Outsourcing 3.0 in the Asset Management industry: Crossing the boundaries for digital transformation
Asset managers have been facing a challenging environment, and this is not expected to end soon. Enhanced regulatory requirements and, more recently (but potentially for a while), low interest rates have put the historically high-margin investment management business under pressure. The latter has also been accentuated by the overly frequent difficulties generating alpha for investing clients that has led to the overwhelming move towards passive management.
The outsourcing culture of the asset management industry
For years, asset managers have developed target operating model considerations, which have already resulted in two outsourcing phases. The first one regarded trade settlement and asset administration, commonly called back-office activities that include for instance, beyond core custody, transfer agency, fund accounting, or tax withholding/reclaims.
Almost 8 years ago some were already writing about “Second generation outsourcing in the asset management industry”1. This phase has broadly covered middle-office activities through advanced business process outsourcing arrangements regarding, mainly, transaction processing and related data and reporting management.
Asset managers should henceforth consider third-party partner(s) beyond transactional back- and middle-office activities, to investigate potentialities in the front-office area. The commoditisation trend spinning so many business activities is also at stake for some of the portfolio managers’ traditional tasks. So, pre-trade compliance, trade execution (except for some complex instruments), and cash and currency management are no longer systematically considered as part of an asset manager’s core strategic focus.
Opinions regarding outsourcing models have always been passionate, no doubt because they try to identify the very scope of what makes a difference, and hence the value, in the complicated alchemy of a successful asset manager. By investigating commoditised tasks to be outsourced up among the front-office operational infrastructure, asset managers should be able to focus on their core business of investing.
Outsourcing having been such a common setup in the asset management landscape, the benefits to be expected do not necessarily require further underlining. There is, however, a mindset change to operate, to accept switching from a best-of-breed approach, which has been dominant in the investment management industry for two decades, to a strategic partnership approach.
Several evolutions henceforth advocate for pushing the limits of a relevant outsourceable scope for an asset manager, and the technology available and required to generate performance at a limited cost is one of the fundamental elements.
Outsourcing 3.0: Outsourcing the digital transformation
Outsourcing 3.0 in the investment management industry means focusing on the asset manager’s truly core activities in which lies its specific competitive advantage. It suggests developing strategic partnerships with providers, which effectively enables the modular outsourcing of business processes on the entire investment management value chain, from front-office to middle-office and back-office, i.e. from investment management to asset administration.
The modularity of the chosen integrated solution will enable the asset manager to retain inhouse what is at the heart of its value proposition and to rely on outsourced processes and/or tools for other activities. In such an entrepreneurial and evolving market, one size cannot fit all, and flexibility is a must.
The openness of the chosen integrated solution is critical. Developing a strategic partnership should not be exclusive. Reactivity and time-to-market being key factors for success, the investment manager should retain full autonomy to develop any new business opportunities. Factually, the costs necessary to maintain and upgrade IT systems in the asset management industry are tremendous. This stems from the continuously more stringent regulation that requires substantial investments for, among others, preparing new or more detailed reporting. It also results from various fascinating technological innovations that portfolio managers need to integrate in their investment processes to cope with their competitors, from the ability to analyse huge amounts of data (which the increase in ESG investments further calls for) to automation and artificial intelligence. The technological challenge additionally originates from the rise in the number of counterparts with whom asset managers need to connect, quickly and trustfully. At the end of the day, all those evolutions point to an increase in the volume of data and the need for an extended capacity for handling them.
Few players have developed end-to-end business process outsourcing platforms packaged in fully integrated offers; not surprisingly considering the investments at stake, mainly the largest ones. Except for asset managers who would consider, in their strategic analysis, a specific competitive advantage in developing/ purchasing their own platform, most of the players, especially mid-sized ones, might rightly consider it appropriate to develop strategic partnerships with integrated business process outsourcing providers, in strict compliance with modularity and openness conditions. Obviously, intense scrutiny of information segregation and security is also part of the long list of factors that need to be considered when preparing the decision for such a leap.
New technologies, evolving market conditions, and pressure from clients have paved the way for crossing the boundaries of traditional business process outsourcing in the asset management industry. While the bigger incumbents may choose to develop digital capabilities internally, this is not an option for smaller players. Their best alternative is to outsource their digital transformation, and successful ones will team up with strategic partners to build an integrated network of expertise.
Due to strategical considerations in outsourcing digital transformation, the decision should be taken in a save-to-transform approach. The move should be considered as an investment on which return is expected: the additional revenue generated from the asset manager focusing on nurturing their specific competitive advantage and bringing real value to their clients.
Yoan Chazal is the Investment Management Leader for Deloitte in France and Monaco, covering the Asset Management, Asset Servicing, Private Banking, and Private Equity activities, responsible for the growth and innovation strategy in this business area. He has 20 years of experience in the financial services sector, gained in the coordination of key projects and proven track record, including in international and multicultural environments. Yoan has an operational knowledge of Investment Management Services issues, notably as Deputy Chief Executive Officer, running the activities of UBS La Maison de Gestion, a joint venture between UBS France and La Maison, after having restructured and turned around the asset management activities of UBS in France as Chief Operating Officer of UBS Asset Management France. His main clients are financial institutions that are most often, but not exclusively, multinational, such as management companies, private banks, investment funds and depository institutions.