How to Achieve Operational Alpha by Creating a More Optimal Ecosystem of Outsourcing Partners

The investment management industry currently faces a turning point. Between the challenges of flattened margins, scaling-up technology capabilities and evolving global regulation – not to mention the economic impact of the covid-19 pandemic – many investment houses will have to make fundamental operational changes as they seek to drive operational performance and achieve investment alpha.

The investment industry is of course aware of this and asset managers are increasingly exploring scalable solutions to build efficiencies. The right solutions can help firms reduce costs, eliminate redundancies and shorten time to market – ultimately leading to higher-quality data flows, improved governance and transparency, better assessment of costs, re-evaluation of priorities, and enhanced client relationships.

Where does a firm begin when rethinking traditional ways of doing things? There are many factors to consider, but a firm’s outsourcing strategy is certainly one of the most important aspects.

When established strategically, the right ecosystem of outsourcing partners can drive what Northern Trust calls Operational Alpha® – the value gained by improving efficiency and maximising technology use to help manage costs. .  

Mitigating the impact of shadow operations

As asset managers move into new areas of business and diversify their strategies, the tools they use and the approaches they take to manage different products and services can change.

As they grow, firms may look to outsourced providers to enhance or replace their in-house capabilities. By embracing outsourcing and developing an ‘ecosystem’ of trusted partners, asset managers can create solutions that provide greater scale, flexibility and speed to market.

However, as they build their outsourcing ecosystems, they may, over years of growth and development,  create ‘shadow operations’ – pockets of resource dedicated to duplicating or checking the work of other departments or outsourced partners. Supporting such a legacy silo structure of outsourced providers can be problematic. Monitoring complex operational arrangements can become a resource drain, and a distraction from key areas of investment management focus, such as portfolio management and client servicing.  

At the same time, as more of these activities duplicate, there is a greater potential for errors, misunderstandings, and misalignments between parties. Operational frameworks may spring up to consolidate fragmented data sets or to oversee different outsourcing suppliers, giving way to these shadow operations. In this way, a company’s operations can develop operational inefficiencies over time that may be ripe for reassessment and change.

Managers can help mitigate this by avoiding vendor “lock-in” – a situation where technology, process, and partners are inextricably linked and impossible to separate. They should be also anticipate whether they will build their own or buy technology from third parties at early points in their growth strategy. Managers should be technology-agnostic and have the flexibility to change their suppliers or approach as required.

Outsourcing operational activity, not responsibility

Many organisations, particularly larger firms that adopt a multi-sourcing approach with different suppliers, may struggle with service standardisation. Having multiple providers can mean dealing with vastly different service approaches or systems set-ups. They may therefore employ staff to cross-check and normalise the work of multiple suppliers in order to manage their day-to-day business – which can be costly and inefficient.

How can investment firms address these challenges? First, technology must be organised so their data is accessible and flexible for all parties and platforms. The most successful investment firms are also holistic in their thinking.

Rather than working on a case-by-case basis, they adopt a broad strategy for building their systems, and are mindful of how technology selection and integration may impact future requirements for expansion. They develop a best-of-breed ‘ecosystem’ of technology and outsourcing partners, and have strategic or preferred partners in place at a functional level.

It’s also important to remember that asset managers can outsource activity but not responsibility. For this reason, the oversight function gains even greater importance under an outsourcing model.

Planning for expansion

Ahead of each business expansion, asset managers need to assess the likely long-term costs of building in-house capabilities versus buying them. What are the costs of procuring and maintaining both the technology and the resources to carry out the new function? Would the new function be duplicating work already carried out by other parts of the business or by an outsourced partner?

In a ‘buy’ scenario, managers should see whether there are synergies with existing suppliers at the process level, and whether the supplier technology integrates with existing systems.

Firms striving to be more efficient should carefully review their outsourcing arrangements, remove duplicative processes where possible, and consolidate services with providers that can offer global solutions.

Rethinking the operating model

Outsourcing partnerships are an important part of many asset managers’ operating models. They can provide access to scale and new solutions to support a business as it grows, and its need for new capabilities evolves. But there are things firms should keep in mind: avoiding vendor lock-in and remaining technology-agnostic with the flexibility to change their suppliers or approach where necessary – are key among these.

As investment managers grapple with managing rising costs and driving bottom line performance, we see more re-assessing their operating models and considering outsourcing options. For many, the volatility and operational strain caused by the coronavirus pandemic also shows the merit of working to ensuring their operating models are as lean and efficient as possible.

Achieving a more optimum, scalable ecosystem of outsourcing partnerships can be key for asset managers in adapting to the demands of change, building flexibility into their operating models and positioning their investment operations for the future.

Laurence Everitt is head of Global Fund Services, UK at Northern Trust