationship with Merrill Lynch Investment Managers (MLIM) and its refusal to move to the SmartSource platform.
At BNY, Daron Pearce head of client management for asset managers, says: “We are having an ongoing dialogue with them about integrating SmartSource.” But he admits that MLIM’s own platform was so ‘pervasive’ into the systems and process at MLIM, that it simply wasn’t possible to ‘just switch over’.
“Their system does stuff we neither want nor need for our platform,” adds Mr Pearce. And while the discussions were ‘long and challenging’ and unlikely to be resolved ‘imminently’, Mr Pearce is certain that technology is rarely the issue that causes an outsourcing failure.
Are these systems the old legacy computers described by critics? “Some custodians run their investment operations outsourcing business on legacy, or multiple legacy, systems,” says Peter Holman, head of investment operations outsourcing at Northern Trust. But it doesn’t take away from a custodians ability to outsource, he adds.
But for Mr Walker the evolution of custodians gradually bundling services onto their old systems means that as a new investment manager joined, they found they had to comply with the limitations of the rigid legacy system. “Effectively fund managers are giving up one legacy system for another,” concludes Mr Walker.
Mr Ellis says the main drive for the asset managers to outsource the back office was to reduce costs, the fixed to variable cost per transaction and less cash spent on systems’ maintenance.
“Then they were moving from straight lift-outs onto developing strategic platforms in order to get economies of scale. That has stalled,” says Mr Ellis. “Many of the larger players simply have not completed the strategic platforms and they won’t say that but we would.”
As a result in many cases they have been unable to provide reassurance that they can cope with the scale of multiple managers working off the same platforms, he believes. These platforms are also being expected to support or link to an increasing number of new software applications for the new asset product range.
Brown Brothers Harriman has been singular in its approach through component outsourcing, but newer non-financial institutions are being tipped as offering competition to the traditional big boys. Also, broker-dealers are trying to secure outsourcing deals with small-to medium-sized financial houses through white-labelling. Already one survey has ranked the top 10 outsourcers to hedge funds as not being made up of the traditional asset management outsourcing companies.
The idea that the technology firms and software houses will take over the business, remains fanciful. “Software houses might have the technology but they haven’t proved it. More importantly they don’t understand the asset managers business process,” observes Mr Ellis.
“Financial software houses potentially have the ‘total systems architecture’ solution, but typically these systems best operate to the standards within which they were developed. That is, they would require significant customisation and re-engineering to satisfy different investment manager requirements,” says Mr Holman.
It remains unashamedly a loss-leading business for now.
