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Opinion

Outsourcing: Why asset managers are rethinking operating models

OutsourcingOutsourcing is no longer taboo, according to Linedata’s Anup Kumar.

Nearly a third of investment firms are looking into outsourcing opportunities for their middle office operations, hoping to free up cash and human resource by removing the need to build and maintain internal teams to compete in the ESG, crypto and private debt markets or invest in introducing new systems.

If there is one thing that’s constant, it’s change. But looking back at the last two years, that’s an understatement for asset and alternative fund management. Facing the rise of new ways of working and new asset classes, what we have seen is nothing short of a paradigm shift – especially when it comes to recalibrating the operating model and modernising business applications across the front, middle and back offices.

Today’s investment and fund managers are starting to leverage the benefits of outsourcing in novel ways to meet the challenges that hybrid and remote working have brought head-on. According to a recent survey we conducted, nearly a third of investment firms are looking into outsourcing opportunities for their middle office operations, up from just 17% in 2019.

While cost transformation is a natural outcome of operating model redesign and outsourcing, the focus is increasingly on improving digital agility, access to specialised talent, increasing efficiency and improving the overall security posture. Increased adoption of outsourcing across middle and back-office functions and processes has become a strategic imperative as funds expand into private markets with increased back-office complexities.

Overcoming the outsourcing taboos
The pandemic reframed not just ways of working but assumptions, attitudes and approaches that had long gone unquestioned and unchallenged within traditional and alternative funds. These ideas dictated that only very few and very specific functions could be outsourced, and some processes should only be done within the office’s four walls.

In short, outsourcing is no longer a taboo.

Fast forward to today, and the conversations at investment management conferences, roundtables and panels play out very differently. Roles such as management accounting, bookkeeping and investment records are no longer the sole responsibility of the in-house team. For funds, outsourcing is not just increasing in the middle office but is also growing in popularity in the front office in areas like investment data management, thematic research, portfolio monitoring and even valuations.

Investors and regulators are demanding a much greater level of sophistication and expertise in dealing with complex asset classes and reporting.

As a result, the highly manual and mundane tasks of collecting, organising, and validating data are being outsourced to free up time for employees – according to the 2021 'Funds Europe Report', 54% of fund managers use third-party fund administrators to produce critical data such as their net asset value (NAV).

operating models Diversifying products and services and new technologies have driven fund houses and investment firms to abandon notions that outsourcing can only be utilised in a single area. The front office is increasingly realising the value of prioritising time spent on finding the next investment rather than servicing existing funds and assets, working on highly manual data processes, and carrying out complex reporting procedures.

Bridging gaps in talent and technology
As trends in the investment management industry evolve, fund managers can find themselves scrambling for the expertise needed to expand the products and services they offer. The private debt market is set to grow to $1.5 trillion by 2025, posing a big challenge to the many firms wanting to compete but finding themselves lacking on a technical and personnel level. In other areas, experts are needed not just in an operational sense but also for better client service in classes such as alternative lending, crypto and ESG. Regarding the latter, the 'Global Asset Management Survey Report 2021' suggests that 41% of firms have sought ESG specialists, be it from internal or external sources, in the last year.

Yet, for many, keeping talent on standby for the more ‘niche’ areas is an expense that not every firm can afford. Nor is it particularly efficient to do so for those that can afford it. The growth of the market and its diversity of assets has normalised the outsourcing of talent and expertise at a far more senior level. This can enable firms of all sizes to bring experts in as and when needed rather than maintaining large teams of experts that are hard to find and harder to retain.

At the same time, there is the question of maximising the benefits of technology. Managers, particularly those working on private funds, are operating in an environment where greater transparency is needed. Regulators are looking closely at the amount of capital that’s being allocated in these large, expensive deals, and expense tracking is very hard to do manually. For 35% of investment firms, the regulatory burden is cited as an operational challenge. Yet we often see firms still working on excel documents or cobbling together several tech systems that might not communicate with each other.

Adding to this, as each deal is unique and takes place in a fast-changing borrower market, it leaves execution teams in the front office bending over backwards to make things work. Coupling that with the 'Global Asset Management Survey Report 2021' that 72% of hedge fund managers and 54% of asset managers are developing less technology in-house, it is clear that strategic deployment of outsourcing is becoming a critical factor in maintaining efficiency and staying competitive in a complex, growing market.

Addressing the growing pains of digital transformation
Diversifying and competitive markets, increased regulation and new technology bring swathes of new data to analyse and check, adding hours of additional manual work for asset and fund managers. Even with artificial intelligence and machine learning automating manual processes, in-house capacity can only achieve so much in making that data manageable and consumable. So, the human element remains for now, but outsourcing is growing in popularity across the front, middle and back offices. Introducing outsourcing into business models is freeing up cash and human resource by removing the need to build and maintain internal teams to compete in the ESG, crypto and private debt markets or invest in introducing new systems.

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