In this article, I am outlining the service and product features needed to meet, and surpass, this evolving client demand.
This is not to say that there has been a change in the fundamental business dynamics underlying the move towards outsourcing. Economic pressures, low interest and political uncertainty remain. It is still hard to argue that the ever-increasing cost of capital, regulation and investment in technology can be mitigated by revenue growth. Interest rates remain low. So the demand for outsourcing looks set to grow with more banks from Europe looking seriously at their options.
The outsourcee that develops the ‘killer apps’ to meet this growing demand will leave its rivals in the shade. But while they might appear simple, that they are not easy to achieve.
Killer app 1 - Top-class staff deployed appropriately
Most banks that have already outsourced post-trade functions appear relatively pleased with what they have accomplished. However, one problem that is consistently mentioned is the knowledge level of staff providing the service and the high staff turnover that many outsourcing firms are experiencing.
Increasing automation and the deployment of artificial intelligence suggests that the best location may not necessarily be the cheapest. A stable and skilled workforce is of more importance. Even better if it is culturally aligned and in the same regulatory environment and time zone as the clients it services. It will be about quality rather than quantity.
So far outsourcing has been adopted mainly by American and UK firms escaping expensive locations. Now, more European banks are looking at it. To service them, the outsourcee will need a split operating model -a servicing centre with appropriate language skills close to the client and a high quality/low cost operating centre.
Killer app 2 - Better and extended processing
Mending broken processes is necessary but not sufficient. To really add value, an outsourcee must re-engineer post-trade processes and ideally integrate them downstream with clearing, settlement and custody. This gives fewer hand-offs, clear accountability and economies of scale from data being shared across the post-trade life cycle.
The core need so far has been for ‘back-office’ processing. However there is increasing interest in including (a) ‘middle-office’ processing such as confirmations and reconciliations and (b) functions which support the ‘front-office’ such as KYC management and client on-boarding. So moving upstream is also important.
A successful outsourcing partner will improve extended processing through deploying artificial intelligence such as machine learning and improved analytics for monitoring securities and cash balances.
Killer app 3 - The right technology
One of the issues that banks and their outsourcing partners are grappling with is the proliferation of systems. Supporting them is inefficient and expensive. It is also hard to build and retain the necessary expertise to deploy the available technology optimally. Choosing a technology partner and having a clear technology roadmap - rather than using whatever system the client uses - surely makes sense. However, the chosen systems must service a broad range of asset classes and business models including the management of collateral.
The ‘lift and shift’ model might sound initially attractive but the shifting and promised simplification does not always happen. The biggest and longest lasting problem for outsourcing partners servicing asset managers has been the cost and confusion that this model can lead to.
Killer app 4 - Generating value from data
The firm providing outsourcing services has a lot of data, including that of their clients. So far, this has been used to provide fairly basic management and regulatory reporting. In the typical asset management example, outsourcing partners have developed their data offer to provide comprehensive reporting including risk analytics. But until now, banks that have outsourced were not clear on their expectations in this area.
Outsourcees must work constructively with clients to develop the uses of data to meet increasing regulatory and management demands. Doing this in conjunction with artificial intelligence should allow not only the reporting of risk but also the reduction of risk. Further collaborative work could lead to monitoring and ensuring regulatory compliance.
How to generate additional value from data remains unclear. We are all working on this but as yet nobody has found this ‘killer app’. Although post-trade providers have lots of data, the question is whether they have it early enough to really be able to add significant value.
An integrated platform
As we know, ‘killer apps’ cannot work in isolation. They are successful only when deployed on a stable, yet flexible, platform that is effortlessly efficient and easy to use. Equally, the successful outsourcing partner must itself be a healthy business with a robust and user-friendly operational environment.