Outsourcing in Better Shape to Meet Demand
Byline: Richard Greensted
In the investment operations outsourcing market, custodians hope that 2002 was the calm before the storm.After a flurry of activity in 2001, the past 12 months have seen no significant transactions in Europe, with the most notable potential deal - Barclays Global Investors in the UK - falling flat at the final hurdle.
Despite this, Jeff Tessler, executive vice president and head of Europe for the Bank of New York (BNY), thinks that 2003 will be a much better year. "The fund management industry is under severe revenue pressure," he says. "It is adjusting to the new environment and driving out operating costs. Institutions know the benefits of outsourcing, and they will come back to the market."
There is a general recognition that, after some very public growing pains, the outsourcing sector now looks in much better shape to handle client demand. There is also a consensus that lift-out deals - where a third-party provider buys the entire back office operation of a manager - will be few and far between. Clive Bellows, head of global fund services for Northern Trust in London, says that both sides have had a change of attitude towards lift-outs. "We hear occasional interest in lift-outs, but nothing like it used to be," he says. "These are very risky deals for the custodian, while larger managers are not yet convinced that the model works."
Rather than the kind of total outsourcing arrangement put together by State Street for Scottish Widows, managers are increasingly looking at component outsourcing.
Jonathan Clark, executive director of Citisoft, a consultancy specialising in the investment management sector, explains the concept. "There are three shades to outsourcing," he says.
"There are those functions you can definitely outsource, such as trade processing, accounting, reporting and performance analysis. Then there are those that you definitely can't, which are mainly related to client-facing operations. And then there's a grey area in between."
State Street, one of the pioneers of lift-outs with Scottish Widows and Seligman, acknowledges that the market is moving. "We do see a trend towards component outsourcing," says Ron Logue, president and chief operating officer. "We won't see many more large-scale deals, although some smaller managers may continue to outsource everything. It's a question of striking the right balance."
One reason for this is the improved technology available to managers, according to Northern Trust's Bellows. "Technology has advanced greatly in the last two years, with availability of data over the internet and industry standardisation initiatives such as ISO 15022," he says. "Platforms are now interchangeable and buyers no longer need to be tied to a single system."
Brown Brothers Harriman (BBH) has been at the forefront of these developments, introducing its own solution, Infomediary, as a way to help managers pull together data from different sources. "Infomediary is the glue that holds together the modular approach to outsourcing," says David Bilbe, head of BBH in the UK. "Component outsourcing is less risky and more manageable.
Another factor is that some managers have the knowledge and requirements that exceed providers' capabilities, so some functions have to remain in-house."
But BNY's Tessler thinks that managers may be losing out if they do not outsource everything. …