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.