Normally, outsourcing operations at a fund firm is a top-down process.
Management declares, technology team prepares. The reasons usually center around saving money. After all, the outsourcing company takes over not just your payroll costs, but the expense of turning over hardware and software, as well as keeping it up to date.
At UBS Global Asset Management, though, the push to outsource all middle office operations, from portfolio tracking to fund accounting to performance reporting to general administration, came from the bottom, up.
But, as UBS' experience would ultimately prove, there is no surefire success in outsourcing of fundamental functions that serve clients.
Back to the start. In the spring of 2010, UBS was relying on "some aging technology" and the usual build versus buy analysis was not comforting, according to Mike Rucci, its Global Head of Operations.
His technology team didn't want to build a replacement. Buying and implementing an outside system could take five years. Getting technology investment dollars in the post-2008 financial world "doesn't come too easily."
Building or buying could be a "constant, constant drain" on time, resources and finances.
"It was just a very daunting task,'' he said. "So we said, well, let's think about outsourcing.''
Even outsourcing could involve three years of transition, in choosing a replacement, coordinating a "liftout" of operations and moving accounting and administration functions onto systems owned and operated by the outsourcing firm.
But the outsourcing option looked like it would have the kind of appeal that top management usually likes. No costs.
No incremental costs, that is.
UBS Global Asset Management has $620 billion of assets under management, $151 billion in the United States. Its mutual funds include traditional equity and fixed-income funds, as well as quantitative, global and specialty funds. At the time, two years ago, taking over its middle office operations was "the biggest deal out there,'' Rucci said.
UBS sent out "requests for information" to top accounting system suppliers and six or seven outsourcing companies.
Working with consultant PricewaterhouseCoopers, UBS was able to come up with a financial package that meant all transition costs would be taken care of, by the outsourcing firm.
Annual operating costs would stay the same. The outsourcer's management fee would be included. So the liftout would be cost-neutral.
UBS did not name its outsourcer. But the number of firms that can handle operations for a firm its size boil down to a handful, according to industry experts. These include State Street, Bank of New York Mellon, Northern Trust and Citigroup.
So sure was the UBS team that this was the right move, that an internal announcement got prepared and was "a couple weeks away" from being sent out.
The announcement never was made.
"We actually ended up doing the heart transplant ourselves," Rucci said.
What did the team miss?
The value of client data. And, particularly for a Swiss financial firm, the reputation for privacy that every client expects. To not possibly be identified to the outside world.
Rucci's team thought it had covered that point, by anonymizing information.
Each transaction would be attributed to a client by number, rather than name. A mapping table would keep track of what account the information belonged to. No "client-identifying data" would be moved across regions or outsourced systems.
But the team learned just how complex information systems have become - and-how even data can be reverse-engineered.
In effect, the regulatory and executive concern became that an outsider could take, say, a portfolio with 10 holdings in it, and figure out whose it was. If, say, 90% of the assets were shares in a single company, such as Microsoft, an outsider might figure out that the holder was - due to size and percentage - Bill Gates, Steve Ballmer or another top company executive.
So, to protect client No. 61 and every other numbered client, the outsourcing project was shelved. Even with the attractive economics, this core business mandate-to protect client identities at all times-took precedence.
"Being a Swiss company, we're a little bit more conservative,'' Rucci said. "The business case started to deteriorate, and ... in the end it just didn't make sense any more.''
The UBS experience is not that unusual for larger firms with $100 billion of assets or more under management, said Ben Keeler, director of practice development at business consultant Citisoft.
"The transaction and transition effort as well as the unwinding of middle office processes and bringing on a service producer is enough to give them pause,'' he said "There's certainly risk. And enough risk management is involved that it can turn them away.''
When outsourcing does make sense, asset management firms need to look at their service providers as partners, not vendors, Keeler said. There will need to be flexibility and constant communication.
Further, the asset manager should not expect the outsourcer to take over processes "as is." The expectation should be for "world-class service.'' But many processes will have to be adapted to processes already in place that are proven and achieve that.
After all, an outsourcer is in the business of commoditizing most processes and limiting the amount of customization that can be provided a given customer, Keeler said.
For instance, a given asset management firm may have gotten used to producing 2,000 different operational reports, when they strike up a relationship with an outsourcer.
Expect that to go away. That will be rationalized, Keeler said. That number could be cut by two-thirds.
What if things go wrong?
Figure that out upfront. The "liability issue" is "typically the last piece of the process to be ironed out,'' he said.
You don't want to wait until the transition is in full bore, when something goes wrong, to resolve who is responsible if trading errors, operational errors or data errors pop up.
At that point, millions of dollars will be at stake. Each side's basic motivation at that point, he notes, will be to protect itself.
"It's a function of balancing trust and certainty,'' said John Herlihy, product manager for North America at the Milestone Group, a global provider of funds processing and investment analytics software.