An entirely new approach to partnership between asset managers and service suppliers is becoming evident in the more progressive deals. It may yet prove a watershed in the effectiveness and profitability of outsourcing, argues Jon Benson
The maturing of asset manager outsourcing deals over the past few years has been well documented. Annual benchmarking studies by Alpha FMC have borne out this trend through improving and stablising service delivery across an increasingly wide scope of services. But perhaps now, more than ever, there is pressure on asset managers to reduce their cost base and improve service quality, while service providers need to increase revenues and profitability. These pressures are leading providers to extend their relationships with their asset manager clients to new services to supplement the margin-squeezed, traditional core services.
The provision of pure administration and custody services has long since ceased to be commercially or strategically exciting for most suppliers. Those suppliers who manage their client relationship proactively and offer a wholesale, strategic direction are more likely to develop long-term, valuable relationships with their clients. Those asset managers who create wide-ranging and deep strategic partnerships with their outsource suppliers are more likely to generate the maximum benefits and synergies from those suppliers.
A number of asset managers are, with varying degrees of engagement, looking closely at how they can more effectively leverage the capabilities offered by their supplier. The most successful managers in this respect are those that have adopted a clear and structured approach to developing their outsourced operations. Often, through effective collaboration, asset managers can lead suppliers in tailoring their market offering. Such collaboration includes the ongoing and active management of a strategic plan to help both the asset manager and service provider grow their businesses.
The big picture
The most effective suppliers will be those most adept at the identification, understanding and management of their evolving client needs. Suppliers need to present a clear and complete view of the full scope of services that they can provide (often easier said than done!), as well as a compelling narrative of how their service offering is evolving to address market developments and the business growth strategy of their client. The focus should then be on identifying the right new products to sell to clients to help them maximise the benefits achieved from the supplier – which in turn can lead the supplier into precisely the higher-margin areas to which they aspire.
Of course, it would be overstating the case to declare that this is a description of a general market trend at this stage. For every client/supplier relationship which is proactively forging ahead into new territory, there is at least another one where a genuine spirit of partnership innovation has yet to take hold. But for those with the will to explore extending their relationship, the opportunities are significant and varied.
The nature of such opportunities will depend on the asset manager’s motivation and the readiness and ability of suppliers to access more difficult service areas. However, key themes include:
- The administration of alternative funds; eg, real estate, private equity, fund of hedge funds. Market consolidation has meant that traditional asset managers have often broadened the scope of investments. This brings both operational management issues and compliance and risk management challenges. This in turn has created an opportunity for service providers to create scalable and robust alternative funds service models to help reduce costs for investment managers. For instance, a large securities service provider might look to leverage existing but fragmented property administration services to create an effective one-stop shop for outsourced property fund administration. It’s an offering that can prove effective, even in the face of stiff competition from specialist providers.
- The provision of dealing functions: by leveraging existing infrastructure suppliers may be able to generate market orders which can be filled automatically. The supplier may be able to build scale and hence reduce the operational costs associated with dealing in the market. Investment managers in turn may be able to identify cost reductions for the dealing of vanilla, market-priced securities. Suppliers can take an internal, fixed-cost function and deliver a transaction-based cost model delivering dealing, matching and settlement process synergies.
- Financing – where suppliers can leverage longstanding administration client relationships to introduce their investment manager clients to investment banking functions to the benefit of the wider relationship, for example when an investment manager embarks on corporate activity.
- Foreign exchange overlay services: outsourcing the administration of currency exposure may offer clients a cost-effective way to manage FX exposure.
- Outsourced client reporting and performance services: suppliers will typically deliver month-end data to investment managers for creation of client reports or calculation of performance and attribution reports. This is a logical extension to the outsource relationship and a key emerging area of opportunity, which will be explored further in a separate article.
- Extending relationships across geographies: many asset managers are looking to leverage global platforms to enable a common service and operational model across all operational geographies. This is only achieved through a joint, strategic partnership with the supplier – which can minimise supplier interfaces and cost, and create a common operational direction.
The common thread running through all of the above examples is an attempt on the part of both service suppliers and their asset manager clients to deepen the nature of their interaction, and to each leverage the widest possible array of capability available to drive value and revenue out of existing relationships. Suppliers attached to large banks in particular will increasingly look to sell all available group services to their clients – and this often means extending traditional service supplier relationships into the realm of corporate services, as well as the extension of a traditional service portfolio into wider and more complex areas. For their part, asset managers may well be looking to the wider group capabilities of their suppliers to see not just how service and cost might be managed through the relationship, but what value and custom the supplier can bring to their core asset and client base. And once we’re into this sort of space, a huge realm of possibilities does begin to open up.
Of course, the above examples represent a broad array of opportunities, which are being leveraged to differing extents across the industry. But far from settling into an established pattern, a number of asset manager-supplier relationships are increasingly being explored for mutually valuable opportunities. The most successful will be those that most effectively extend the scope of service provision into higher-value areas in a secure fashion. No two suppliers or clients are the same. Knowing your client/supplier and effectively identifying the breadth of services that can be offered will enable the suppliers and clients to effectively grow together and meet their joint strategic service and financial goals. And this type of corporate partnership approach will certainly be required if suppliers are going to crack the increasingly aged problem of profitable securities services outsourcing, and if asset managers are going to drive the maximum value possible from their existing service outsourcing arrangements.
• Jon Benson is a principal at Alpha Financial Markets Consulting
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