Decisions, decisions, decisions…. Asset managers must contend with a constant stream of them. Determining whether to outsource and, if so, selecting a service provider fall under this heading, but in a special bucket. They are critical.

Developing a Request for Proposal (RFP) and reviewing the responses narrow the field of potential vendors to a short list. However, the subsequent due diligence step is the litmus test to pick one strategic partner that provides the best business fit.

Whereas the RFP and analysis of responses are straightforward, the due diligence sequence is not. It is more variable. In light of the large and long-term nature of the matter at stake, the due diligence phase can make or break an outsourcing project.

Due Diligence Defined: A series of in-person meetings between the asset manager’s operations team and service providers’ sales and operations leaders.

With this in mind, we recommend asset managers give due diligence its due. That is: take full advantage of this pivotal phase.

What’s the key to success? Organize and set up a well-defined initiative. Incorporate these elements into the due diligence exercise:

1. Provide a Formal Agenda and Objectives
The onus is on the asset manager to lead the process. By being proactive, the asset manager helps ensure that service providers are ready to discuss the appropriate priorities at each session.

As best practices, asset managers should:

  • Provide formal agendas to the service providers ahead of time
  • Offer explicit details on process flows, e.g., custom processing requirements, in-scope functions, straight-through processing rates, the 24-hour clock
  • Structure sessions by topic, function and soft issues
  • Hold an orientation beforehand to review this information and set expectations
  • Give timely, candid feedback for multi-day efforts on vendors’ presentation and performance

2. Describe Business Requirements
The watchword here is clarity. It serves as a guideline for due diligence. In line with this thinking, asset managers should provide details ─ and ideally documentation ─ for each outsourced function under consideration. Share business requirements with candidates. Include information on a broad range of items, such as communication methodologies, cut-off times and error-rate targets.

The quality in, quality out principle applies here. Asset managers that give a thorough account of their operations and objectives can benefit in return. It sets the course for meaningful conversations during the proceedings.

3. Forward Case Studies
Case studies depict complex business situations using real world examples. Capturing challenges in this way gives service providers an opportunity to demonstrate their knowledge and capabilities. How would they handle this matter? To do so, they draw upon their experience as well as their arsenal of tools.

Approaching due diligence this way helps to achieve several goals. It helps generate apples-to-apples comparisons. It helps verify that criteria used to assess candidates ties to operational issues realistically. And it paints a picture of what a day in the life with a service provider may be like.

The length of due diligence meetings can span from half a day to several weeks

4. Invite Subject Matter Experts
The appropriate people at the table make for more productive discussions. This axiom pertains to both asset managers and service providers. Simple principle: ensure those who need to participate in the sessions attend.

5. Use Scorecards
Scorecards standardize judging for all candidates. For it to be of value, the instrument must contain the decision-making criteria set at the outset of the process. Ideally, those on the asset managers’ team complete the document at the end of each workshop or session. What’s more, a huddle afterwards to review scores and observations is a way to obtain follow-up questions and insights.

In all…. Due diligence is a journey of discovery. That applies to both asset managers and service providers. The sessions help uncover information to make valuable fact-based decisions. Done properly, this phase sets the stage for a fruitful, long-term relationship.

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