Cutter AdvantEdge

Issue 71, November 2009

More With Less

“More with Less” is the new mission for asset managers, and it means “do more with smaller budgets, fewer people, and less risk.” The mandate is forcing firms to look at their operating environments in new ways and to examine all available options. New opportunities for streamlining operations are now available, with the emergence of external services such as Business Process Outsourcing (BPO), Application Service Providers (ASPs), and Software as a Service (SaaS). Outsourcing commoditized processes—the functions that don’t differentiate you from the competition—can free up resources that can then be re–assigned to competitive differentiators. Additionally, larger firms are creating their own internal BPO function, using shared services and centers of excellence that allow them to consolidate platforms and staff.

Recently, firms have discovered that comparing internal infrastructure and processes to these external services can be difficult, because traditional metrics can’t accurately represent the value of the external services. How do you set up the internal organization for managing and overseeing a service provider? How do your staffing and technology requirements change? How do you measure opportunity cost? While measuring “future cost avoidance” can be straightforward, it’s harder to determine if using external services actually enables firms to re–assign resources or if, in reality, those resources are still tied up “checking the checker.”

Before comprehensive systems were available, most processing was performed manually or by in–house solutions. More recently, firms began using commercial solutions as well as bundled offerings that combine technology and other services. These changes have evolved over time, and that evolution is portrayed in the diagram below.

Investment managers have found that outsourcing can be an attractive option for commoditized processes, and some have been outsourcing for some time. Most mutual fund complexes already outsource their 40 act accounting and their fund administration. This paradigm is also seen in the shareholder servicing arms of these companies. Insurance companies and institutional asset managers are showing signs of following this trend, but the available offerings are not as mature as the offerings for mutual funds.

Many opportunities are emerging for outsourcing different parts of investment processing. The figure below lists and categorizes the functional areas covered by many of the investment administration outsourcing providers. We are noticing that these vendors are rapidly expanding their optional services, which they see as their own competitive differentiators.

Given the appetite for outsourcing commodity functions, there must be a process and methodology to answer important questions about moving in that direction, including how to include the service option in the target architecture. Also, you need to decide early in the process if a BPO solution is even worth considering, beginning with answers to the following questions:

Will it improve my ability to focus on higher value tasks?
Will it help reduce current and/or future costs?
Will it improve quality and reliability for internal and external clients?
Will it improve agility for adding new products and for addressing changes in the business model?
Can it lower the overall risk profile?

If you can answer “yes” to these questions, it might be worth pursuing BPO services. But this is just the beginning of what should be an exhaustive due diligence process, involving not only the typical feature function analysis but also coming to a detailed understanding of current and future workflows and processes, service definitions and levels, and KPIs for meaningful ongoing metrics.

If a BPO solution is not suitable for your firm, ASPs and SaaS platforms can still be compelling options. Complying with Sarbanes Oxley can increase the cost of running internal platforms with installed software by as much as 20%. If an ASP or SaaS provider measures up to your internal standards, they can reduce your cost of ownership and potentially reduce operating risk as well. Most commercial vendors are now providing ASP and SaaS options in addition to an installed software option.

Asset management firms must respond to industry pressure for operational efficiencies and cost reductions, but should keep the following in mind when considering external services:

Managing operational efficiency requires measurement
Standardizing process and tools is a means to an end
ASPs, SaaS, and BPO can all have their place
Outsourcing is about a strategic partnership—it’s more than a standard vendor selection process or cost reduction measure
The large providers are delivering standard products with economies of scale, but specialist and component providers potentially offer benefits in flexibility and specialist skills
An internal strategy assessment is essential to determining the fit of outsourcing

Lastly, decisions involving BPO solutions can have a deep impact on an organization. Making changes that involve possible staff reduction or reassignment can cause uncertainty, anxiety, and changes in behavior, so a well–defined, well–orchestrated process must be in place to minimize disruption in your firm.