Building relationships for the long term
A good working relationship between an investment manager and a service provider should be the foundation on which a successful outsourcing arrangement is built. This is the second of a series looking at outsourcing trends in different European markets.
Recent outsourcing developments in markets such as the Netherlands, Luxembourg, and Germany are proof that European investment managers are facing the same principal driving forces for outsourcing as their Anglo-Saxon counterparts. No matter what the geography, cost-pressures, technology demands and increasing complexity all play into the equation.
Asset managers who find themselves contemplating an outsourcing arrangement must look beyond its more tangible components to the relationships upon which such a solution is built.
What are the components of a good relationship? Marriage experts might list a few common traits. One, they are mutually beneficial and respectful. Two, there must be a strong undercurrent of trust and commitment. Three, they must move forward and develop over time. Four, they must be built on clear and honest communication. All told, the best relationships are strong enough and flexible enough to overcome both short- and long-term challenges.
These attributes of an enduring marriage can also ring true in the working relationship between an asset manager and a service provider. Amid the complexities of an ever-changing industry, however, building a beneficial relationship can be very demanding. Ultimately, hard work will bring results that are well worth the efforts, yielding operational efficiencies, the ability to clearly focus on the core business, more predictable operating costs and improved reporting.
Laying the Foundations
Identifying and recruiting a potential service partner is not a difficult task. The range of companies offering an impressive array of products and services is broad enough to stimulate the appetite of the most jaded and cynical of asset managers. Indeed, when faced with so many attractive options, it can be tempting for asset managers to snatch at the menu and make impulse decisions, instead of carefully weighing and evaluating all the potential advantages, setbacks and long-term implications of such partnerships.
Managers should be scrutinising potential service providers with their own best interest in mind. A provider can have all the technology, global scale and expertise to conduct transactions, but unless the primary objectives – and the strategies needed to achieve them – are clear, the relationship will inevitably break up. And this will cost more than the initial investment of time, resources and money.
Unfortunately, the service providers who may offer quick solutions and easy fixes are the ones that demand the most attention, and call for the most caution. While their suitcase-full of wares may seem to solve an immediate need, can they provide solutions at all stages of the investment cycle? Do they have pre-trade, compliance monitoring, trade order management capabilities and proven IT network infrastructure? Asset managers may be better off with an experienced provider that can expand its support across the entire cycle over one that does one or two things particularly well.
Will the development and provision of multiple capabilities dilute a service provider’s focus? Best to check the numbers. If a provider can demonstrate that most of its growth comes from existing clients, it is likely to be a provider that has a strong service and relationship focus. A reluctance to discuss the track record will likely suggest otherwise.
As an example, consider the European government pension plan embarking upon a new relationship with a service provider to outsource its index equity strategy. After two years, the plan decides it needs global custody services. Later still, it wants foreign exchange trading, fund accounting, daily pricing and custody solutions. At this point, there are two options, either patch together a network of specialists, or appoint a single provider with the expertise to provide them all
Products + People = Complexity
It’s easy to understand why a relationship with a provider becomes more complex when an entire function needs to be outsourced. The arrangement may be traditional by function, as in the takeover of people, facilities, systems and infrastructure that strictly handles fund accounting. Or, it could be much larger, as in outsourcing the entire back or middle office.
The greater the complexity of the arrangement, the more that needs to change. Some outsourcing agreements require a re-engineering of distribution networks, product suites and other infrastructure. This list of qualified providers for this type of work is quite short.
In some cases, the extent of the customisation work needed to maintain the arrangement is quite extensive. Simple off-the-shelf solutions offered by some providers simply won’t work. There is a significant difference between providers who have successfully implemented repeatable solutions and those learning how to build solutions they can re-use.
Sharing the Vision
Creating a single vision for the relationship and the operating model is critical, especially in multilayered outsourcing arrangements. Without that vision, effective strategies cannot be created or implemented across a variety of channels and markets. A reputable provider must be able to deliver seamless service across multiple products, markets, currencies, languages and platforms. Many companies claim they “think globally, act locally”, but few can live up to that promise.
Although the driving forces behind outsourcing seem almost universal, misconceptions about this very important decision still remain.
Once a decision to outsource has been made, it should be followed by a thorough evaluation of the work that must ensue. Any difficulties within the current in-house operation must be addressed. Anyone who tries to ‘outsource a headache’ is likely to find that the pain may go away for a short time only to return with renewed ferocity. Understand the challenges, and be prepared to share them honestly with potential providers. Only then can expectations be set realistically from the outset.
In an effective outsourcing arrangement, the asset manager should always continue to pay close attention to the functions and processes it turned over to its service provider. Ignoring what’s no longer an integral part of the business can lead to problems down the road.
Culture is another huge issue. Providers must learn to maintain and nurture their own culture while serving the needs of their clients. Constant communication makes this possible. Like most successful marriages, a true client/supplier relationship occurs when both parties come to the table hoping it will succeed. Outsourcing mustn’t be just viewed or introduced as a means to getting rid of an existing problem.
Employees also can not be overlooked during an outsourcing transition. Other issues that can cause concern surround the in-house employees – whether they still feel important to their organisation, how they may be affected by a relocation, and whether a company’s managers will also follow suit or remain within the asset manager. It is essential to be a true partner with both parties dedicated to making the relationship a success.
Managing and nurturing the relationship is also critical. Service providers must be proactive; there is no point in an outsourcer waiting for a customer to do something. Adding value and generating fresh ideas are a crucial element in maximising the benefits of long-term relationships with clients.
What is needed to ensure good relationship management? Structures? Standards? Strong, mutually appealing personal relationships? It’s really all of these and more. Ideally, there needs to be an element of formality. A set of structured meetings with relevant workers of differing levels is required if issues are to be identified and brought out into the open to be resolved. A service provider must acknowledge what is wrong and understand how it can be corrected so that service level agreements are met.
A Reassuring Commitment
Over the course of time, the daily stresses of the relationship between asset managers and service providers in an outsourcing relationship are likely to intensify. With the need to continually introduce new products, complicated fund structures and multiple distribution channels, it’s easy to lose sight of the larger strategy.
The successful service providers are able to prove their commitment to potential clients and the market as a whole by:
q Ongoing investment in new technology and staff development;
q Maintaining large-scale, automated operations;
q Offering integrated custody, multicurrency accounting and daily portfolio pricing capabilities in multiple markets;
q Delivering around-the-clock global securities lending, foreign exchange and asset pricing from exchanges around the world;
q Providing highly efficient, innovative and cost-effective solutions;
q Focusing on constant evolution and growth of the business relationship.
Faced with new pressures, fund managers are changing the way they do business, and that’s a good thing. When they make informed and strategic decisions about selecting the best provider for the long term, it can be a great thing.
Tim Caverly is executive vice president and head of State Street’s investor services business in Continental Europe.