October 2011

OUTSOURCING: Time to bring a human element to the procedure

Filing-CabinetRFP documents have become bloated, expensive and time-consuming. Nicholas Pratt looks at how the tendering process can be reformed to benefit both asset managers and their prospective providers.

Thud! That is the sound of a 300-question, 60-page request-for-proposal (RFP) document landing on the doorstep of an asset servicing firm. It is not surprising that such documents have become longer and more detailed in the past few years. There is greater pressure on managers to demonstrate due diligence and their businesses have become more complex.

However, the concern among asset servicing firms is that RFPs have become more expensive and time-consuming for potential providers without being any more effective for the asset managers. Responding to a typical one can cost more than $1 million (€0.73 million) and take weeks to prepare.

One of the problems is that as asset management outsourcing deals become multi-jurisdictional, more and more people from different offices in different locations get involved in compiling the document. “A book written by one author is generally clear and concise, but once you start adding several authors, the message becomes more unclear,” says Frank Froud, head of Emea (Europe, the Middle East and Africa) at BNY Mellon Asset Servicing. “This is increasingly how they are being written.”

The lack of clarity is exacerbated by the fact that there is often a fissure between the statement of strategic intent made by the senior management at the outset and the subsequent questions that are included in the documents, he says. “The granularity of the questions at a lower level do not always reflect the strategic objectives at the higher level.”

There is also too much attention on those areas that are relatively commoditised in the asset servicing area. The forensic level of detail on tasks such as basic custody all add to the cost without contributing much to the process, says Froud.

This does not mean that the documents should be less focused on details and less intense. Froud adds: “We realise that appointing an asset servicer is not a small decision. And there does need to be a certain level of detail but it is about asking the right questions at the right time.

“Asset managers have to understand what they are trying to achieve before they send it out. And they have to be more selective about the areas that will make a difference. It is not the size of the RFP document that is important but the quality. The bigger it gets, the harder it becomes to extract the important details.”

The question-heavy approach was understandable when the outsourcing market was less mature and little was known about the providers’ capabilities, but this is not the case anymore, says Charlie Goddard, head of the investment management practice at Navigant Consulting. “It is the same names appearing on the lists of providers.”

Consequently, Goddard has noticed a definite change in the attitude towards RFPs. “Suppliers are fed up with churning out the same information. And asset managers want to move quicker as well. They have realised that they do not need reams of information provided in the document when so much of it is readily and publicly available.”

Rather than asking multiple questions about the providers’ corporate structure and basic custody service, asset managers should concentrate on where the providers can differentiate and where they can support the clients’ business needs, says James Hockley, principal consultant at Investit. And this is very difficult to do in a written document.

Instead, clients should make more use of client-focused workshops, he says. “It is relatively easy to identify the usual suspects and to come up with a focused shortlist of providers whose capabilities can be matched to your business requirements. These providers can then be asked to present in detail at a structured workshop. Clients need to know if they can work with these people. That human element has to come up earlier in the process.”

Investit has been running client workshops for two to three years. The idea is that the client spends a day with each provider focusing on very specific elements that cover qualitative as well as quantitative factors. There has to be the right mix of people in the room, says Hockley.

“You cannot just leave it to the operations manager, there has to be a mix of department heads and senior management, so about eight to ten people. You can spread these days over a week or two and give each provider a precise agenda with enough time to prepare detailed presentations and specific responses.”

Quality and quantity
The workshops should then be followed by a post-match debriefing as soon as possible so that the list of four goes down to two – with a preferred provider and a back-up.

“That choice is ultimately made based on site visits, client references and further due diligence,” says Hockley “This does not necessarily mean that the decision will be made any quicker but there will be less time spent on the 60-page RFP and more time on the truly important aspects.”

Nor does the use of client workshops mean that the document has no role in the process. According to Ann Doherty, managing director and market manager for JP Morgan Worldwide Securities Services (WSS), Emea, the RFP is the foundation but not the final step. “It gets you on a shortlist and the workshops then bring that list down to a single provider. But the RFP has to be very good to get you to that point.”

JP Morgan WSS has already responded to 400 this year, a number that continues to grow with each year, especially in markets such as Asia where new business continues to emerge. Doherty does feel, however, that the quality as well as the quantity has increased. “The RFPs have become less boiler plated and more focused on the clients’ specific requirements,” he says. “And in due diligence terms, they are no longer a box-ticking exercise but a proper governance process.”

Goddard believes that it is still appropriate to have a mix of both the document and the client workshop. “The workshop is good for getting the practitioners involved, to get away from the sales people who compile the RFPs, and to gauge the true capability. But that doesn’t necessarily negate the use of a simplified one. It is good to have certain things written down.”

The simplified RFPs have tended to focus on the commercial aspects, given that the robustness and core competencies of the providers are largely understood by managers. However, asset managers must be careful when raising the subject of fees and tariffs given that suppliers are much more sensitive about these issues than in the past.

Speed-dating approach
There is a feeling that the process has sometimes been misused. The client may be fixated only on price and ignore the first 59 pages of the response in order to turn straight to the fee schedule. Or the client may just be using the process as a way to put pressure on its current supplier. 

“That is often a concern if you’re not the incumbent supplier. Is the client really willing to change?” asks Rob Wright, global head of product and client segments at RBC Dexia Investor Services. “We turn down a number of RFPs because they do not fit our profile, but we also like to think that we win more of those that we go for as a result,” he says.

A number of asset servicing firms are becoming more selective about the work they bid for. “Suppliers will make a determination about whether the clients are using the RFP as a process for benchmarking or whether they are really serious about picking a new provider,” says Froud. “The days when we will be used to create commercial tension are over.”

And the days when asset servicers would bid for every job in order to build their client base are largely over. In a fashion, the process is a means for suppliers to judge the prospective client rather than the other way round.

As Froud says: “A badly constructed RFP does not necessarily make the client less attractive but it does suggest that any relationship would be turbulent and taxing.”

There are, however, encouraging signs that a more mature approach to processes is developing on both sides, as suggested by the use of client workshops – a kind of speed-dating approach rather than a beauty parade – even though Goddard believes this approach is still an emerging model used by the enlightened few.

Of course, the best way to avoid the time and expense involved in a lengthy document is not to draft one at all. A number of long-standing outsourcing deals are approaching their renewal dates and instead of automatically going to an RFP, many managers are first looking at the strengths and weaknesses of their current relationship.

To continue the personal relationship analogies, it is akin to undergoing marriage guidance counselling to see if they can stay out of the divorce courts and avoid the disruption that that causes. As Hockley says: “The last thing an asset manager wants to do is see
the shutters come down because they are changing provider.”

©2011 funds europe