A cornerstone of excellence
In the fifth and final article in a new survey, Jervis Smith and Amin Rajan argue that outsourcing is no longer a nickel-and-dime business
More stringent due diligence is one immediate outcome of the credit crisis. Institutional clients and fund distributors no longer focus on front-office talent and track records when selecting their asset managers. Operations feature high on the list, according to a new global survey sponsored by Citi and Principal Global Investors*.
Outsourcing of non-core activities is becoming a cornerstone of excellence. Already strong in back office, it will spread to a number of high value added activities in the middle office. It will ensure that asset management remains a quintessential craft business, but with a professional overlay of skills and infrastructure to exploit the opportunities created by the crisis. In the process, new forms of alliance will deliver higher operating leverage as well as a raft of checks and balances that rank high in clients' due diligence.
Asset managers had been concentrating on their core capabilities and outsourcing the non-core areas in the aftermath of the 2000-02 bear market. It looks as though history is about to repeat itself. Back then, cost control was the aim. Now, it is operational excellence and business resilience.
The professionalisation of the client base - highlighted in our July article - will result in a step-increase in demand as well as the quality of services. These will include: accurate timely reports, regular ad hoc communication, prompt response times to queries, frequent valuation and investment reviews, performance attribution analysis, product suitability checks, and independent stress tests on new products.
Thus, outsourcing will spread to new high value added services like derivatives pricing; valuation of illiquid assets; tax planning; performance attribution analysis; and risk, collateral and data management.
Due to a cumulative lack of investment in data warehouses, asset managers had a rude awakening when the collapse of Lehman Brothers left them with no idea of their trade positions and risk exposures. They also discovered that excellence in this and all other middle and back-office activities comes at a heavy price.
To bridge the gaps, third party administrators are building a new generation of platforms with enhanced line speeds, scalability, and multi-product capabilities. They are emerging as strategic partners, using their critical mass of clients to deliver operating leverage. They are also delivering economies of scope by enabling their clients to penetrate new markets in Asia, Europe and Latin America via UCITS funds. This is done by providing the essential data and process connectivity in real time between asset managers and their distributors. Some administrators have also started to offer introductory services that enable asset managers to find distribution partners in far-flung geographies.
Post crisis, operational excellence is about doing new things to cope with the new reality, while doing old things better. Its leverage has been just as pronounced in penetrating new markets via UCITS as with running the multi-boutique model. New forms of alliance are emerging that go well beyond cost savings, and deliver symbiotic dependencies in the business strategies of the partners.
Jervis Smith is global head of client executive, Citi Global Transaction Services and Amin Rajan is CEO of CREATE-Research
* Available for free from firstname.lastname@example.org