As the new year kicks off, you’ve likely made a list of resolutions (haven’t we all), both personal and professional. If any of those resolutions carry over into improving your sourcing model, consider this: 2019 might be the year that we finally see the tipping point where it becomes more advantageous and cost effective to outsource middle, back, and now front office functions instead of attempting to provide the same functionality via in-house implementations. Why? Let’s consider the answer by looking back at how the investment management industry has evolved over the last thirty years.
In the mid-1980s, investment managers developed their own systems in-house. The IT department was king. I spent my formative years designing and developing these systems, which were built from the ground up. Move forward just ten years to the mid-90s and a new breed of vendors emerged, providing packaged applications—you could now buy “off the shelf” systems. You had to do a bit of work to fit them to your model, but their creation and ongoing development was supported by the vendor, not your in-house IT group.
Jump ahead another ten years to the mid-2000s and two things occurred. First, we started to see a maturing of packaged applications and a consolidation of the software vendors who provided them. Second, the major custodians started to emerge as “service providers”—offering not only custody and trust services, but provision of business functionality via outsourcing. The custodians were joined by non-custodian service providers offering similar, and sometimes more comprehensive, outsourced solutions.
By the early 2010s the range of system choices provided by vendors was wide, and the “best of breed” solution option was dominant. The downside to best of breed was that it was asset-class and business-function based: separate systems for order management, accounting, performance, risk; systems that focused on equities, or fixed income, or derivatives; separate data warehouse and data management providers. The outcome was that large best of breed implementations resulted in a patchwork of different systems, some with horrendous interfacing. But at the time, what was the alternative?
This same period saw the emergence of the single system solution: a single platform that provided middle and back office functionality across multiple asset classes; a single accounting engine with centralized data, and business functionality driven from the core system. The single system solution is attractive in principle, but fiendishly difficult to execute successfully in practice. The price tag is high, the implementation complexity even higher.
The last five years have seen a maturing of the offerings provided by the major custodians and service providers. Ten years ago, the argument could be made that service provider systems were too legacy and operational performance of the providers was not as strong as could be achieved by an in-house team. This situation has changed, and service providers have upped their game. The money they are spending on new toolsets for data management and data delivery is considerable. They are driven to improve operations to achieve efficiency and reduce cost. But, more than any of this, we are seeing an attitude shift. Ten years ago, a service provider would tell you, “This is the way we do things, this is the model you need to work with.” Service providers are now using the words “partnership” and “journey.” They are looking to build a relationship with their clients to create an operational model that works for both sides.
As we enter 2019, anyone looking to undertake a major system overhaul should consider a managed service provider-based model. Before you invest significantly in an in-house single system solution, ask yourself these important questions: Will this really be the single solution that you were promised, or will it end up being best of breed with lots of applications bolted onto a central accounting engine? What is the probability that you will successfully complete such an ambitious undertaking on time and on budget? What are the maintenance and operational costs going forward? What is the real cost-benefit analysis?
Why not take some of the money you planned to invest in a single system solution and use it to partner with a managed service provider? Consider outsourcing trade capture, affirmation and confirmation, centralized accounting books of record (ABOR and IBOR), fund administration and record keeping, collateral management, data quality management, performance measurement and risk attribution—even elements of your OMS. Prioritize having the service provider send cleansed, aggregated accounting data to your in-house warehouse/mart/store solution, driving your business intelligence, reporting, and data provision to any systems which you choose to manage in-house. Let the service provider own operational responsibility for custody, accounting, and valuation processing across your multiple asset classes. Have the service provider be the one staying up at night managing overnight processing, ensuring data quality, and conforming to increasing regulatory requirements. Work with the service provider to agree and improve your target state model and implement the required oversight processes and service level agreements.
The key takeaway for 2019: Resolve to put outsourcing at the top of your New Year’s resolution list so you can focus valued time and money on the things that really separate you from the competition.