Standardise all key  processes Fund managers sometimes have  a crisis of self-discovery when they  outsource operational functions.  They find their ‘highly customised’  processes often need to be  standardised in order to fit into the  operating model of the custodian.  This can lead to tension between  both parties, and in many cases, the  custodian will agree just to appease  their client. In the vast majority  of situations, this is often causes  operational errors and inefficiencies.  Before outsourcing, managers  should judge whether their  operations depart from industry  standards. If they are different, the  manager should aim to standardise  operating processes where possible,  and objectively question the need  for customisation. Conversely,  custodians should have the  conviction to push back on  customisation requirements and  be fully transparent regarding  associated risks and inefficiencies  that it can cause.

Realign commercial  goals While custodians endeavour  to differentiate themselves from  their competitors on the basis of  service, the reality is that fund  managers typically use price as  the determinant of their decision.  Recognising this, it is common for  incumbent custodians to discount  their rate cards for key clients in  order to prevent them from being  subjected to re-tender.  From an industry perspective  the results are telling. As  revealed by the March quarterly  superannuation statistics from the  Australian Prudential Regulation  Authority, fees paid to custodians  in 2009 averaged 0.02 per cent,  compared with the total investment  costs passed to investors of 0.78 per  cent, primarily due to management  and administration fees.  Custodians need to ensure  that the revenue for their services  properly reflects the cost of  providing these services. Fund  managers should recognise the  current ‘price war’ is not to their  advantage and that it is a key  contributor to the current service  level standards. Comparing  the costs of outsourcing against  developing and maintaining inhouse  proprietary technology is not  a meaningful exercise. 

Standardise the SLA : no  more War and Peace There has been good progress  made towards standardising the  exchange of data between fund  managers and custodians (for  example, SWIFT communications  and straight-through processing).  But many fund managers and  custodians still operate within the  constraints of archaic and highly  customised SLAs that do not  reflect the ‘real’ services offered.  To enable managers to compare  and benchmark services, an  industry-standard SLA between  managers and custodians should  be written. This independent  document would succinctly  describe the services to be provided,  expectations of these services and  how they will be measured and  reported. In comparison to the  existing 200-page ‘War and Peace’  SLAs, this standard document  should be no more than 20 pages,  structured in a clear and concise  format and benefit both parties.  By fulfilling the steps  mentioned above, Shoreline believes  the full potential of outsourcing can  be achieved.