How an asset or wealth manager handles the transition from in-sourcing to outsourcing can make or break their business.
Done well, outsourcing can provide investment firms with significant efficiency, scalability and functionality gains. But ensuring the outsourcing process is a success will depend on two key factors: the investment manager’s strategy, and its service provider selection.
Those outsourcing decisions—the what, whether and to whom—play a critical role in a firm’s ability to differentiate its offering, and achieve (and sustain) a competitive edge.
The question is, how do you get it right?
When an asset or wealth manager moves from in-sourcing to outsourcing too often the initial results disappoint. The firm doesn’t get the rapid cost savings it was expecting. Or the hands-off service. Or the wholesale ability to redeploy staff. Or an immediate drop in error rates.
The relationship can become fraught. The manager may even consider switching outsourcing providers. Or, in extremis, taking the work back in-house.
Yet all these woes can be avoided.
In our experience, the root of the problem typically lies in focusing too much on near-term priorities. Fixating on the headline cost savings a provider claims it can deliver shouldn’t constitute the be-all and end-all of the vendor selection process. Making decisions through the lens of such immediate needs or goals is a shortcut to failure.
Strategy for success
Instead, the decision to in-source or outsource, and choice of which service provider to use, has to be based on a long-term strategy for the business—not simply as a tool to solve an urgent pain point.
The relationship works best (i.e. delivers the greatest sustainable benefits to your firm) when you have a clear picture of what the rival providers in the field can offer your business now and going forward. Issues to consider include:
- What capabilities does each service provider have?
- How do they plan to augment those? Is there a clear service offering roadmap?
- What is their R&D program like? How much do they invest? Where is that investment focused?
- Where are their true areas of expertise?
- How much experience do they have? In which fields?
- How strong is their track record?
In short, baseline considerations are:
- Can they address your current needs?
- Do they have the financial and technological firepower, and desire, to evolve their offering so they can continue to support the changing priorities of your business over the long haul?
Flexibility through component-based outsourcing
Flexibility will be critical.
That means choosing an outsourcing partner that is willing and able to adapt to your shifting support requirements. And opting for a component-based service approach that can fit with your existing in-house capabilities (and any other service providers you may use), while giving you the freedom to change approach as you grow.
Think of how we bank. In the past, people typically kept their current and savings accounts, mortgage and car loans with one institution. Today, we’re likely to have multiple relationships thanks to information flow and technology, which have made it possible to choose different component-based banking services.
The same is happening in financial services outsourcing.
With the emergence of so many specialist providers, the scope of what can be outsourced has broadened massively—to AML and KYC functions, compliance, regulatory reporting, client servicing, portfolio risk management, trading … not to mention the more traditional middle- and back-office functions.
But finding the right combination of services (i.e. whatever will maximize your competitive edge) is only possible if your providers’ technology and processes can interact seamlessly.
Reversibility is also key. Outsourcing should not be a one-time, irrevocable decision. Any provider(s) you pick should have the service and technological flexibility to let you expand or alter the relationship as needs and circumstances change over the medium to long term.
Factoring in this level of future flexibility should be a prime consideration at the outset of any relationship. It is these kinds of strategic decisions—not a preoccupation on short-term wins—that will determine how successful your outsourcing partnerships, and operating environment, will ultimately be.