The scarcity of experienced back office staff is a major driver of the uptake outsourcing services by both buy side and sell side institutions. With investment managers and pension funds becoming ever more sophisticated in their investment strategies, back offices are struggling to cope with the added processing burdens being placed upon them.

Securities services providers see this as a significant opportunity to insource the back office processing of brokers, investment banks, pension funds and fund managers. The latest announcement in this area was from Kas Bank, the Amsterdam-based securities and investor services bank.

Last month it launched an integrated back-office outsourcing service for UK wholesale brokers operating in the main European markets. Further plans are for a rollout to Germany and other primary markets.

The system links directly to Kas Bank’s cross-border clearing and settlement platform, providing fully integrated support of the entire post-execution process. Users will be able to deal exclusively with Kas Bank from front-office deal capture to data enrichment to cash and stock position reconciliation.

Peter Rouwen, head of global and European banks and brokers at Kas Bank, says an increasing number of clients are looking to outsource back office functionality.

“Many of these back office functions are also done by us, so in order to minimise processing flows, it is more efficient if we take care of the back office for our clients,” says Rouwen. “Clients send a transaction file electronically from their order management system in to us, which can be then linked into the settlement details we have in our system. From this, we generate settlement instructions on behalf of the client. We can then route these instructions via the clearing and settlement platform to the relevant market. The whole transaction flow is more condensed and straight through processing rates are much higher,” he says.

Rouwen says operations are becoming a much more difficult task for Kas Bank’s clients particularly as their business becomes more cross-border. “Each market has a different way of dealing with clearing and settlement, and brokers, particularly in the mid-sized market, don’t have the development staff to deal with this.”

Laurens Vis, managing director UK at Kas Bank says there is a big demand in the broker community for cross-border settlement services combined with general clearing services. “For brokers to survive in the future, they will need to be able to offer their clients the capacity to service more books and exchanges across Europe and globally,” he says. “Kas Bank has built a Europe-wide clearing and settlement system on the back of which we can support clients with transaction reporting, margin calculations and margin finance, including direct credit facilities.”

Another area that is feeling the pinch in terms of back office staff is the hedge fund industry. A recent study by US business consultancy Rothstein Kass has found a “piecemeal approach” to personnel issues at hedge funds, with a focus on back office staffing only when problems have become apparent.

The majority of the 500 chief financial officers surveyed by Rothstein Kass cited difficulties retaining their back office personnel. “Operations is one of the areas most taxed by rapid business growth, as infrastructure expansion is almost always, by its very nature, a response to an increase in accounts and assets. Nearly 60% of the firms in our study felt that they did not have sufficient manpower in the back office, but smaller firms were more likely to cite this as an issue than larger firms,” says the report.

While this may be a headache for hedge funds, the traditional custody providers view the skills shortage as a real business opportunity. Over the past few years custodians have built up their alternative funds servicing capabilities - most by acquisition - in order to service the high growth hedge fund market.

This has coincided with the increasing involvement of institutional investors in hedge funds. An SEI and Infovest21 survey published in December last year found that two thirds of the 100 institutions surveyed ranged fund administration as a prime concern.

As investors become more sophisticated, more business is transacted across borders and regulators require higher levels of reporting, back offices will struggle to cope. Outsourcing, which was once considered a risk, has now become a necessity for many buy side firms. Securities services providers are, however, facing similar staffing problems and the job market in this sector is tight.