Back-office outsourcing has been a common practice in asset management for years. Now we are seeing more and more asset managers begin to outsource some highly specialized middle-office functions, as well. The middle office provides the front office with critical information necessary for trading strategy, making it a vital part of the investment management process. Because of that, asset managers need to exercise a higher level of due diligence when selecting a middle-office outsource partner.
Proof of concept (POC) has long been included as a standard step in the technology selection process as a way for the vendors to prove they can do everything they promise. Due to the complexity of middle-office outsourcing, POCs are also now becoming a recommended practice in the selection of an outsourcing partner.
POCs are a relatively low risk way for asset managers to increase the chances of selecting the best outsourcing partner by:
- Creating an opportunity to assess the provider’s service model
- Determining how the provider’s technology will integrate with the existing infrastructure
- Providing business users with an opportunity to validate key requirements
- Helping familiarize themselves with the overall client experience
- Providing assurance that the right service provider is chosen
This next level of due diligence effectively minimizes the risk of critical gaps or potential service level degradation just surfacing in the future.
Conducting a POC during an outsourcing assessment can be mutually beneficial to both parties. Through a POC, asset managers gain insight into how the service provider’s core systems will support specific scenarios. They also gain exposure to data output along with the method in which they will be interacting with the data, and experience firsthand interactions with some of the people who would be supporting their business in the future. The service provider has an opportunity to showcase its technology and staff; and has a chance to gain a deeper understanding of the asset manager’s profile and business requirements.
Costs versus Results
Asset managers need to consider the expected outcomes versus the resources required to complete the exercise. The POC is best used to validate a small, prioritized representation of some of the most sensitive business scenarios. If the service provider has made it through the initial Request for Proposal (RFP)/ Request for Information (RFI) and an extended due diligence, it has already demonstrated that it is capable of supporting the majority of use cases, which are common across their existing client base. Therefore, it’s best to focus the POC on the subset of scenarios that represent the greatest operational risk or are the most unique.
The key to a successful long-term partnership
Most outsourcing arrangements are, by nature, long term. Therefore, it is important to learn as much as possible about both parties. Due diligence provides the opportunity to discuss capabilities and operating models, while a POC offers the ability to further validate specific high touch scenarios which will ultimately help lead to a more informed decision. Having a clear understanding of service provider capabilities allows the asset manager to design an operating model that is based in reality and has the potential to evolve over the course of a successful long-term partnership.
For more information, read InsideOps: Optimizing a Middle Office Outsourcing Proof of Concept or contact me at firstname.lastname@example.org.