Covid-19 is changing the shape of outsourcing with asset managers now looking to more holistic solutions that cover all of the front-office, middle-office, and back-office operations as a means of addressing increasing cost pressures brought on by the pandemic.
"The trend that we’re seeing with outsourcing is not only about the middle office or the investment book of records solutions. It is becoming more holistic from the whole of the front and middle office solutions right through to the back end. We are seeing managers look to focus on their core competencies because they’re facing increasing pressure around costs, and operational areas are often the highest or the biggest fix costs,” says Caroline Higgins, head of Global Fund Services, Asia at Northern Trust and co-author of a white paper titled “Driving growth in asset management solutions for the whole office in 2020 and beyond”.
The white paper includes a survey of 300 global asset managers, many from the Asia-Pacific region, on outsourcing trends and behaviors. “The interesting part is that we do see definite trends of outsourcing across the entire investment lifecycle that covers middle office and includes front office solutions, which enables our clients to focus on core activities. These outsourcing solutions include data, trade processing, foreign exchange, investment analytics, or trading,” Higgins says.
The asset management industry is going through tremendous changes. While the full impact of the pandemic is yet to be realized, the current market stress has magnified what has already been a difficult environment of escalating costs and fee pressures. Many asset managers have focused on cost containment, which has become more urgent during the Covid-19 era. Firms seeking greater efficiencies have looked at streamlining their operations through both outsourcing of non-core competencies and by implementing new technologies to improve reach and scalability.
Controlling costs is a key strategic priority in the next two years, according to 87% of the survey respondents, closely followed by focusing on risk and compliance (86%), and supporting expansion into new markets (85%). The survey also finds that 64% of respondents will achieve their strategic priorities through leveraging new technology, with 55% stating a change in the direction of product strategy and 41% citing M&A action.
While outsourcing isn’t a new phenomenon, more asset managers are turning their attention to areas that previously had not been outsourced, such as the front office. Clients recognize that functions such as trading, previously not considered a candidate for outsourcing, can be done more efficiently by specialized providers who have the expertise and reach.
“One of the themes that is interesting about outsourcing and relates to Covid-19 is that the pandemic led to a significant bounce of volatility, as we saw in March and April, which put a lot of stress on investment managers around their treasury operations. There were increased cyber-attacks, especially on cash wire processes. We saw an increase in cash wires, margin movements, market valuation challenges, and tracking counterparty exposure with this volatility in the market, on top of monitoring their books and balance sheets.Through outsourcing, investment managers have access to the technology, automation and most of the controls, to stop cybersecurity attacks and erroneous cash disruptions,” says Iain Carey, head of Hedge Fund Services, the Asia Pacific, at Northern Trust.
The potential of technology to reshape asset management has become more evident in recent months, with Covid-19 shining a spotlight on digital interaction and resiliency.
“Our clients are looking strategically at implementing technologies that fit with the way they work. This may mean choosing providers with open platforms that allow them to plug in services on either a component or a fully outsourced basis, depending upon the activities they wish to keep in-house,” Carey says.
When asked about their plans to outsource, 45% of the survey respondents consider data management the function most likely to be outsourced, followed by back-office operations (40%) and middle office/IBOR (38%). When asked about outsourcing their trading function, 85% say they either already outsource this capability or are interested or planning to do so in the next two years.
According to the study, the future of asset management depends on firms that will find ways to support their growth while also reducing costs. Many asset managers are tweaking their operating models to find ways to be nimbler by leveraging innovative technology and scalable solutions that can significantly reduce costs and enhance operational efficiencies.