Post-Outsourcing Data a Struggle For Some Firms

What should an investment manager’s data architecture look like post-outsourcing? The answer, as always, is “it depends” but new regulatory and risk requirements are straining some firms that have outsourced their investment operations without a clear pre-defined data vision going into the relationship.

The constant driver for investment operations outsourcing from the beginning has been simplifying the manager's technology and operations cost and burden. The ideal outcome is a relationship that allows the investment manager to focus on managing money while adding capability, but in reality, there are a number of firms that have found themselves in a post-outsourcing world with serious constraints; specifically with data access/storage and internal reporting requirements. Some of these challenges can be traced back to a firm's mind-set going into outsourcing transition during strategic solution design conversations between the client and provider.  These conversations are a critical step in determining what stays and what goes, but all too often, investment managers don't enter or exit these conversations with a full understanding of what their remaining technology and operations model will look like post-transition. We'll call this the "Calgon" effect (“Calgon, take me away...”).  A post-outsourcing environment doesn’t need to be completely determined before engaging in a detailed outsourcing conversation but many firms are simply unprepared from what life will look like after the fact and rely too heavily on their service provider to help them define their own future state. Outsourcing transition is a time of great change and having a solid target data environment that is inclusive of the data needs on both sides of the fence is a key for transition success.

Unfortunately, we're seeing post-outsourcing data storage and reporting issues come to fruition today for some of those that have adopted middle office outsourcing relationships. Obviously, data is the lifeblood of an outsourcing relationship.  It is the constant in the relationship and a (the?) critical element in end client satisfaction. Now with new data dependent requirements facing investment managers such as ad-hoc compliance and risk management requests or regulatory-driven requests such as Form PF, firms are often faced with slow, costly, or down-right broken ways to acquire this data and support these requirements. 

In response to these needs, service providers are taking the data challenge very seriously and beefing up data storage, reporting, and accessibility.  Northern Trust (Markit/Cadis), State Street (Enterprise), and BNY Mellon / Eagle have all made significant investments in taking a data-first first approach to outsourcing conversions but there is still a long road to go before a service provider could support 100% of the data firms would require to support risk, compliance, and regulatory regulations in their entirety. Until that time, managers would be wise to take a holistic view of data in preparation for outsourcing.

- Ben Keeler