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Buy Side Offshoring - has it finally arrived?

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When we look at the over-all cost benefit analysis, we see that 3rd party service providers do bring in unique advantages to a partnership which is not available with pure-play asset servicers.


Background

With Buy-side firms (asset managers, wealth managers and hedge fund managers) facing competitive pressures, asset servicers (which primarily includes the custodians, record keepers, fund accountants, transfer agents) witnessed rapid growth in their business during the 70's and 80's of last millennium. Over the last decade and half, business pressures forced these asset servicers in turn to explore near-shoring (Ireland, Canada etc.) and offshoring (India, Philippines etc.).

However, the Asset management industry esp. the buy-side firms are yet to consider embracing offshoring directly to 3rd party IT / BPO service providers  as a means to stay competitive in the market. While some of the requirements to provide these services are indeed technical, e.g. legal eligibility (licenses and charters as per the local government regulations) and financial capabilities (liquidity requirements), a lot of this also has to do with the risk averseness and conservative mindset of these buy-side firms. 
 
Trends & Challenges across Asset Management industry
Asset management industry is witnessing some sharp trends over the last few years. First of all, financial regulations across US and EU are now past the deliberation stage and have entered the implementation stage. As per our discussion with clients in capital markets industry, we find that more than 50% of our clients view meeting new regulatory requirements as one of their top challenges.

Secondly, the customers of buy-side firms are demanding a wider range of products, as they want to participate in economic growth in non-domestic markets. They are asking for better trade execution management systems, better geographic coverage, superior performance reporting services and insightful analytics services, all delivered through multiple channels including mobile devices.

Thirdly, Central Clearing and Straight-Through Processing is the new focus area. News around OTC to CCP, Tripartite Collateral Highways etc. has dominated business press in 2013 and will be in focus in 2014 as well. There will be greater focus on straight through processing (STP) from front to middle to back office, esp. among the US based buy-side firms.

Fourthly, uncertain business environment coupled with modest portfolio performance and rock-bottom portfolio management fees, has resulted in narrow margins for the asset managers.

Lastly, new delivery options are being experimented with. Asset management firms are exploring non-traditional newer delivery options. Firms that are yet to adopt and new to outsourcing journey prefer proven locations like India and Philippines, while other firms that are already present in India (through their captive model operations) prefer to venture out in newer geographies beyond India and Philippines like Poland, Sri Lanka, South Africa etc. Almost a 3rd of our capital markets clients feel that reducing cost is one of the top 3 challenges for year 2014 (improving the cost/income ratio).
 
Considering the challenges, what are the key imperatives for Buy Side firms? 
To tackle the challenges, buy-side firms need to look at newer service models beyond the regular operating models and commercial constructs; which provide bandwidth to buy-side firms to enhance their products offerings at low servicing cost. It's in this journey that the 3rd party IT / BPO service provides an important link in the delivery model and help asset managers achieve their objectives.
 
Key advantages brought in by a 3rd party service provider

  1. Proven Delivery Capabilities - Proven history of delivering service at committed quality and cost (zero defects in critical functions such as trade management, reconciliation, corporate actions etc.). This has helped Buy side firms to focus on portfolio performance and differentiation in terms of types of products, geographic coverage, service timings coverage, enhanced reporting etc.
  2. Willingness to Invest - Service providers are hungry for growth, are willing to invest and take on more risk, as they are financially sound (generally sitting on large pile of cash). They are keen to partner with clients, are open to make investments including Asset Monetization and joint development of delivery capabilities. Having gained fair insight into the industry, service providers are able to create Centers of Excellence which focus on creating sufficient supply of trained resources, develop deep domain competencies, create industry leading view points,  build tools etc. This adds real value to any engagement.
  3. Significant presence across IT & BPO - the large service providers are able to offer better deals to their customers in terms of Utility pricing models / Platform + BPO / SaaS etc. Generally, service providers are technology agnostic, they act as one stop shop and have the right capabilities to service multiple platforms like TLM, Intellimach, Golden Source, Asset Control, Eagle Star etc.
  4. Automation and Transformation - As an example, usage of Automation as a Wrap Layer to enhance efficiencies i.e. artificially improve the STP rates, improve controls and thereby reduce risks with minimal additional investments by the client organization
  5. Flexibility - Service providers are willing to demonstrate flexibility in engagement in terms of Pricing, Operating models, Governance models etc. They are also flexible in terms of Deal scope, size and duration. Vendors are willing to take up small pieces of work for durations ranging from 2 to 5 years, unlike 5+ years as is the case with asset servicers.

Conclusion
When we look at the over-all cost benefit analysis, we see that 3rd party service providers do bring in unique advantages to a partnership which is not available with pure-play asset servicers. 3rd party service providers have gained deeper understanding of domain and business processes within the industry, which was not available a decade ago. So much so, now many of these service providers are seen winning business consulting assignments from the Big 4 in the consulting space. Hence, Buy side organizations have an opportunity to take advantage of these new capabilities of the service providers and move their business to the next level.

"When you're finished changing, you're finished." - Benjamin Franklin (1706-1790) American statesman, scientist and philosopher.

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