An asset manager’s decision to change their operating model and outsource their middle office to a service provider should not be made in haste. From building internal consensus to carefully designing an evaluation process, selecting the best fit for an outsourcing partner is a significant investment.
However, what happens when, despite completing a well-thought-out outsourcing evaluation and selection project, an asset manager concludes that their current processes and requirements cannot all be transplanted, as they are currently performed, to their selected provider?
This brief will review key considerations for asset managers to successfully navigate the period between selecting a service provider and signing an outsourcing contract. By defining differences between customised and configured solutions and exploring the effect of each, informed asset managers can maintain momentum toward outsourcing while in the long term benefit from a more standardised operating model over the life of a partnership.
Look at customisation vs configuration
During the life cycle of an asset manager/service provider relationship, an asset manager’s leverage is at its apex during the period between selecting a service provider and signing a contract. Asset managers often use this leverage to negotiate perceived gaps surfaced during the due diligence process. By attempting to prescribe individualised solutions to requirements, asset managers risk creating a dissonance between their individual preference for a solution and the value gained by sharing the service provider’s technology platform, operational processes and controls with other asset managers. During the service provider evaluation process (and even during contract negotiation), the word “custom” comes up quite often in discussing requirements, when often what is really meant is that they would be considered “configured processes.”
Customisation, by definition, is the act of modifying something for an individual. In the context of a shared technology platform, customisation is further defined as any modification that entails altering the native functionality of a system. For example, changing how a portfolio accounting engine natively calculates unrealised gain/loss is a customisation. Individualised customisations are inherently a high-risk solution with potential impacts ranging from losing the ability to take advantage of system upgrades, to increased costs for maintenance and regression testing over the contract period.
Configuration, by contrast, is defined as any modification that does not require changing the native functionality of a system. For example, changing a report to display unrealised gain/loss is a configuration. From the creation of new report formats to replicating a manager’s existing pricing hierarchy, individualised configurations are the typical mechanism for solving the asset manager’s requirements in a platform made up of shared systems.
There are many flavours of customisation and configuration and whether a request falls into one bucket or the other will depend on the service provider and their standard offering. The service provider needs to have a conversation with the asset manager to understand if the request will result in a configuration or customisation effort. By and large, if a request is considered an actual customisation by the definition above, these requests should be limited or avoided. On the other hand, service providers that offer flexible, nimble platforms make excellent partners as they can handle different configuration requests based on client-specific needs without incurring outsized effort, resource realignment or cost.
The benefits of using the service provider’s standard, proven processes
An important consideration for asset managers to keep in mind, especially those that are outsourcing for the first time, is that they should not assume their internal functional processes will remain the same – this includes front-office processes as well as any retained middle-office processes. Asset managers must objectively review and rationalise their current state functional processes in partnership with the provider’s transition team, which typically results in changes and compromises when designing detailed system-agnostic requirements for future-state processes. This could be as simple as adapting to viewing information in a different reporting format, compromising on timing for SLAs, or as complex as creating new front-office interfaces.
The most successful asset manager transitions are the ones where the asset manager understands that the way they do some things internally may need to change.
The incentives for aligning closely to the service provider’s standard and proven processes were discussed in detail in our 2017 brief, “Navigating the Middle Office Outsourcing Transition: A Guide for Asset Managers.”
The record of accomplishment and expertise of the service provider results in a standard service and technology model that works for most asset managers. Furthermore, a provider’s standard service improves with each client implementation creating a virtuous cycle whereby the processes determined to benefit the greater good are typically incorporated into the standard service over time.
In considering the need to customise or not, an asset manager should first ponder the benefits of staying within the bounds of the standard offering. For asset managers who implement the provider’s standard processes, configured to their requirements, it will ultimately maximise the inherent benefits of outsourcing: scalability, enhanced operational controls, seamless upgrades, overall operational efficiency, and potentially benefit from a self-improving standard service.
When customisation is in order
Asset managers may experience some reticence in letting go of legacy processes that have not been revisited in many years, especially in a first-generation outsourcing contract. In other instances, customisation is requested because there’s a true business goal that the asset manager deems critical. Regardless of the reason and despite the potential risks, customisation requests are not uncommon. In these circumstances, it’s essential that the asset manager, in partnership with the service provider, perform an assessment to determine why customisation is needed or whether there is a configurable alternative.
Once the joint analysis is complete, and there’s a consensus between parties, there are five possible outcomes:
To help determine if customisation is really in order, or if it can be avoided, ask the following questions during the analysis:
Arguably before the above questions are even asked, it’s important for both firms to agree on what the holistic operating model looks like for the outsourced middle office.
Jointly discussing the combined future operating model, including where functionality is delivered from and who is responsible for specific data and integration points, may help to answer the questions and determine the best path forward for the requirement.
The asset manager/service provider relationship is first and foremost a partnership. Regardless of the result, both parties may need to compromise in some way, but it’s in the best interest of all involved that both parties are comfortable and confident with the result. While compromise is encouraged, the result should never introduce significant risk to the service provider’s process. Any custom requests that would introduce risk to the service provider would instead need to be delivered by the asset manager, as the service provider will never agree to perform a function that would jeopardise the integrity of services for other clients.
Reasonability of requests
There are no fixed rules on what is a reasonable customisation request vs. what is considered completely unreasonable. A service provider will reject any request that compromises their greater solution, introduce a significant amount of risk or a material change in their core processing workflow, or jeopardise/reduce their existing controls or security practices.
While this is not an exhaustive list, the following are a few examples of unreasonable requests for customisation:
While asset managers are always encouraged to limit the number of custom requests, the following list includes examples of common configurations or customisations a service provider may deliver without modifying the native functionality of their systems.
It’s important to note that depending on the service provider’s standard model and core capabilities, the above examples may be considered custom over configure, or vice versa. Further, there may be an incremental cost to the asset manager associated with requiring changes outside of the standard model.
Sometimes standard is better
While client-specific configurations and customisations are typical for most outsourcing transitions, asset managers who strive to align with their service provider’s standard offering and avoid customisations stand to benefit the most. Requirements that are considered customised vs configured will vary from one service provider to another based on the provider’s core capabilities, nimbleness, and flexibility in their platform. As such, the asset manager should work with their provider to understand which requirements fall into each category, the cost to make such changes and determine the optimal path forward. Ultimately, even if the asset manager elects to outsource their middle office, they will need to retain a small in-house team that may be better suited to provide some complex, custom requirements. By viewing a service provider’s standard processes as a valuable culmination of know-how and experience, with ongoing upgrades and industry security levels, instead of viewing the acceptance of standard processes as a concession, the benefits of outsourcing can become fully realised. A good rule of thumb for asset managers to follow is: If the outcome of the service provider’s standard process is objectively the same when compared to the legacy process, then take the standard. Customising “just because you can” isn’t a good strategy and often leads to additional cost, risk and time to delivery. Sometimes an asset manager is surprised to find that the outcome is better.
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