Fund managers and investment operations experts have different opinions about what is most important in an outsourcing relationship, and how the operations market will change in coming years. SIMON MUMME reports.
Many fund managers outsource investment operations so they can concentrate on buying and selling assets. But it is becoming more common for outsourcing managers to employ more people to implement customised systems and check data, says Peter Hill, Asia-Pacific managing director of SimCorp. Hill’s comment is based on findings by global wealth management researcher Investit.
To compile its recent report, The future of investment operations in Australia, Investit interviewed chief operating officers at more than 40 independent and institutionally owned investment managers overseeing about $500 billion in funds under management, plus service providers and software vendors.
The research was sponsored by SimCorp StrategyLab and released on October 26. Investit finds that the average number of employees responsible for operations, as a percentage of total staff, is 15 per cent for outsourcers and 23 per cent for companies that insource.
Some outsourcers, particularly those managing complex investment strategies across many jurisdictions, regard this operations head count as too high, says Doug Neill, principal of Investit Australia.
There is a “fine line” between checking and validating data supplied by external operations providers and duplicating this work, Neill says. This can distract managers from their “core business focus” of investing money and interacting with current and prospective clients, which is judged by almost 80 per cent of managers as the primary reason for outsourcing.
Other reasons given by managers for outsourcing include cutting the current and future costs of investment operations, and their lack of expertise in the field. Interestingly, transferring risk to an external service provider – often voiced as a primary reason for outsourcing – is identified by only 20 per cent of managers as the major reason for not running operations internally.
The “spiral of decline” shows how a lack of communication can damage ties between an outsourced operations provider and an investment manager (see figure 1). Poor dialogue following an error can increase costs and workloads for investment managers, Neill says.
Reasons to insource
Close to 60 per cent of managers say that ensuring their business is “flexible” is the main reason to conduct investment operations themselves, Investit finds. “Funds want to succeed or fail fast,” Neill says. “They don’t want to set up a contract with a service provider for two years if they don’t know if their product line will succeed or fail.”
About 50 per cent of managers say having a specialist operational capability that competitors don’t have is another reason to insource. The aim of controlling business risk, such as minimising errors in portfolio valuation or performance reporting, leads 30 per cent of managers to insource.
Neill says that some managers are doubtful that external providers who move jobs offshore will continue to provide high-quality services. “Some outsourced providers are shifting tasks offshore,” Neill says. “This is a dislocation. People offshore might not know the full implications of the work they are doing.”