Outsourcing—Three Steps You Need to Take Before Beginning a Transition

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Choosing to outsource your investment operations is no small decision. Experience has taught me that the journey to get there can be painful or painless depending on what is done prior to starting a transition process. A little preparation ahead of time goes a long way towards ensuring a successful transition of services between both the asset manager and service provider. I view these three steps as essential in aligning both parties’ expectations:

Step 1: To know where you are going, you need to know where you are coming from

Citisoft advises its asset management clients that prior to signing a service provider contract, it would be in their best interest to create a business process inventory (BPI). The BPI is a detailed current state inventory of all activities/processes performed by the asset manager for in scope functions that could be outsourced. It captures control frameworks, reporting needs, interactions with the front office, ownership, level of process automation, and the technology applications leveraged in the process. When done properly, it highlights the complexities and challenges within the current operating environment. Understanding where the problems lie ensures the asset manager can focus on how a future service provider is positioned to address those needs.

Step 2: Should I stay, or should I go?

After completing the BPI, the next step is to determine whether the inventoried activities and processes are indeed suitable for an outsourcing arrangement. To do this, a functional scope assessment or FSA is performed. The FSA analyzes each activity in the BPI against criterium—process automation, process risk, process stability, and service provider capabilities are all catalogued in varying degrees of detail for each function. Each activity is scored against an agreed-upon set of criteria to produce an outsourcing suitability score. Scoring thresholds are created to bucket analyzed activities and processes into one of three categories; appropriate for outsourcing, service provider proof of concept required before decision can be made, or not suitable for an outsourcing arrangement. This analysis is presented to the asset manager’s management team to make an initial set of recommendations on what should stay in house or move to a service provider. Those falling in the proof of concept bucket get fleshed out in the next step.

Step 3: Dating before the marriage

Once it is understood what should go and what requires further investigation, it is imperative that the proposed service provider and asset manager engage in a thorough due diligence exercise. A service provider will only get on board with this exercise if there is a letter of intent (LOI) in place. Due diligence is perhaps the most critical step when undertaking an outsourcing transition. During this time, both parties work closely together and review in detail each activity slated for outsourcing. As always, the devil is in the details, and this step provides both parties an opportunity to delve much deeper than otherwise would have been afforded had they not performed the BPI and FSA.

The ability to understand these gaps upfront allows the asset manager to track the gaps as part of the transition plan and ensure there is a mitigation (“back-up”) plan should the service provider not deliver a suitable option.

Oftentimes, outsourcing transitions go sideways or have friction because expectations of both parties are not entirely understood at the outset. Taking the above steps is a good way to ensure you got yourself the right partner. Service providers have their own personalities, so understanding how they handle differences in opinion or adapt to your needs before beginning a transition is invaluable.