One thing that both JPMorgan and Schroders agreed on when they called it a day on their troubled lift-out contract was that their “operating models are no longer sufficiently aligned to justify the continuation of the project”.
“We had just gone in different directions as institutions,” says Mark Austin, vice-president and head of strategy for JPMorgan Investor Services in Europe, Middle East and Africa.
Some would argue that not being able to cope with that gradual development was something that should have been caught by their service level agreements (SLA) and key performance indicators (KPI). While admittedly it was one of the first lift-outs, the two parties made errors like having two project teams which would be considered unthinkable within a couple of years. JPMorgan’s work was made even harder by taking on a client that handled its own custody, denying itself even a custody industry-base line from which to work.
“As far as I can see, Schroders didn’t define what it wanted to do and these things fail or succeed depending on the behaviour of the two parties,” observes Les Aitkenhead, chief operating officer at Gartmore. “You have to sit around and tackle service level issues as a single entity, not as Gartmore or HSBC.”
Les Aitkenhead, chief operating officer at Gartmore
But not working with a supplier/purchaser mentality is something all the large players advocate. The starting point is more confused.
“There’s no standardisation on SLAs or KPIs, what happens is that they go round in circles until they arrive at something both are prepared to sign up to,” says Peter Ellis, a principal at Investit. At Gartmore no contract was signed until the SLA terms had been identified and agreed.
Alain Grisay, deputy chief executive officer at F&C, has just finished hammering out the final details on its Mellon outsourcing contract. “From our view, we saw outsourcing the back office operations to a specialist who would handle it as a primary business,” he reveals.
Once the decision has been made you have to look at the implications. “Then you have to make sure that your supplier has the strategic positioning to be around in five years,” says Mr Grisay.
His attitude to outsourcing reflects the custodians’ old model of financial incentives, with a certain level of costs on the first few years and then benefiting from economies of scale that the provider can pass on, including being able to handle the new emerging asset classes.
Axa’s recent signing of a European contract with State Street, was in part based on a promise that State Street would provide systems to help and speed up product releases throughout Europe.
But according to Mr Aitkenhead, the SLA remains the most important part of the process, with key performance indicators merely detailing the obvious. “We spent a good six months documenting an information memorandum with all the functions and scope we wanted to outsource,” outlines Mr Aitkenhead. “Then you have to think about how you want your business model to operate, then how services are provided back to you – the SLA needs to define how it all works.”
He believes some firms underestimate this stage of the process and its importance. “The SLA is huge and goes through every interface and information flow, all of which must be detailed – the transfer of information between two organisations must be done with clarity around the key processes and when things go wrong what’s important is how quickly the error is trapped.”
KPIs are a quantifiable measure used to monitor the success of people, processes and organisations, under the remit of the SLA. According to Investit research, asset managers use four types of KPIs: business management, risk control, process monitoring and process improvement. Each, in turn, are defined as low-level, top-down and risk management, but more than one criteria can be used and, according to Investit, there is little or no central control over their definition or use.
“There’s no standardisation on KPIs in the industry although we’ve identified 48 key ones,” says Mr Ellis, who advocates the formation of an industry body made up of service providers to draw a standard list. “The main focus for the use of KPIs in investment management is low-level operational control, not business management.”
But adds Mr Aitkenhead: “Things can also go wrong when asset managers have too high an expectation of the service – often they scream and shout about delivery because they never understood the operations of the back office in the first place,” he comments wryly.
Of course, one element vital to the contract is the exit clause, the one that Schroders or JPMorgan called on to end their deal.
“You need exit clauses - it’s a way of keeping them [service providers] honest and ensuring they keep an eye on new product development,” explains Mr Grisay. He accepts that in an ideal world, the investment management house would not want to do that, but it was a business reality.
