The trend in asset management has been to outsource many middle and back office processes in order to cut costs and gain efficiency. For companies that keep these operations in-house, the desire to be nimble on product development and able to respond quickly to client needs can sometimes be done in a more cost effective way than outsourcing. Others, with complexity on the rise, choose to let an outsourcing partner take care of the details and concentrate on their core investment management business. One of the most common reasons Dan Pitchenik, principal in PwC's asset management advisory practice, said PwC's clients cite for keeping back and middle office functions in house is shadowing some of the efforts of the outsourcing partners. "Our clients can triangulate and make sure everything matches up. This is particularly relevant for some of the control functions," he said.
Another reason Pitchenik said clients cite as a rationale for keeping processes in house is to keep a tighter bond with internal clients. "Another reason that I don't hear quite as often is retaining partnerships with the middle and front office and trying to strengthen those ties to have a more intimate relationship and understanding of internal clients. There's a tight governance around those particular interactions," he said.
Keeping functions in house lends a greater control that can translate into a more agile product development function and address client needs more effectively, George Batejan, executive vice president, global head of technology and operations at Janus said.
From Janus' perspective the reasons companies outsource range from lowering cost, to transferring liabilities to entering new markets, Batejan said. He added that many also think will they are going to avoid a major capital upgrade to some of their technology platforms through outsourcing. He gives the example that if Janus were to launch ETFs they may want to outsource the operations side of this rather than build it internally.
Batejan said that Janus did complete an RFP to measure the cost of keeping operations internal vs. outsourcing. "We did in fact do an RFP to the usual suspects to see what benefit we might get from outsourcing the back office, fund accounting and such or the middle office, trade operations and pricing. Somewhat surprising to us was that we are in fact lower cost. On the back office side, the fund accounting piece of our operation was close in cost, but we were still cheaper. On the middle office side we were substantially lower in cost. Also our systems are new and our core accounting platform is only a couple years old," he said.
The RFP process is a benchmark for Janus to see how the cost of running their internal operations compare to the cost of outsourcing. "When we looked at potentially outsourcing, it was to some extent valuable as a benchmark to show to our executive committee, fund trustees and board of directors," Batejan said. This process shows the executive suite that Janus in fact is competitive from a cost and quality perspective.
Janus will do another RFP in the future. "We will at some point do that again, not because I have a desire to outsource, quite the contrary. It is a means of proving that what we are doing is as effective as an outsourced partner could do," Batejan said.
Transferring liability through an outsourcing partner is an attractive proposition, but Batejan said this is more difficult than it seems as the company discovered in the RFP process. "Transferring liability is actually harder to do than you might think because the vendors that provide outsourcing services typically try to limit their liability to fees paid. If they blow a corporate action and there is a loss of $12 million, they might not cover it, in fact we might have to step in and cover it," Batejan said.
Keeping operations in-house leads to a greater flexibility in product development as well, Batejan said. Janus can set priorities when building new products to make sure it is ready for the market. If that was outsourced Batejan said, this would have to be negotiated with the outsourced partner, cost more and take longer overall to get a product built. Also with operations in house, employees understand the Janus business.
With tight control over operations Janus also has the ability to react more quickly to client needs. Batejan gives the example of timeliness of NAV delivery to intermediary partners. "We can put a task force together and modify our procedures and technology and become best in class in that category to satisfy who our customers, the intermediaries who sell our products. That would have been something we had to negotiate with an outsourcing partner," Batejan said.
With an increasing complex regulatory environment and the growing popularity of putting alternatives in traditional wrappers, many companies still do choose to outsource the operations functions in order to concentrate on their core strength of investment management.
There are several market factors that Fred Naddaff, managing director of strategic business development at SunGard Asset Management, said influence the decision to outsource."If you look at the last four or five years since the financial crisis, there are two things driving a bigger push toward outsourcing. One would be the regulatory environment, which continues to be constantly and consistently changing. The other is the convergence between the traditional products and the alternative products," Naddaff said.
The complexity of product systems also leads companies to consider outsourcing, Naddaff said. "You see a lot of cross product and cross regional to cross jurisdictional technology needed. As people are rolling out traditional funds, ETFs and hedge funds, they find there are several systems that they need to build front ends for. They have to ask again if it's easier to have an outsourcer do that for them."