Summer is coming to a close but it doesn’t feel like the change in seasons I’m used to. Toronto has had an unusually warm, humid summer with no end in sight, there’s been nary a backyard barbeque to speak of, and I’m staring at a bank of unused vacation days. The transition to fall used to bring cool weather and excitement for a new chapter, but in 2020, it all feels like a blur. I suppose we’re in the season of COVID.
While Canada has stayed afloat through a pandemic summer, warding off the very worst outbreak scenarios, we’ve felt the pain of lost family members, lost freedoms, closed borders, and a fragile economy. As we muddle through one of the worst crises of my lifetime, I look for silver linings—and to be honest, they haven’t been hard to find through my work. The asset management community in Canada is weathering the storm with resolve; we’re innovating, strategizing, and putting in the work to lay the foundation for a future that is all but clear right now. We’ve grown the Citisoft team in Canada this summer with some extraordinary new talent and I must admit that my lack of vacation isn’t really due to COVID season—we’ve simply been busy.
With so much economic uncertainty, one might assume that near-term cost-cutting measures would overshadow infrastructure work—but the numbers tell a different story. According to a recent paper released by Northern Trust, 69% of asset managers in the Canadian market are investing in technology innovation for their business model. Why are asset managers engaging in technology and operations programs now? The aforementioned paper from Northern Trust makes a salient point: technology is enabling smaller players to level the playing field with mega-managers.
In some ways, I think that COVID-19 was an impetus for small to mid-tier asset managers, insurers, and pension plans in Canada to consider how outsourcing can help them navigate uncertainty. There’s no doubt that Canada’s outsourcing providers have the ability to scale and provide robust continuity plans to their clients. This has always been important for fund accounting, but many firms are seeing the benefits of outsourcing their middle office operations as well, particularly on the heels of the COVID crisis. What these firms are seeing is that outsourcing more of their operations isn’t just beneficial in terms of business continuity planning or scaling up during market volatility—middle office outsourcing gives smaller players the opportunity to compete with technology advantage. By leveraging sophisticated tools offered by service providers, firms can automate more, glean insights from complex datasets, and double down on their core competencies.
I think this is a positive shift but with it, there are new challenges. Canadian regulation is complex and outsourcing arrangements are under scrutiny from the Office of the Superintendent of Financial Institutions (OSFI) and Ontario Securities Commission (OSC). Ensuring an outsourcing governance model makes sense internally, complying with Sarbanes-Oxley and System and Organization Controls (SOC), or structuring a contract to meet regulatory guidelines requires expertise and nuance. This is an area that we’ve focused a lot of our advisory work on in Canada and I don’t anticipate this will slow down any time soon.
With all this talk of outsourcing, I’d be remiss to overlook the managers in Canada that benefit most from keeping their operations in house. For a number of large pension plan managers, the complexity of their operations and investment types preclude them from outsourcing—at least as of today. But that does not mean these firms are sleeping on their tech infrastructure. I’m seeing a corollary rise in advisory programs at large, insourced managers who are taking a holistic view of their operations and asking: Where can we streamline? Over the last few decades, operating models have grown extraordinarily complex, particularly among pension plans. With bolt-on application upon bolt-on applications weighing down technology infrastructures, these managers are realizing that the risk (and latent costs) associated with these models are no longer sustainable. The work we’re doing here really revolves around understanding front office needs and structurally supporting that in a simplified way.
So as summer fades away in the season of COVID, I’m feeling hopeful. We’re moving forward and we’re thinking big picture in Canada. I suppose that is often the case in times of crisis—our world gets shaken up and innovation emerges. I hope that the resilience of the asset management community here is mirrored in our communities at home as we move warily into the unknown. With that, I’ll leave you with my best wishes for the health and safety of you and your loved ones in the months to come.