After a series of false dawns since the mid-1990s, a series of deals announced over the past 12 months suggest the tide may now have turned and outsourcing is finally set to take off in Europe as it has in the US. The most significant of these deals was probably JP Morgan Investment Management’s appointment of Bank of New York to provide client reporting, portfolio accounting, valuations and master recordkeeping services to some $300bn worth of assets. Elsewhere, Schroders has put its custody and fund administration in the hands of JP Morgan Chase, Scottish Widows has outsourced to State Street while Gartmore has signed up with HSBC’s Global Funds Services arm.
As Stefan Gmuer at Deutsche Bank points out: “If I am an insurance company or asset manager, then my core business is not processing securities, and the challenge for custodians is how to relieve clients of that administrative burden.” However, while the economics of the European market means more institutions are contemplating outsourcing, the ongoing process of consolidation within the region means commitment remains a key issue.
“Companies are taking particular care when it comes to assessing whether a provider is going to be in the business for the long-term and will maintain the necessary level of investment,” notes Tom Zeeb of Bank of New York. As well they might – if it is to prove a success, an outsourcing deal demands an extremely close relationship between client and custodian coupled with a high level of individual customisation, all of which adds up to equal an undertaking that is at once complex and time-consuming.
Of course, the omnipresent danger is that, without very careful management, the custodian could end up neglecting other areas of its business, not least its ‘regular’ client base. There also remains some debate as to whether the economies scale that underpin the outsourcing concept can be applied to investment administration services, which by their nature are not such a ‘vanilla’ proposition as trade processing.