Managers Weigh Up Outsourcing
Byline: Richard Greensted
Just as every good general knows when and how to retreat, so every fund manager considering outsourcing should have a well-defined exit strategy. Anticipating failure is just as important as planning for success, as there can be nothing worse than discovering your outsourcing provider is hopeless and there is no alternative.Recent high-profile failures, such as the Cazenove agreement with IBM, are a reminder of the pitfalls involved in outsourcing to a third party.
Despite these hazards, a growing number of asset managers are considering outsourcing as a means of reducing cost. Having slashed bonuses, reduced staff and deferred IT spending, managers are keen to make further savings by outsourcing some, or all, of their operations. Pioneers in the field include Aberdeen Asset Management, Scottish Widows and Schroders, all of which have extensive administration outsourcing agreements.
After a quiet 2002, some providers think there is more to come this year. John Campbell, managing director of State Street's European investment manager solutions group, which offers outsourcing services, says: "Large management groups, which are geographically dispersed and have different systems, are looking for a single global platform. They are making a tactical change to the business model and looking to add value to their shareholders in the short term."
Some of State Street's competitors are more cautious. Tom Abraham, who runs Citibank's outsourcing business, says managers are looking at easier targets first. "Asset managers are more focused on quick solutions. Consolidating their operations, for instance, gives them big, immediate cost benefits without the complications of outsourcing," he says.
Abraham sees a more gradual approach to outsourcing. "Managers will look at specific purpose solutions, with low start-up costs and relatively few complications," he says. "The Big Bang solution, where an asset manager gets rid of the whole back office, has passed its time."
At the heart of the debate is whether managers should close the back office and hand it all over to a specialist provider, often referred to as a lift-out, or outsource on a best-of-breed, component basis. Ian Stephenson, who runs investment administration for HSBC, sees both sides of the debate. "Some managers are still talking about total solutions, but the incremental approach offers more comfort for many clients," he says.
Mark Austin, head of European strategy for JP Morgan Investor Services (JPMIS), says: "The up-front costs of a total solution are just too great. In some ways, total outsourcing is like the first fish to leave the sea and try and walk on land. It's just too big a jump. Component outsourcing is a more reasonable path to a total solution with a single provider."
But Campbell has a different perspective. He says: "The market is actually moving towards total solutions. Managers were outsourcing components, but their strategic plans have changed. I am confident we will see more lift-outs and total solutions. …