Asset management firms have been slow to adopt data management outsourcing and cloud technology. Although outsourcing is very much in fashion, reservations remain and cyber security is key. Alex Rolandi reports.
The rise of pay-per-use public cloud services like Microsoft Azure and Amazon Web Services has seen a boom in the outsourcing of core technology functionalities. It brings down the large cost of owning and operating hardware, as well as the expense of maintaining systems in data centres.
According to Morningstar’s Tony Gillett, director for emerging capabilities, Emea, outsourcing is “very much in vogue”. “No self-respecting fintech company today is likely to be spending hard-won capital on hardware when it can rent it in a scalable way that keeps their CFO happy, not to mention their investors,” he argues.
Banking and shadow banking sectors have been slower to adopt the use of cloud technology in favour of retaining complete control over their IT – but in recent years, this has started to change.
“The benefits of outsourcing have become more undeniable, so the trend has reached even traditionalists such as the City’s asset management firms,” says Gillett. “Nevertheless, there perhaps remains a certain stigma associated with admitting that core technology functions have been outsourced.”
One reason is cyber security, which has become increasingly important in the pandemic. A CoreData report in February found that nearly six in ten institutional investors say a cyber security breach is a reason to undertake an unplanned review of a mandate.
Using cloud technology, sensitive data can be accessed from any location. This has in turn prompted change in the industry as cyber security strives to stay ahead of cyber crime.
According to Jan Nießen, portfolio manager at Union Investments, the rising prevalence of cloud computing has been accelerated by the current crisis. “Traditional approaches to security such as the use of firewalls to protect company data are less effective, and new approaches like identity and access management are emerging,” Nießen says. “The biggest challenges of using cloud computing technology for companies are related to security.”
Security was the main reason for the slow adoption of cloud technology in the financial world. Meanwhile, regulators have struggled to understand the remaining risks in the cyber world.
Various regulations such as the Cloud Act in the US and its equivalent in Europe aim to secure cloud technology by securing the location of physical servers, managing the cryptographic keys used to protect the data and encrypting the flows of information between final users and data centres, according to Yvan Mirochnikoff, head of innovation and digital transformation at Societe Generale Securities Services (SGSS).
“Today, multiple audits have shown that there are ways to manage such a cloud environment in a more stable and secure way,” he says, pointing out that SGSS now stores 80% of its data in the cloud – “preferably in public clouds which are suitably secure”.
Mirochnikoff adds that it is the outsourced firm’s duty to manage clients’ data on their behalf. In the case of SGSS and other firms undertaking outsourced services, clients remain the final owner of it. In the EU, this was established in the General Data Protection Regulation. In most cases where services are outsourced to SGSS, the firm is seen as a “data processor” rather than data owner.
An investment firm’s outsourcing decisions will ultimately be based on the cyber security of the cloud infrastructure.
According to SimCorp Gain managing director Josef Sommeregger, whenever a firm gives something to a third party, it’s a given that layered network securities and intrusion detection must be in place.
“We have to satisfy any of our clients’ external controls for cyber security compliance. This can go typically very far, and it’s a set of tools and processes, and technology,” he says. “Big cloud providers already come with an inbuilt security set. It can take a long time if you build this up yourself to get to anywhere near to what they’re offering today.”
According to Sommeregger, the asset management world’s view on cloud tech adoption has followed a similar route to the industry’s perspective on outsourcing business offerings. For a long time, it has been looked upon with cautious eyes.
“What we’re seeing now, at least from our perspective, is a big transition and huge demand shift in this area,” he says.
“If you think about all that you need, like in clouds, with high availability, and risk, and processes, and risk governance – building all of this up takes an enormous amount of time and skills and energy.”
It’s a case of bringing the funds industry up to speed with the digital age. Outsourcing certain data management or business services can also allow asset managers to deploy technological tools that otherwise would not be so readily available for them.
The core driver behind the outsourcing trend has moved on from cost and quality – issues that the industry has been dealing with for a while.
“Most of our clients have taken their own approaches to cost and quality and achieved something, but where they’re all held back is that even with the technology that they’ve bought from us and our competitors, it often still takes them quarters to release a new asset class,” says Sommeregger.
A report by software provider SimCorp found a “compelling business case” for automation and data as a service. This rests on three pillars: direct cost savings of up to 20%, redeployment of expensive human experts, and future-proofing of operating models and IT capabilities.
“If you look at the current outsourcing approaches in the market, they often are very much focused on operations. They often are very focused on leveraging labour arbitrage or making certain things more efficient, very often about quality, efficiency, and in some way costs,” says Sommeregger. “What we’ve really seen amongst some of our big clients is that the real challenge for them is not just about a few base points of cost, but it really is to be agile, to launch a new asset class in a much shorter period of time, and to have somebody that helps with the know-how around it and having an expert who’s done this before.”
For Matt Davey, head of coverage, marketing and solutions at SGSS UK, access to detailed portfolio data is more important than ever during the ongoing uncertainty. “Since the 2008 financial crisis, monitoring risk is essential, not only on the back of the crisis, but mandatory as a result of continuing regulatory pressure,” he explains.
According to Davey, detailed and in-depth portfolio data and ongoing risk reporting monitoring are crucial for investors and asset managers to make the right investment decisions. Outsourcing, he argues, allows clients to devote more time to their core business.
“The growing contribution of technology, and data technology, will revolutionise risk management and operational efficiency: two issues at the very heart of the asset management industry,” he says.
SGSS’s Mirochnikoff adds that many financial institutions have decided that the best and most economical way to strengthen their systems and secure their data is to delegate this kind of responsibility to specialists.
According to the digital innovation expert, the role of major data centres hosted in different areas connected through intelligent monitoring software has become clearer during the Covid-19 crisis. From an industry perspective, data centres are able to manage performances, anticipate technical failures and allow back-up scenarios in the case of any major disaster – such as the pandemic.
“The management of large data centres requires a high level of professionalism, with the ability to simultaneously manage the physical infrastructures, and the logical environment to secure access to data, along with the capacity to optimise performance,” Mirochnikoff says. Managing data is no easy feat – there are many factors at play.
“From a financial perspective, it is preferable to focus added value on the topics that can be mastered. Therefore, apart from large organisations which are able to invest in the environment and have people who are adept at managing huge data infrastructures, many financial companies do not have the critical mass to invest in the technology. This is aside from their capacity to create models and to use the data, stored and managed in large data centres,” he adds.
One thing is certain – outsourcing data management expertise remains very much in fashion, in spite of the reservations and stigma. Many asset managers that use third-party firms do so under full-disclosure agreements, preferring to remain anonymous for competitive and other reasons. There seems little doubt, says Gillett, “that the more progressive City bastions will ultimately follow the fintech upstarts, such reservations will evaporate and cloud services will be firmly in fashion”.
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