Cutter AdvantEdge
Issue 59, June 2008
Managing Your Outsourcer
Many investment firms have endured the time-consuming, labor-intensive process of transitioning their investment administration functions to an outsourcer. Now they find themselves facing the ongoing burden of ensuring optimal performance from their outsourcer. These investment firms have assumed the added responsibility of managing the outsourcer, and they have surrendered direct control over the performance, responsibilities, and activities of the outsourcer’s staff and operations.
A recent survey among firms belonging to CutterBenchmarking, a consortium of 50 firms collectively managing nearly $26 trillion in AUM, found many dissatisfied with their outsourcer SLAs (Service Level Agreements). This is not surprising given that legal contracts and accompanying SLAs are written several years prior to “go live” dates; furthermore, contracts are often seven years in duration. When contracts were signed several years ago, hedge funds, 130/30 funds, and derivatives were not widely used by institutional managers. SLAs do not necessarily help facilitate the processing for new products and asset types. Finally, SLAs do not keep abreast of industry improvements and changes in managing corporate actions, settlement, data management, performance measurement, compliance, or client reporting.
One survey participant who manages the outsourcing relationship at one of the largest asset managers said “SLAs do not guarantee success, in fact SLAs can do more harm than good to a relationship. The intent of an SLA in a vendor outsourcing contract is to unambiguously state the firm’s expectations and the rewards the outsourcer will receive for meeting those expectations. However, SLAs are wrapped in complex legal terms and often become obsolete because of changes at the firm and in the industry. SLAs need to be turned into actionable and manageable operating metrics to be successful. If you are relying on SLAs as the primary means to manage your outsourcer, the relationship is likely over.”
Companies outside the investment management industry have been successfully outsourcing select business functions for decades, and investment management firms can learn from their experience. The most successful companies began with mature, structured processes such as customer service and maintenance, and they incorporated a limited number of metrics to measure the value the vendor was expected to deliver. These metrics were quantifiable, measurable, repeatable, and tied directly to the company’s performance objectives. For example, retailers joined forces to get benchmarks on client service, including metrics on response time, throughput (transactions per hour), errors, error correction, and client satisfaction—all by client type. Similarly, manufacturers have partnered to gather metrics on production volume, sourcing strategies, time to market, defect percentages, and on-schedule delivery percentages.
All of these metrics are timely and actionable—the firm can immediately act on the results either by insisting on process changes or by changing the rate it pays the vendor for its work.
| In addition to key process metrics unique to their industry, companies typically gather benchmarks on: |
 | Reliability |
| Cost impact |
| Accuracy |
| Timeliness |
| Integration |
| Flexibility |
| Responsiveness |
Many firms have established a Project Management Office (PMO) to manage their outsourcing relationships. PMOs first appeared in IT organizations to oversee and control large system development efforts, but they now encompass most large contracts with a significant element of operational risk. PMOs include contract specialists who first help draft the initial vendor contract with help from IT and the business. They then manage the execution of the contract, and finally they serve as the primary contact between the vendor and the firm. In recent years we have seen a migration of PMOs from the IT group to the Operations group as more contracts are being written to manage business process outsourcing. The true success of the PMO comes from their ability to represent both IT and Operations, and to leverage their contracts expertise across multiple programs.
It is important to keep in mind that securities processing for institutional managers is very complex and that the industry is relatively new to outsourcing. Nevertheless, those firms that adopt the benchmarking and management practices successfully used by other industries will be well positioned to get high quality results from their outsourcers.