Coming Changes to Middle and Back Offices

Every major financial crisis has generated significant change in how the Capital Markets industry operates. 

Examples include: 

• Mandatory trading halts introduced after the crash of 1987 to prevent the U.S. equity markets from ever again going into an unrestrained freefall. 

• Research Services removed from industry participants’ revenue models following the demise of the dot coms in early 2000. 

This latest crisis is no different and a view into one of the coming changes is beginning to emerge. 

Cost Concerns as the Primary Driver of Adjusting Risk Thresholds 

Cost reduction initiatives dominate the industry as few participants are untouched by the current crisis.  Headcount reductions, business line eliminations and procurement based initiatives have not been enough to offset the severe damage done to balance sheets.

 As a result, alternatives that one year ago were unthinkable are now being considered. 

A primary example is the emerging trend of industry participants taking a hard look at the cost of ownership of their middle and back offices. 

This is true of all participants: Investment Banks/Broker Dealers, Asset Managers and Custodians.

For the first time, BPO environments covering core middle and back office functions: processing, reconciliation, custody services, data management and others are being seriously discussed.

This represents a major structural shift for the industry and indicates the extent of the current crisis. 

While Industry professionals knew this would happen eventually, it was not expected so soon.

For some time the industry has been moving portions of middle and back office infrastructures outside their organizations.  It began with low risk processes and the supporting technology and slowly moved upstream towards those carrying higher risk.

Today risk thresholds have been adjusted to support cost reduction goals and the phrase heard over and over in BPO conversations is “everything is on the table”. 

Service Providers Adjust 

It isn’t just industry participants examining their appetite for risk. BPO providers are also reviewing their risk tolerance levels in response to client demands.  Not every provider is willing to take on risk intensive processes and applications. While some see it as a logical progression, others view it as too far away from their risk adverse culture and business model. For those willing to provide such services, new contractual arrangements will need to be developed that satisfy the risk based concerns of both parties: the service providers and their clients. 

A Contrary View –Middle and Back Offices as Competitive Drivers

An interesting aside is some organizations with a different point of view reject BPO alternatives and use middle and back office ownership as a competitive driver.  The idea of local resources supporting local clients is viewed as an attractive marketing tool.

Time will tell if this is feasible or affordable. 

Change is Coming

Regardless of who does what, significant change is coming and industry participants as well as BPO providers will emerge from this crisis looking much different than when it began.