May 10, 2023

Some would characterize today’s middle-office outsourcing as a “seller’s market” ─ that is, the seller (service provider) has gained the advantage and an imbalance of supply and demand forces the buyer (investment manager) to accept terms that they would otherwise find disagreeable – whether it’s price, scope, quality, or contract terms.

But this perspective is far from the truth.

With today’s investment managers facing increasing pressure, they’re more open to outsourcing as they confront challenges with the labor market, legacy technology, and heightened regulation. Fortunately, today’s managers have more options to choose from than ever before. They just need to understand that they remain in the driver’s seat and possess the power to negotiate.

Defining the Middle Office

Every service provider has its own definition of what constitutes the middle office. And while common core elements exist (e.g., trade support/servicing, IBOR/portfolio accounting, derivatives support, etc.), there is no single “industry standard.”

Where your firm finds itself on the journey will dictate the outcomes you’re seeking. This is critical in defining a set of middle-office services for your firm, as well as determining which capabilities you want to outsource. Although your firm should develop clarity around the desired outcomes, you have many ways to achieve those outcomes.   

 It’s also important to keep in mind that you’re not just outsourcing a function (e.g., performance, recordkeeping, etc.), but also a large dose of interaction, a metric and requirement often difficult to quantify. For example, how your operational teams interact with one another, with stakeholders and consumers of data, and with the data itself. These examples form just the tip of the iceberg when thinking through the levels of interaction that take place in your current middle-office operations. When seeking a service provider, the concept of interaction needs to become part of how your firm defines the middle office, beyond the core functional capabilities that are in scope. This underscores the fact that you are selecting a partner ─ and not just a service provider.

Evolution of the Industry

The middle-office outsourcing world has moved on from the early days when the primary model was service providers looking to take on “your mess for less” and not make any material changes to how the service looked to the front office. Today, we often see a partnership approach to achieve desired outcomes. Middle-office outsourcing is a lot like matchmaking ─ to start a successful relationship, buyers and sellers have choices and the duty to find the right fit with a mutually agreeable scope and terms.

In addition, the range of available solutions continues to expand, with the emergence of new and innovative providers, alternative operating solutions, and the strengthening of traditional providers. The industry is learning and evolving, which is demonstrated by the fact that some early-adopter organizations are in their second (or third, in some cases!) iteration of outsourcing models and even providers. As a result, service providers have gained ground ─ improving the quality of their standard offerings, expanding regional support, modularizing more of their services, and adding efficiency and controls at interaction points with the client.

An increasing number of providers have also expanded their offerings into the front office and various aspects of data management, and they’re touting this "front-to-back" capability as their focused solution. Although this may be in scope for some organizations, for others it can feel a bit forced. Most organizations prefer to leave the capabilities with the front office and not include them in the outsourced middle office.

One Size Doesn't Fit All

In this competitive, yet balanced market, more buyers have a broader range of needs, but they can choose from more capable providers. Buyers must educate themselves about the market. With thorough research and due diligence, informed investment managers can selectively choose service providers with the right fit for the desired scope and quality of services. Buyers beware that your choice of partners will significantly impact your business outcomes – make sure you select one that aligns with what you are trying to achieve.

To learn more about middle-office outsourcing, contact us at [email protected] to speak with a Cutter analyst or consultant.