What Size Is Your Oversight Model?

Asset managers considering outsourcing need to consider that although several benefits can be realized from the transition of functions, the shift of responsibility is not one of them.  Outsourcing requires effective management and oversight but oversight models are not prescriptive, so how much is too much or too little?  Providing too much oversight diminishes the benefits of outsourcing and decreases productivity due to inability of resources to allocate time to other initiatives. On the other hand, providing too little oversight can expose an asset manager to operational and reputational risk, which can have a variety of adverse effects, and makes it difficult to proactively hold a service provider accountable. 

Operational oversight teams must have clearly defined roles and responsibilities and the appropriate skills and expertise to monitor outsourced functions.  This may include handling inquiries; resolving and escalating processing issues, control failures and system outages; and maintaining documentation and metrics to track the frequency and severity of incidents.  But again, how to define the model?

Finding the correct balance begins with an understanding and assessment of the scope of services and capabilities of the service provider.  This includes operating models, location of services, standard vs. bespoke processes, control frameworks and technology offerings.  This understanding enables asset managers to conduct a holistic risk assessment to evaluate potential impacts and changes to their internal operations, as well as to their end clients.  Unfortunately, this process is not one size fits all as each firm must weigh these impacts against their own risk tolerance levels and willingness to incur oversight investment costs to mitigate these risks.    

To maximize the expected benefits of an outsourcing model, there needs to be clear internal ownership of the outsourcing relationship, as well as ongoing governance of the services provided.  Oversight models are expected to adapt and evolve over the course of the relationship with a focus on continuous improvement, therefore effective governance must include, but is not limited to, the following:

• Clearly defined and measurable SLAs and KPIs
• Risk-focused management reporting
• Review of key operating model and technology changes
• Service provider response to regulatory changes
• Periodic review of risk assessment for outsourcing services
• Plan for continuous improvement

In short, there is no industry standard for outsourcing oversight.  Asset managers need to be able to effectively assess their own risk tolerance and tailor their oversight models based upon what is most important to them.  With the appropriate level of oversight, effective governance, and shared commitment to continuous improvement, trust is more readily established, therefore increasing the likelihood of a mutually beneficial outsourcing relationship.