Outsourcing Still Growth Area for Custodians

Financial News, January 7, 2002 | Go to article overview

Outsourcing Still Growth Area for Custodians


The year 2001 should have been the one that saw outsourcing take off. Yet, despite a plethora of deals in the pipeline, somewhere along the way the objective was lost. Providers, however, continue to insist that 2002 could prove to be the year that finally sees this strategy come into its own.

The big custodian banks have increasingly addressed this potentially lucrative business by establishing divisions dedicated to outsourcing. State Street set up its investment manager solutions (IMS) group in May 2001, Citibank has its advisory services group and JP Morgan Investor Services established its asset managers solutions group.

In April, the Bank of New York (BNY) announced an outsourcing solution in partnership with Accenture, Microsoft and Compaq, dubbed Encompys.

It is clear, therefore, that the market changed and matured over the course of 2001, with players both entering and leaving the arena. For example, Socx, a joint venture between Deutsche Bank and software company Wall Street Systems, entered the market, while JP Morgan's Arcordia and Global Trading Operations, an outsourcing provider owned by Banc One, exited.

Jeff Conway, managing director and senior vice-president at State Street, says: "There were both successes and questions with outsourcing last year. Our asset management crew will continue to monitor the capabilities of counterparties to see if there is a match for their own organisation.

"Outsourcing as a model is not a standard off-the-shelf product: it needs to be customised to meet the needs of the asset manager."

Daron Pearce, managing director for European outsourcing services at BNY, says: "It has been a year of enormous activity, dealing with potential outsourcing clients. The deals that we have been working on perhaps have not come to fruition yet, but there are some very large initiatives that are close to the key decision phase."

Reflecting on the past year, Rachael Hoey, director of global product management at RBC Global Services' institutional and investor services, says: "For many institutions globally, it has been a year of discovery more than a year of implementation. This reflects the market pressures and the fact that clients were in the midst of their own decision-making processes."

The main idea behind outsourcing the back office is, unsurprisingly, cost savings. In an outsourcing deal, the custodian takes over the routing, aggregation and reconciliation functions that investment managers spend a lot of time on, dealing as they do with multiple vendors, custodians and brokers.

State Street's Conway says: "The first challenge in any outsourcing deal is to bring the business in-house within a short timeframe. But this is only part of the work. As the activities have been transferred from one site to another, it is key to find an operating model and create integration between the two organisations."

The past year saw a number of high-flying deals completed. JP Morgan took on the back office of Schroeder Investment Managers, State Street signed a deal with Scottish Widows, and BNY was contracted by JP Morgan Investment Managers to conduct back-office services for its European book.

Nonetheless, the jury is still out on whether outsourcing on a big scale is the way forward. Some players argue that it will work, providing the outsourcing partner is chosen carefully, whereas others are adopting a wait-and-see approach. Undoubtedly, these are large-scale projects, and organisations have to be careful not to bite off more than they can chew. …

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