Speaking at a recent round table discussion on middle- and back-office outsourcing, hosted by FT Mandate, Mr Back said there had been a number of examples of buy-side disappointment with the lack of strategic platform development by some of the supply-side players.
He explained that one of the main rationales for buy-side firms such as asset managers to engage in outsourcing was to gain access to “a leveragable platform” that enabled both rapid product development capacity and the unit cost advantage of being on a scalable platform. While financial benefits might be driven via up-front payments and the rate-card for bundled services, there was a hidden cost of failure to provide a flexible solution which could enable the business to grow and keep up with product innovation.
He said: “While clients remain on their existing lifted-out platforms it is difficult to see the delivery of significant benefits from outsourcing - indeed the lack of flexibility suffered from relinquishing control of the back and middle office functions can lead to a less flexible delivery of service to the front office than when the provision of services was inhouse.”
Michael Hooper, chief financial and operating officer (soon to be chief executive officer) at RCM UK, referring to the firm’s outsourcing contract with the Bank of New York, said there were mismatches between “what we were sold and what, ultimately, we were introduced to.”
He added: There is also a mismatch, within the outsourcing company between what their salesman sells you and what their back-office platform can actually deliver for you. This is an issue that is still burning away for us.”
Contending that outsourcing service-providers are too sales-oriented and overly keen to push full middle- and back-office lift-outs, he claimed: “There is a rush to gather assets at hell or high water. From their point of view, a lift-out is advantageous; they can lift you out, get you on, start getting the money in and then figure out what it is that they’ve actually sold you. On the other hand, if you transition the way we did [component-by-component], you see that they haven’t really got a proper working platform for you..”
James Bevan, chief investment officer at Abbey National Asset Managers, said the issue of change management, in terms of the nature of the outsourcing mandate and the capability of the outsourcing service provider to cope and accommodate it in a manner that was “economically appropriate”, was a vexed and difficult one to address.
He said: “It seems to me that agreements can be structured which, at the outset, appear to be flexible, fair, reasonable and attractive to both parties, but which can very easily fall apart when either the service-provider wishes to establish a more normal process, or the purchaser wishes to introduce additional instruments and strategies, different pricing regimes, different service levels. In which case, change can be very complex and stressful.”
Abbey is using the messaging capabilities of Brown Brothers Harriman’s Infomediary communications management platform to collect trade instructions from its external sub-advisors and feed them directly into its own internal accounting system.
Margaret Harwood-Jones, head of client segment for institutional investors at BNP Paribas Securities Services, said a clear and agreed understanding between asset manager and service-provider of the target operating model was not always evident at the start of an outsourcing contract. “It might be that both the perception of the client and the provider evolves before [they] get to crystallising a particular deal.”
Asset managers, she added, needed to establish what benefits they and their underlying clients were going to derive from a planned outsourcing arrangement.
“These benefits could be financial, or around speed to market or flexibility for new products. If there is certainty and clarity around some of these elements, then the probability of a successful deal, in our experience, is very much greater.”
HS
See Round Table report, pages 10-27, Securities Services Supplement
