For starters, where did things go wrong? Its probable that those of us who were not party to the failed transactions will never really know. Beyond issuing bland or euphemistically-worded statements at the time, the protagonists have been slow to reveal what the specific sticking points were. Leaving, of course, the rumour mill to fill the gaps.
F&C Asset Management, for instance, merely blamed the breakdown of outsourcing negotiations with Mellon Global Securities Services on a failure “to agree contractual terms”. When asked, during a recent FT Mandate round table discussion on middle-and back-office outsourcing, whether the merger with Isis had undermined the existing outsourcing relationship with Mellon, Alain Grisay, F&C’s chief executive officer was adamant that it had not.
He said only that after a year of negotiations, Mellon “still would not answer a very simple question which was: ‘would you deliver a defined service at a defined price?’” And referring to F&C’s previous outsourcing arrangement with Mellon, he observed: “I would have expected a different negotiation style to the one they used.” He refused to elaborate further on either point, which one can understand. Few people in the financial services industry are prepared to rock the boat or court controversy by calling a spade a spade. The securities services industry is particularly sensitive to less-than-complimentary press coverage.
However, if outsourcing service-providers are going to learn from past failures and build a profitable, sustainable business in the future, less pie-in-the-sky and more plain speaking will be called for.
Why? Because although the outsourcing market potential is huge the future is uncertain for many players. But first the good news. A new survey of the investment operations outsourcing market by consultants CityIQ in association with Northern Trust and HSBC showed that two-thirds of all asset managers polled believed that outsourcing is here to stay, with only 10 per cent believing it is destined to fail.
The bad news is that following the aforementioned outsourcing failures, 68 per cent of respondents are now worried about the capacity of service-providers to deliver what they want.
Respondents also expect half of the current service-providers to be out of the market within 10 years. And the popularity of service-providers varied considerably, with approval rating between 58 per cent and 17 per cent. A similar outsourcing report published recently by Investit, an investment management consultancy also contained a slew of worrying findings to make service-providers sit up and take stock.
For example, the research showed that providers’ solutions fall short of meeting investment managers’ evolving needs, particularly derivatives handling capabilities.
Also, managers and providers have difficulty in agreeing to and delivering on mutually acceptable tactical and strategic product and service enhancements.
Both surveys show a question mark hanging over the ability of service-providers to respond to the changing needs of their clients over time. This should ring a few alarm bells especially in light of another CityIQ finding that 21 per cent of respondents need assistance with hedge funds and derivatives and 9 per cent of asset managers would like to outsource property management.
Commenting on the CityIQ findings, Toby Glaysher, senior vice president, global fund services at Northern Trust, said: “robust technological capabilities that can cope with increasingly complex investment instruments and reporting, combined with a deep understanding of fund managers’ requirements and motivations are key to the success of an outsourcing relationship.”
While technological capability hinges on having deep pockets, successful outsourcing arrangements simply depend on clear and on-going communication between client and provider.
But while the supply-side should become more responsive to the needs of the buy-side, our outsourcing round table report (see Securities Services Supplement) reveals that the expectations of fund managers, in turn, must be tempered by realism and an awareness of the commercial drivers of their service-providers.
That said, players in the outsourcing market acknowledge that mistakes have been made on both sides and lessons need to be learned. They recognise that outsourcing arrangements are not static but constantly evolving over the lifetime of a contract. They talk about the outsourcing deal being a partnership where two parties work to achieve common goals to derive mutual benefit. Some liken the outsourcing contract to a marriage which both partners have little choice but to make work on account of the unthinkable cost and inconvenience of breaking up.
Whether future outsourcing contracts are marriages made in heaven or hell, only time will tell.
Henry Smith, editor
henry.smith@ft.com
