As investment managers juggle a variety of priorities in order to continue to evolve their business model, trying to balance where to spend operating budget on internal resources versus outsourcing has become a critical consideration. In many ways, the advances in technology and the sheer number of outsourcing providers in the marketplace have given COOs of investment firms much more choice for consideration. 

Deciding which tasks to outsource has moved beyond the realm of the back-office into the front- and middle-office. With so many regulatory and investor reporting demands, leveraging outsourced providers with expertise in data management, aggregation, and report production, is fast becoming an effective tool; one that frees up fund managers as they focus on the more important task of running their fund strategies and delivering performance to their end investors. 

To provide asset managers with unbiased transparency into the key considerations in selecting a service provider as well as advice on preparing for a transition, SEI – one of the industry’s leading fund administrators - recently enlisted the help of Citisoft, a specialised consultancy that has successfully completed nearly 40 middle-office outsourcing transitions for its clients. 

Every fund manager is different in terms of the type of service provider(s) it wishes to partner with. With so much choice, knowing where to start can feel like a daunting exercise. The best place to start is to get top management and the firm’s key stakeholders to agree on what the main drivers and goals are before embarking on the evaluation and selection process.

In his blog, “Who’s the Best Middle Office Outsourcing Provider?” Citisoft director David Quirk provided a list of questions that a firm should ask to help draw up their short list. These include: What are our fund/portfolio structures? What level of service do we require (timing, customisation)? What changes do we envision in our business over the next few years (markets, products, asset classes)? Do we have unique performance and attribution needs?

Scalability in the middle office is vital. Today’s ambitious fund manager no longer runs just traditional offshore commingled structures. Typically they will have managed accounts, a ’40 Act version of their flagship strategy, an alternative UCITS version for the European institutional market, and for private equity managers, the trend towards co-investing is pushing the creation of funds-of-one. 

Whatever the different fund structures (both private and regulated), the key is that managers do not ever want to find themselves in a position where an institution requests a product, or variation on the strategy, and they say they cannot support it, for operational reasons.

This is why scalability is so attractive when outsourcing the middle-office. It gives fund managers the ability to scale up without any disruption to their middle-office operations. 

From an expense perspective, this is typically achieved using a variable cost model, driven primarily by the firm’s AUM; in the event of a downturn in assets, the firm pays a lower fee.

Another important driver for increased middle-office outsourcing is to leverage the expertise of third party providers in respect to business continuity, disaster recovery and cybersecurity. The scale and frequency of cyber breaches continue to rise, placing managers in the crosshairs and putting them at real risk of reputation harm. Knowing that their fund data is protected with the best technology and system controls/processes can go a long way to assuaging a COO’s fears. 

Moreover, the more comprehensive a service provider’s platform is, the more opportunity there is for COOs to scale back the number – and therefore costs – of outsourced providers. 

This is again why the evaluation and selection process is critical to get right. The long-term synergies and cost-efficiencies that can be achieved by partnering with the right firm could be the difference between running an average fund management group and a successful one, in the eyes of investors. 

Not that the decision should be based on cost considerations alone. The most productive partnerships are those where there is a strong cultural fit and a mutual commitment to the long-term evolution of that partnership. 

Firms should not look to their service providers as just firms they’re paying for specific services, but rather as extensions of their in-house team.

Before signing any service level agreement with an outsourced provider, it is incumbent upon the fund manager to analyse their existing operating model. Upfront and detailed operating model analysis will reveal any potential gaps which will need to be addressed prior to, or during the transition phase. 

The fewer point-to-point interfaces there are between the fund manager and service provider, the more efficient the operating model will be. 

In tandem, fund managers should also think about developing a well-defined data integration strategy to ensure that the outsourced relationship is optimised, and that all desired objectives are met. 

Part of that integration strategy should include a data governance model with clear ownership to oversee the strategy and ensure it is executed as designed. In some cases, additional tools, software and data platforms need to be implemented as a precursor to an outsourcing implementation. Other considerations might include determining where data master files will reside, unifying data standards between both parties and rationalising market data feeds. 

Outsourcing middle-office functions does not automatically mean outsourcing one’s responsibilities. Even when the outsourced relationship is up and running, managers will need to ensure that the right personnel are liaising with the third party. The internal operations team will also be responsible for ensuring the proper quality of data; this means cleansing it, formatting it and normalising it such that the outsourced middle office has the best inputs with which to generate reports and data analytics. 

Those who neglect this and shift their focus to other areas of the business will simply be shooting themselves in the foot. The key to any successful outsourced relationship is constant dialogue and being proactive at all times. 

Done correctly, an outsourced partnership can add immeasurable value to a fund manager’s business; one where expertise and skills are applied to enhance the firm’s long-term prospects. 

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