Successes
There is a strong record of success for outsourcing shareholder accounting, fund accounting and custody. There are several proven, stable and capable outsourcing solutions for these functions.

There have been limited successes in outsourcing investment accounting, performance and settlement operations. There have been early successes with lift outs. (A lift-out is when a third party takes ownership of an investment manager's systems and people.) However, since lift outs still use inadequate legacy systems, they should be viewed as a transitional step until more robust and comprehensive systems solutions can be deployed. The third parties that have done lift-outs still need to make substantial investments in systems to build capabilities that are sustainable and can be used by a wide range of investment firms.

Failures
As a result of evolving business models and immature systems, many early adopters that have outsourced accounting, performance and settlement have experienced long and painful transitions. A few investment firms have experienced costly failures and have abandoned their efforts. These failures have occurred because the providers have not fully understood the business and/or have not had the right systems to support the business. Also, several multi-vendor portals (most notable is Encompys) have predictably failed.

Current Status
The business model for outsourcing shareholder accounting, fund accounting and custody is mature, stable and efficient. Cutter Associates contends that outsourcers providing accounting, performance and settlement solutions have not established clear and sustainable business models. The providers do not have the required systems to leverage and build a repeatable and sustainable business. They are still in the process of defining their business models and building systems. As a result of evolving business models and immature systems, even the successful early adopters of accounting and settlement outsourcing have experienced difficult transitions.

Cost Savings
Cutter has found that, in most cases, outsourcing didn't lower costs. However, outsourcing does provide predictable costs, often with costs tied to volume.

The Opportunity
Cutter found that those firms that have successfully outsourced accounting and settlement functions have no regrets. They no longer have to deal with complex and costly regulatory and industry changes as well as upgrades to their accounting and performance systems. Disaster recovery is no longer an issue and they do not have to build complex reference data repositories. Instead, they can focus on key functions (research, portfolio management and trading) that are core to the business and unique to the firm.

The key issue is for the third parties to provide systems and operational capabilities that can be broadly adopted by a range of investment managers. The industry is eagerly waiting.

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