Moving up the value chain - BNP Paribas CIB
Friday 18 August 2017

Outsourcing is no longer only about back office processes and cost efficiency. Welcome to outsourcing 2.0.

Early-adopting asset managers started their outsourcing journey with selected back office activities in the early 1990s, driven primarily by cost optimisation. Twenty-five years later, the outsourcing proposition is no longer confined to administrative functions. Cost efficiency and risk mitigation remain primary drivers, but they are only one part of the story.

Scaling up to support growth

There is no 'one-size-fits-all' approach to outsourcing. Asset managers differ regarding which aspects of their business could be outsourced and which are core and should remain in-house. However, most understand that outsourcing can not only reduce cost; it can also 'de-risk' operations and provide immediately available scale to support growth.

The benefits that an experienced service provider can deliver increase as the outsourcing relationship is extended further up the value chain, from back to middle to front office. Outsourced activities can also cover collateral management, cash management, FX, derivatives clearing and execution, and enhanced reporting. Outsourcing aspects of the dealing operations is also attractive to some firms. Where there was once a concern that outsourcing strategic functions risked diluting an asset manager's client experience, today it can actually enhance a manager's unique value proposition.

Open-architecture platforms offered by a few select service providers can be calibrated to meet an asset manager's specific needs, while future-proofing the platform technology is the responsibility of the provider. Outsourcing removes distractions that could divert an asset manager's attention from their core investment priorities.

Added value from data

The term 'outsourcing' suggests the handing over of processes or activities that are clearly defined and functional. Indeed, managers initially employed service providers to handle specific functions, such as reconciliations. Relationships were founded on a transactional basis but, with the arrival of ever more complex international trading and distribution environments, the challenge of managing operations internally grew quickly. Today, the focus has moved beyond core services to the additional value that can be derived from the better use of the data being delivered. This has increased the importance of leveraging sophisticated digital tools to utilise data commercially. Where outsourcing was once exclusively process-centric, it is now increasingly data-centric.

Previously deemed a sensitive area, we are seeing a growing client interest in outsourcing various aspects of data management. The cost of sourcing, scrubbing, enriching, storing and aggregating data can quickly spiral out of control and this has triggered reconsideration of what can be outsourced. Technology is facilitating a move towards a 'partnership' data model, where asset managers access data through flexible means such as application programming interfaces (APIs), potentially using third-party tools which have been fully integrated and hosted by their service provider. This gives them the benefits of full access to their data and software tools without having to maintain the underlying infrastructure.

As technology has enabled the capture, organisation and transmission of huge amounts of data, analytics has become an increasingly important component of a service provider's proposition. Integrated technology has strengthened the link between data analysis and robust decision-making across all aspects of the asset manager's business. It is no surprise therefore that asset managers are investing increasingly in analytical tools and resources. But today they have a choice: to develop and maintain this capability internally or use a provider that can meet this need, supported by scale, functionality and continuous investment.

To enhance data quality, in particular data consistency, accuracy and speed between front, middle and back office, the industry is increasingly looking to simplify the investment management and operations architecture. Some of our clients are investigating a front-to-back integrated platform hosted by a third-party provider. In this set-up, the asset manager accesses and uses the front office components of the platform (asset management, pre-trade compliance management, risk management and order management), while the third party provider ensures the post-execution processes on the same technical platform.

Strategic partnering 

Asset managers regularly review the relevance of outsourcing against their strategic development plans. Whether making acquisitions, consolidating geographically disparate operations or diversifying into new strategies, an experienced service provider can help to make the transition a smooth one. In particular, the weight of regulation under which asset managers operate has increased exponentially in recent years. And while engaging a service provider does not outsource the responsibility, it makes available the expertise and experience needed to navigate layers of regulation across multiple regions, thereby de-risking the entire operation.
The evolution of outsourcing has spawned a new breed of service provider, including technology companies. Typically, they are based on a specific competency and can provide deep, often cutting-edge solutions, but procuring services in this way can result in a piecemeal model rather than a scalable, integrated service.

Beyond cost efficiency 

The future of asset managers and service providers is inextricably linked. A low-yield environment, increased trading complexity, international competition, increasingly efficient fund ranges and investment models, manager consolidation and technology innovations will change the landscape of the industry over the next five to eight years.
"The future of asset managers and service providers is inextricably linked."
A partnership model that insulates managers against these forces and allows co-development of competitive, tailored solutions is a compelling way to take the lead.

Maxime Boyer Chammard
Head of Investment Services & Analytics at BNP Paribas Securities Services

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