For many asset owners outsourcing front office services would often be a way to cut costs, but the recent pandemic has brought about other reasons to consider such a move.

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets, believes the current financial environment has brought about an increase in outsourcing activity as asset owners seek increased governance and control around business continuity.

He told IPE that outsourcing in general is a trend within the asset management world that is driven in part by an increased emphasis on governance and transparency, that in turn contributes to margin compression.

“Costs are always a consideration, it is a given,” he said, but added that “COVID-19 has provided excuses and opportunities for [asset owners] to review and reset operations”.

Pension funds have grown uneasy about lack of control and many believe the optimal model is to own and control those resources in house, but quite often that is expensive, he explained.

In a recent white paper, Northern Trust stated: “Instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.”

Paulin also noted that “the past will always inform the future” when it comes to business resiliency and disaster recovery, but the fact is that investors never had to deal with a pandemic before, he told IPE.

“Prolonged staff absence, sickness, social distancing, remote surveillance – all these come into play. COVID-19 has accelerated some of the changes already occurring.”

“No one likes change, and there are always risks with transition,” he said, adding that with technology, for example, “we all have been dragged or forced” into it.

“No one likes change, and there are always risks with transition”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets

“Working remotely challenged the assumption of proximity between dealing teams and investment teams,” he explained, noting that when outsourcing occurs there is no break in connectivity between teams. “The only difference is who is paying the bills.”

Perceived risks

The perceived risk of outsourcing being seen as reacting to cost pressure is changing and has “evolved to something more of an optimal future state”, Paulin continued.

Increased benefits in terms of fulfilling governance requirements are also evolving to become an equally compelling reason for asset owners to outsource their trading function.

Transparency and accountability are the cornerstones of good governance and regulators are already trying to improve those aspects within the investment industry.

Another common concern among asset owners is that “they fear that connectivity to the street will be lost, but in fact is the opposite. Those relationships are actually enhanced,” Paulin said, adding that the working remotely element has certainly strengthened teams’ relationships as challenges are overcome.

The people risk also exists, he said, as it is perceived that there are staff reductions when outsourcing takes place. “For front office outsourcing, people don’t necessarily lose their jobs, but their roles often change and evolve: having someone internally that understands how to deal with a team and monitor the outsourced relationship,” he went on.

Gary Paulin at Northern Trust

Gary Paulin, Northern Trust Capital Markets

“As the oversight function in any outsourced relations is critical, who best to provide that but someone who intimately knows the role of a dealer and best placed to ensure the vendor shows continual improvement,” Paulin said.

Northern Trust’s paper said: “As regulators require greater transparency in order to restore trust, and as investors become more digitally conversant (with the fastest growing cohort being digital natives), decision-making is becoming more evidenced-based.

“The presumption now is that decisions should be based on full information, and not beliefs or preconceptions, for these often blind us to accepting reality, change, or new ideas.”

Contract with Border to Coast

Border to Coast Pensions Partnership appointed Northern Trust back in 2018 to provide administration and depositary services to the investment pool.

The Partnership was created in 2018 and had the advantage of a “blank sheet of paper” when considering the appropriate operating model for securities dealing for its internally managed assets, Mark Lyon, head of internal management, told IPE.

“Our analysis pointed to an evolving trend for asset managers to outsource their dealing arrangements to specialist third parties both from an efficiency and a regulatory/compliance perspective,” he said.

Outsourced dealing services were included as part of a formal procurement with a provider that was able to supply a wide range of administration services. “Northern Trust was selected as the provider of those services,” he added.

“Our experience since the launch of our investment offerings, which have current assets under management of c. £9bn, has been positive. The process is more efficient than historic arrangements without losing the benefits of market intelligence, and Northern Trust is able to source liquidity across a wider range of market participants,” Lyon said.

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