For asset managers, outsourcing to external service providers is a common practice. But what happens when those providers suffer a doomsday event such as a cyber-attack, a major blackout or a significant facility disaster? These very rare but serious events can have a big impact on an asset manager’s ability to do what is required to keep an organization moving forward. What’s more, for asset managers who are not prepared, the responsibility of the damage can fall to them.
Exposure to such a risk is most important in a commonly-outsourced function: back-office accounting. The complexity of calculating net asset values (NAV), and the tightness and frequency of the providers’ deadlines all magnify the challenges.
Having a well-designed and tested contingency plan could greatly reduce the impact of a doomsday scenario. An asset manager with a framework in place is likely to be better prepared to jump into action and protect the product while moving forward quickly with regular functions.
In our latest InsideOps report, Asset Managers: Planning for Contingencies with Outsourcing Partners, we explore some of the different approaches asset managers could use to prepare for doomsday events:
- First Line of Defence: In this scenario, asset managers rely on the outsourced service provider’s disaster recovery plan, integrating it into their own response contingency plan. This is a rather easy-to-implement solution but does demand robust testing and a deep understanding of the technology, requiring both IT and business resources to be part of the review process.
- Leveraging Multiple Partners: By spreading the responsibility across multiple partners, asset managers could mitigate a single-failure fallout. If a particular service provider suffers an outage, not all operations will be impacted as some remain with another party. This option has not commonly been used due to its complexity and inherently higher cost, although it is increasing in popularity as the need to diversify grows.
- Full Shadow: A full shadow consists of an asset manager duplicating the activities of a service provider’s deliverable in order to create a backup and help ensure everything is safeguarded. While this scenario provides an opportunity for the asset manager to step in immediately should there be any issue, the cost of performing the same functions twice is very often considered a major barrier.
- Using the Oversight Model: Oversight models are more cost-effect methods to review a service provider on a day-to-day basis, usually without requiring a full shadow approach. The solution creates some contingencies, but does not protect the asset manager as well as a full shadow does. An oversight model can help patch things together and get an organization moving again, although some risk for lost data might remain.
- Using Your Investment Book of Record (IBOR): As a short-term backup, asset managers could temporarily use the IBOR as a contingency plan, which contains all the valued portfolio positions and prices––and is already maintained for investment purposes. An experienced accounting group could potentially leverage the information in the IBOR to calculate the NAV, however this approach requires large amounts of offline processing and patchwork operations.
- Contingency-Dedicated Platform: Many asset managers are now turning to an internal platform separate from the IBOR, one that has the sole function of acting as an accounting contingency. This platform, which can be enabled either through a secure SaaS or a custom internal design, can use data from different internal platforms to maintain the foundational records required to function. It is not as robust an option as a full shadow, but does have the potential to be a high-quality contingency at a reasonable cost.
All of the listed approaches have some benefit in the case of a doomsday event. The challenge comes from the asset management side in determining which approach meets their criteria for cost and efficacy. There’s little doubt that an unexpected disaster could have a huge impact. The question is: how ready are you for it and how will you survive?
To learn more about doomsday contingency plans for asset managers using outsourced service providers, please read our report: Asset Managers: Planning for Contingencies with Outsourcing Partners.
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