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Article (54/286)
Optimising the middle office - questions to consider
Optimising the middle office - questions to consider

Optimising the middle office - questions to consider


Arnaud Claudon

Arnaud Claudon

Head of Asset Managers

BNP Paribas Securities Services

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Asset managers operate in a very competitive world, with regulatory demands not abating, pressure on fees intensifying and rapidly changing technology. One of the key considerations in this challenging environment is management of the middle office. In weighing up the decision to outsource the middle office function to a partner, Arnaud Claudon, head of the asset management client line at BNP Paribas Securities Services, suggests several key questions to consider

Which parts of the middle office can I outsource?

No decision involving this many factors is ever straightforward. First and foremost, an asset manager must examine its own business model and decide which functions are core to its business and which are not. Non-core activities should be prioritised for potential outsourcing.

As with all complex decisions, there are multiple drivers. Outsourcing can reduce or avoid investment and therefore free up scarce capital. It can reduce running costs or swap fixed for variable costs. It could also induce a reduction or a transfer of risk. It simplifies the business, allowing the outsourcer to concentrate on its core business. Not only is this a difficult question, the answer is not static, as the boundary between core and non-core activities can move as technologies develop.

Whatever the outcome, decision making at this level has many stakeholders. IT, operations, distribution, legal, compliance, HR, the front office - and ultimately the board – will all have a view. The process cannot be rushed and is often facilitated by specialised consultants.

What are the challenges to outsourcing in my organisation?

While there are many rational reasons for outsourcing, such a big corporate decision is unlikely to be made purely on a rational basis. There may be a cultural barrier to be overcome, while risk-averse managers may be reluctant to pioneer outsourcing even if it makes sense on a cost-benefit analysis. This is especially so if outsourcing is uncommon in an industry segment or geographical region.

Outsourcing can also lead to difficult decisions requiring the re-deployment of staff whose former roles will be lost.

Am I ready to manage the outsourcing relationship? 

It is important to remember that when a regulated entity outsources part of its operations, it does not outsource its regulatory responsibility.
This means service providers have to be prepared to provide full transparency, allowing the outsourcer to meet its regulatory obligations, while the outsourcer must demonstrate full oversight of the functions which the service provider performs on its behalf.

How far does the regulatory requirement go?

As the ultimate regulatory responsibility remains with the outsourcer, a provision must be made against any failure on the part of the service provider.

At first sight this may seem an argument against outsourcing, but actually it reflects existing regulatory requirements – and good business sense. Any well-run business should have contingency planning in place, even for in-house functions, so outsourcing itself does not create a new need.

Furthermore, rather than being a hindrance to outsourcing, this is rather an argument for outsourcing to banks. Asset management companies outsourcing to a strong well-capitalised bank, with tight contractual liability provisions may be doing a better job from a fiduciary perspective.

Is my chosen service provider agile enough to keep up?

A smaller fund manager needs to be agile to meet changing client demands, so will need its service provider to be able to keep up. The very economies of scale and capital investment that makes outsourcing a good idea can hinder that agility. But perhaps the perception of the problem outstrips the reality. With a global offering and a software platform that is agnostic to the outsourcer’s front office systems, it is important that a middle office provider offers a modular range of solutions that clients can select according to their needs.
In this way, clients can benefit from a broad range of expertise –even if they’re not using all of it – and have a flexible approach as their businesses grow, relying on a provider that continuously upgrades and improves its services.

What should I be looking for in a middle office outsourcing partner?

In short, expertise, scale and vision. These are universal characteristics for any such partnership.

An asset manager looking to outsource middle office functions needs a partner with an intimate understanding of the middle office - one that truly understands how to help the outsourcer improve their outcomes and become more efficient.

Scale is also a pre-requisite. Cost-savings are a key argument for outsourcing, so an outsourcing partner has to be able to share the benefits of economies of scale.

Vision and innovation are vital elements of the partnership. By outsourcing a non-core function to a business that sees it as core, you should expect to reap the benefits of the service provider’s focus on improving efficiency, technological standards and data management. Importantly, the outsourcer should also expect ongoing expertise and development in the arena of regulatory change – a fundamental requirement in meeting its own obligations.

An innovative middle office partner is likely to use technology, scale and expertise to continually challenge the border between core and non-core, allowing outsourcers to focus with greater clarity on their true core.

How will I work with my service provider?

Successfully delivering middle office functions requires a genuinely close partnership. Only if strategic objectives and corporate values are aligned will the relationship flourish and the outsourcing objectives be achieved.

There must be commitment to a joint design approach on both sides - outsourcing involves deep change at the asset manager, and processes to manage that change should be created together from the outset. Co-creation of these processes should build an expectation of future change and development if the relationship is to develop over time.

Where are we in the cycle of innovation for outsourcing?

The trend towards outsourcing has come in waves. The first wave outsourced back office business processes, blending in software as it became appropriate. Now increasing automation and end-to-end processing means we are in a race towards zero inefficiencies.

Fundamentally, this is still business process outsourcing, but the traditional operations focus will be replaced by the ability to automate tasks, to connect technology solutions and to integrate with external, open platforms to aggregate, safe keep, manipulate and disseminate data and analytics.

Although zero inefficiencies sounds like an end-point, it will be just the starting point for the next generation of outsourcing. This will combine technology, data and process workflow management with results that we are only starting to imagine.

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