Outsourcing takes a blow

The recent announcement by Penson that it is undertaking a massive restructuring worldwide including selling the UK (and potentially the Australian) Back office outsourcing business could be an indicator that the existing outsourced industry is about to go into a mass change. Penson have tried to become a world supplier of back office outsourced services for many years and their restructuring programme could be seen as an admission of failure. Penson states that low volume is one of the reasons but this in a time when most firms are complaining of high volume problems. Cutting costs could be translated into not making enough however, the large amount of bad debit that has just been written off was surely a significant factor and the deal to expand their outsourcing relationship with IBM and Broadridge, as their systems and operations are not up to it.

So Penson looks vulnerable to acquisition and I expect a named player in the outsourcing business to buy Penson in the not too distant future. However, does this mean that outsourcing is in decline, with Penson the first casualty?

I don’t think so! The Cloud offers new outsourcing opportunities that are far more subtle than the legacy style offered by firms like Penson. The demand for outsourcing is growing but the understanding by firms of what is being offered is at a very low level. This is jointly the fault of bad marketing by outsourced services providers and a head-in-the-sand attitude by managers in financial services firms who base their knowledge on superficial technology understanding. There is also a fair amount of job protectionism that reinforces their decisions to keep operations in house.

The future does and must include financial services firms outsourcing operational functions wherever possible. For example it makes no sense for Wealth Managers to run data centres or have to keep redeveloping technology to keep up with on-going regulatory changes.

Custodians are prime candidates in the market structure, to evolve their outsource services utilising Cloud technology. Why should investment managers have to keep spending huge amounts of money on buying or developing technology when Investment Banks already have the structure and systems to support their business?

Outsourcing is changing! It’s becoming more flexible and far more technically efficient in supplying the services and support, which buy-side firms and the intermediaries need. The Penson announcement is just another line being drawn through legacy outsourcing and a sign that future outsourcing will work a whole lot better and without the risks and costs of yesteryear.

All these issues and more will be discussed during the Post-Trade Forum’s  ‘21st Century Outsourcing versus Internalisation’ debate,  hosted by the London Stock Exchange on the morning of the 29th September 2011.