Driving Down the Successful Middle Office Outsourcing Transition Highway

Guest Contributor: Philip Sindel, President & CEO, Olmstead Associates, Inc.

We have learned a couple of things over the past several years.  First, investment managers are more willing to consider outsourcing middle and back office functions.  The slow and uneven recovery has focused continual attention on expense management.  The typical asset management business model will see a drop in revenue if a client’s assets drop but not an equivalent drop in the operational cost to maintain that client’s portfolio.  Therefore asset managers have been looking at whether or not to run their own internal investment operations or outsource to a provider.  The goal being to realize expense reduction through the provider’s efficiencies and economies of scale.  The second thing we have learned is that executing and transitioning (or on-boarding ) to and maintaining an outsourced relationship is not easy and faces multiple challenges.  Therefore, what are some key areas of focus that the asset manager (and service provider) need to think about to insure that the move to outsourcing is smooth and successful?

Methodology – a well defined, repeatable process is required for any successful on-boarding to insure consistent and predictable results.  Both the asset manager and service provider need to carefully consider customizations to the process as they are likely to have a ripple effect within the on-boarding process and ongoing operations and significantly impact the transition timeline.

Governance – having a well written outsource contract with clearly defined SLAs is a must and a key part of governance.  However, realize that no contract can be written to deal with all issues.  Both asset manager and service provider need an effective governance structure.  The governance structure will deal with contract compliance, performance management, issue resolution as well as risk management since any time organizations engage in a partnership there are risks.  Also, the outsource contract must be reviewed regularly over the life of the agreement.

Business Process Optimization – there are two areas to consider here.  The obvious one are the business processes outsourced to the provider.  What are the processes and data to be controlled by the service provider and what will the process flows be to support them?  The other area that needs to be looked at are the business processes that are retained by the asset manager. These processes need to be redesigned to enable touch points and handoffs between the manager and service provider so that the processes are carried out correctly and efficiently.

Culture and Communication – is the asset manager ready for outsourced processes?  Can the culture morph from one that was possibly built on variations of informal communications (“asking the person in the next cubicle”) and documentation (“let’s get this change in quickly”) to more formal procedures?  Can the service provider, by bringing past experiences to the table, help prepare the asset manager?

By insuring that these areas are addressed during the on-boarding planning process, the goals of both the asset manager and service provider can be met.  The asset manager can successfully reduce expenses, improve their operational efficiency and focus on the investment process while the service provider will increase revenue, decrease service delivery cost and meet client objectives.

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