European asset managers will begin outsourcing more of their front-office services over the next two years so they can concentrate on their core business- investment performance – according to a report issued on Monday by Celent.

The impetus: the need for cost reduction; risk mitigation; and regulations as the Alternative Investment Fund Managers Directive and the latest version of the Undertakings for Collective Investments in Transferable Securities.

“Given that a buy-side manager’s core business and key competitive differentiator is its investment process, core functions within this area would appear to be the less likely for outsourcing,” wrote Celent analysts Anshuman Jaswal and Muraldidhar Dasar. “While the mantra of outsourcing non-core functions still holds true, firms have come to realize that there is no reason that the front office should be untouched by outsourcing.”

Among the front office functions which European fund managers may outsource are: trade entry, routing, and trade order management, said the Celent analysts. Among the middle and back-office functions that remain popular for outsourcing are: trade matching and settlement; custody; reconciliation; and corporate actions processing.

Technology vendors and third-party processing agents will likely win the outsourcing business for pre-trade and trade functions while global custodians are favored for custody and middle and back-office work. Celent cites firms such as Thomson Reuters; SunGard and Sophis in the category of technology vendors and Capital Financial; Phoenix Fund Services and GlobeOp Fund Serves as third party “traditional outsourcers.”

Among the advantages of using global custodians: they are already providing services such as custody, securities lending, and cash management so migrating deeper into the middle and front-office operations seems like a natural progression. Global custodians include Bank of New York Mellon; JPMorgan Chase; Citi; HSBC; and Northern Trust.

Third-party processing agents may also win favor among smaller investment management firms who fear that larger global custodians might not give them enough attention. However, they may not be able to provide the same comprehensive platform as global custodians and may not have the same global reach.

Technology providers are also ideal for smaller to mid-tier investment management firms with up to E100 billion in assets under management because they can provide a limited scope of services at a cost-effective rate. “Technology vendors offer only pieces of the outsourcing continuum and fall short in providing the actual operations personnel to support outsourcing initiatives,” wrote Jaswal and Dasar.