The new breed of vertically-integrated outsourcing solutions have enabled service providers to move up the value chain to support front office functions such as order management and modelling, in addition to traditional middle and back office services. The enhanced scope of services is proving compelling to many asset managers. Yet, the complexity, effort and risks associated with bringing the new front to back solutions to life are considerable.
Implementing middle office outsourcing opportunities was and remains hard enough, especially for larger managers operating across multiple time-zones, as well as those managers who’ve not experienced outsourcing before and therefore haven’t had to overcome the barriers associated with passing the keyboard to a third party. But now, front office functions such as portfolio modelling and order management—hitherto insulated from the headline impacts of outsourcing—have been pulled firmly into scope, further upping the ante and adding significantly more profile, senior stakeholders, complexity and, of course, risk, to an already challenging equation.
From the asset manager’s perspective, the vertical integration of front-middle-back office makes a lot of sense strategically. The manager can concentrate on alpha generation, product design and innovation, branding, marketing, distribution and customer experience and can move further to a variable cost model. This leaves the service provider to lift the heavy weights operationally and to ultimately deliver a more scalable service which is both robust and ‘future-proofed.’ For a deep dive on the shift to front-to-back integration, see Citisoft’s 2020 paper, A New Frontier in Asset Management Operations.
Equally, for the service provider, the incentive of becoming an intrinsic part of multiple managers’ eco-systems is a highly attractive one, opening up numerous future opportunities for their sticky assets to be deployed not only within their traditional asset servicing and administration business lines, but now also in innovative data services and emerging technologies. In short, the move into front-to-back is enabling asset servicers to break out and become more of the ecosystem as a whole, rivalling traditional data providers.
There is a clear business case to be made on both sides, with win-win solutions there for the taking. But the implementation challenges and pitfalls are many.
Both asset managers and service providers alike therefore need to spend a good deal of time working with experts at different levels of their respective organisations considering these challenges in some detail, ideally prior to embarking on a formal engagement. The following are my top five key areas to concentrate on, first independently and then jointly, to help pave the way for a successful implementation experience:
- Governance and Resources
- Current State: Ecosystem Analysis
- Target State: Vision, Data Integration Strategy and Operating Model
- Future Roadmap
- Conversion Approach
Governance and Resources
Possibly the single biggest area of focus, especially as a transition is getting off the ground, is governing and resourcing the programme. While the effort required to implement a new front-to-back solution will obviously vary according to the size and complexity of each opportunity, the methodology, the lifecycle of the project, the roles and responsibilities, the skills required, and the governance principles remain constant. In our experience, firms rarely get this right first time, hence there is a need both for detailed planning at the outset, and for periodic reviews of these to be built in.
Current State
While current state assessments are much maligned (nobody likes naval gazing after all), both asset manager and service provider will need their teams to attain a reasonably detailed understanding of their respective current states. This will identify nuances, quantify gaps and inform the baseline implementation plan. The greater the quality and ‘standardisation’ of current state documentation, the greater the ability to engage meaningfully moving forward. Current state documents should use industry-standard terms to define the in-scope functions and services at a consistent level of detail, explaining how these are carried out today, including key inputs and outputs.
Sharing a Future Vision
Both asset managers and service providers should be comfortable sharing their future vision and strategy. While these should stay independent of each other, they will need to align on the critical, common areas of data integration and data distribution. For more on how to identify critical requirements, see David Yardley’s recent blog It’s “The Great RFP”—Have You Identified Your Stakes in the Ground? The target operating model and service level agreement should build from the data integration strategy, outlining how the business functions are organised and interact with one another to deliver the in-scope services.
Relevant Roadmaps
Relevant roadmaps outlining indicative target development dates should also be shared. Asset managers will be keen to see innovation in areas such as data amalgamation, data distribution, regulatory reporting capability, digitization of funds, utilization of distributed ledger technology, and of course, growth plans to facilitate distribution in the asset manager’s target markets.
Conversion Approach
Collective thoughts on the approach to converting the asset manager’s business onto the service provider’s platform should be shared at a relatively early stage. While what works in one scenario may not work in another, front-to-back conversions are inherently more risky and so risk-based evaluation of the various conversion options may be warranted. An example of this might be to consider a function-by-function conversion vs a big-bang or series of big-bangs (with each phase constituting a large swathe of portfolios) Hand-in-hand with the conversion approach, the testing approach should also be outlined.
Given the scale of the prospective changes of a front-to-back services transformation, getting the implementation wrong in any of these key areas can lead to a world of pain, both financial and otherwise. The stakes are high.
