Compliance, risk management and accounting – often overlooked as the unglamorous side of asset management – have been gaining a lot of attention recently.
As a result of spiralling asset levels and the widespread cost cutting exercises that have followed, asset managers are re-assessing their fixed costs and whether they can afford to continue carrying out these functions in-house.
According to Create Research, around 15 per cent of jobs in the middle and back offices were axed in 2008.
Rob Wright, global head of product and client segments at RBC Dexia Investor Services, says: “Outsourcing is a continuing trend but it has accelerated among asset managers given recent market events. Times have changed and the industry has to adapt to survive.”
He says RBC Dexia has seen an increase in enquiries around middle office and client reporting rather than fund accounting, custody and transfer agency activities, which have been common areas for managers to outsource.
Stephen Wynne, chief executive of PNC Global Investment Servicing, says: “We’re having conversations with organisations that we thought would never have contemplated outsourcing. These are some of the giants operating in the industry and those which you might have expected to insulate themselves from outside
providers.” Although shedding back and middle office jobs can be a painful blow to firms’ headcount, the financial incentive for those looking to outsource their operations are enticing enough to consider this sacrifice.
One provider claims an asset management client saved around £15m last year as a result of outsourcing its record keeping alone.
Indeed, Mr Wynne says firms that decide to go down the outsourcing route can expect to shed much of the cost associated with back and middle office functions “virtually overnight”.
He adds: “There will be restructuring costs involved, but the fixed expense becomes a variable one.”
Maintaining existing in-house back office systems can also be expensive for asset managers. Investing in new technology is no longer a viable option for firms that are struggling to plug holes elsewhere in their business.
“Outsourcing allows us to take advantage of external providers’ greater functional capacity, technological capabilities and geographical reach,” says Markus Ruetimann, group chief operating officer at Schroders.
But the cost savings are not as immediate as some might believe. Asset managers looking to outsource their back and middle office operations should expect cost savings to materialise much later.
Mr Ruetimann says: “Industry research suggests significant costs materialise from two or three years onwards. This is as a result of the costs required to change internal modus operandi – processes, IT applications, resourced pools – prior to and post outsourcing.
“However, long-term savings depend on both organisations’ ability and willingness to align their operating and servicing models so that economies of scale can be exploited together.”
Simon Hudson-Lund, chief executive of Interactive Financial Data Services, believes the outsourcing trend is likely to continue for some time, particularly among clients looking to scale back in other parts of their business.
“The biggest area where we’ve seen a slowdown is our clients’ willingness to spend money on product development, and we are not seeing asset managers come to us with big expansion plans either,” he says.
“Instead, they are focusing more on consolidation, including merging funds and eliminating products. There’s also an interest in straight-through processing and automation as managers seek to reduce costs.”
But outsourcing does not come without its drawbacks, says Mr Hudson-Lund.
Aside from taking anywhere between six months and a year to transfer data across to providers, the process can be a wake-up call for those not normally exposed to their firm’s everyday operational costs. These are usually buried deep within the business.
“When people first outsource, they think they are going to get the same supply of services as when they did it in house. If they were used to calling up the operational director and getting a team involved on a project, they would not perceive that as a cost. With an outsource provider, it usually is,” says Mr Hudson-Lund.