An asset manager makes the decision to outsource all or part of its middle office functions to a third-party service provider. So now what? Kick back, pop the champagne, and hope the service provider executes on the contractual arrangements? Or, do you set up shop at the service provider to monitor the people, processes, and technology applications used? I recognize this is a dichotomy of two extreme approaches, but it begs the question: what is the right level of oversight needed after the execution of an operations outsourcing agreement?
In my 12+ years of working on outsourcing initiatives with both asset managers and service providers, I have seen varying levels of oversight covering all ends of the spectrum. There are certainly several factors which can influence the degree of service provider oversight, such as complexity/criticality of the function outsourced, the level of service provider maturity and trust, the specificity of contractual arrangements and related service level agreements (SLAs) and key performance indicators (KPIs), and the asset manager’s tolerance levels for risk.
In the past three to five years, I’ve seen momentum swinging toward the more oversight side of the house. First, as asset managers continue to strengthen their risk management, outsourced functions should be included in conversations alongside the insourced functions. After all, the asset manager is ultimately responsible for the success (or failure) of these functions. Second, service providers are acknowledging that asset managers want a greater level of transparency into KPIs and SLAs, and are offering enhanced tools, reporting, and relationship management services to meet this need. As a result, we are seeing a collaboration of efforts which enables more effective service provider oversight.
Additionally, both sides recognize the increasing importance of having a formal and dedicated oversight and governance process. This ensures frequent communication, defined escalation procedures, and a means to evolve the business needs moving forward. Although contracts and business requirements are written with the best of intentions, gray areas arise and requirements can change over time. The change management aspect of service provider oversight is critical to aligning both asset manager and service providers through joint process improvements and transformations.
Common trends I’m seeing in the service provider oversight space
The overall theme is evolving from a transactional basis to a more holistic, mutually beneficial relationship; not about just meeting service levels, but growing and transforming the business along the way
Asset management organizations are giving the service provider oversight function increased attention and visibility within the executive ranks
Asset managers are dedicating more experienced and skilled resources to the oversight function;
The phrase “trust, but verify” is echoed a lot, meaning “we are engaged with a trusted provider, but we have an obligation to verify key metrics and service levels”
Service providers and asset managers are spending more time up front focusing on SLAs/KPIs, roles and responsibilities, and joint governance structures; the outcome is better alignment on specific areas requiring oversight
Service providers are working to enhance their product/service offerings to meet client oversight needs with timely dashboards, automated scorecards, exception reports, and other service status reports
In summary, both asset managers and service providers appear to be focusing more efforts around the service provider oversight function. In the early days of middle office outsourcing, oversight was a lesser priority activity for asset managers, and service providers may have felt a general sense of intrusion. In the past ~five years, both sides have been jointly collaborating and recognizing the value gained from a greater level of oversight. At times, less is more, but with service provider oversight, we’re now seeing more is more.