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Pick a partner
Pick a partner
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Pick a partner

02/03/2017

Author : Alan Cameron, Global Solutions Sponsor - Clearing and Custody Services at BNP Paribas Securities Services

For the sell-side, the question is no longer why or what to outsource: it’s whom you partner with

img_bp2s_alan_cameron_2017-02-27.jpgThe cost and complexity of post-trade operations and technology have pushed the outsourcing of these functions to the top of the agenda for many banks. They are faced with increasing regulation, the rising cost of capital and the complications of offering multi-asset class solutions on system sets that may have been fit for purpose once but now are outdated and costly to run or develop. These factors have been widely acknowledged in numerous conferences and articles. Suffice to say that the traditional questions of why banks should outsource and what should be outsourced are yesterday’s debate. The question that most are asking now is: to whom?

For most of my working life, banks have explored the idea of outsourcing to a mutualised entity created for this purpose, but this appears just too difficult to achieve. The real and present options for outsourcing are provided by commercial entities viewing post-trade outsourcing as an extension of their established activities. However, their profiles differ greatly.

So, what are the key attributes that an outsourcing bank should look for in an outsourcing partner? They are not of equal importance to each bank, and each entity seeking this business has different attributes, so banks will come to different conclusions and quite distinct partnerships will be formed.

While the traditional ‘lift-out’ approach to outsourcing may initially seem attractive to some, further reflection may lead to the view that this is in fact a sub-optimal approach: it does not really solve the fundamental issues, it just moves them.

To be genuinely beneficial, outsourcing really has to change the operational cost dynamics, simplify and improve technology, and offer faster development and support of new products. And it has to be robust, compliant with current and future regulation and let everybody sleep at night.

So, among the attributes that banks seek in an outsourcing partner are:

 

Viability

 

Outsourcing is a long-term commitment. It only makes sense to outsource to an institution that is going to be in this business in the long term. Commitment in itself is not enough: many firms are committed to businesses that fail.

The outsourcing partner must also be able to attract other clients in order to build a viable business that delivers economies of scale and supports investment in the future. And it has to be ‘centre of their plate’; anything else is too risky. A one-off deal may appear initially attractive; however it is unlikely to be easily replicable or an indication that the partner is committed to building a sustainable business.

 

Experience

 

Looking back is not always the best way to move forward. However, most entities who are considering outsourcing something as crucial as their post-trade operations will want to partner with an institution that has considerable experience in the global securities industry as well as outsourcing.

Having a few experienced people at the top of the organisation is not enough: it is a matter of having strength and depth throughout the company.

 

Integration

 

If the outsourcing institution can integrate the middle and back office functions with clearing and custody, vertical economies of scale can be gained with fewer hand-offs. If it means that the outsourcing bank can reduce the costs of running a network of agent banks and market infrastructures, so much the better.

 

Global capabilities

 

Forward compatibility of operating models will most often dictate the need to be global. This has as much to do with culture as it does with operations and market knowledge.

As requirements change, so will the geographies – and only providers with a global footprint can meet the challenge of being global and future-proof.

 

Technology

 

One of the prime reasons to outsource is to simplify and modernise the system set being used. It is hard to imagine that any outsourcing company can provide this in-house. So, outsourcing to an institution that is free to use market-leading technology is important; even more so if it has an alliance with a technology firm that is committed to the endeavour.

 

Innovation

 

What is needed today is unlikely to be what is needed tomorrow. It is already apparent that big data and distributed leger technology will transform our post-trade world. Other developments (beyond my imagination) will be just as disruptive in the life of most outsourcing partnerships.

What is really essential is that the partners involved in outsourcing share an approach to innovation: it’s a question of culture.

 

Trust

 

Every partnership will have problems: it is how they are dealt with that matters. Service-level agreements, contracts, commercial terms, performance indicators and so on are all important, but amount to little without trust.

The attributes listed above are in no particular order, but trust must be the most important in any partnership. How companies choose whom they can trust varies, but as it is built on a combination of character and competence, trust is certainly easier to find in an established relationship than when you are starting from scratch.

 

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