For years, asset managers have engaged strategic partners to perform their non-core functions. These arrangements can improve efficiency, reduce risk and add to the bottom line. They also enable firms to focus on their main business—servicing clients and understanding the markets.
Each asset manager defines its own set of guiding principles to navigate the outsourcing decision-making process. That said, most firms seek partners that provide transparency, resiliency, agility and expediency.
However, in light of an uptick in outsourcing activity and attention on real and perceived vendor risks, firms may be asking themselves: How many service providers do we need?
In other words: Is there an optimal number of strategic partners for best-in-class servicing?
Single Provider vs. Dual Provider Model
While using one service provider—or a single provider model—is the standard for the asset management industry, the question to ask is: What is a “dual provider” model? This term does not mean the same thing to all firms. For some, a dual provider model is a “complete shadow book.” For example, an asset manager outsources Portfolio Accounting to Provider A and Provider B, and both perform the function. A dual provider model can also be a “split book.” In the case of Fund Accounting, an asset manager outsources a portion of its accounts to Fund Accountant A and the other portion to Fund Accountant B. The vendors process their own share of the workload with no overlap between them. From an industry perspective, we see the “split book” version more often employed.
However, to help firms decide between the single vs. dual decision, we work with clients to examine three perspectives. These angles frame the problem statement, identify the asset manager’s goals, and establish the path forward. The three lenses we deploy are: business, risk and finance.
From a business perspective, there are benefits to a dual provider model. Competitive tension can lead to greater leverage over service providers. Using two providers can result in increased quality, services and service level agreement (SLA) benchmarking, and expanded access to industry knowledge and experience. On the flip side, the dual model may cause inconsistency in the client experience and requires more vendor management, oversight responsibility, integration and ongoing maintenance.
Of utmost importance, a dual provider model can foster greater innovation. After all, both providers may be in constant battle to outdo one another to increase market share.
The industry often views risk as a 2×2 matrix, with “likelihood” on the x axis and “impact” on the y. For asset managers, a dual provider model could reduce the likelihood of an error and the impact of a service outage or processing error from a provider. As such, a dual provider model partially mitigates the risk associated with outsourcing middle- and back-office functions; consequently, it can fuel enterprise resiliency.
Using two providers also guards against “exit” risk in the event of a termination. However, to realize the benefits of a dual provider model, it is important to note that true resiliency can only be achieved if an asset manager can quickly convert from one provider to another. The potential of this can be maximized if each provider services a similar subset of products and asset types.
Today, when margins are being squeezed, fees are tumbling and regulatory burdens are mounting, operating spend is top-of-mind. Asset managers wrestling with a single versus dual model are challenged by budget constraints. Using two providers costs more and, thus, limits the ability to drive down firm-wide outsourcing basis point charges. In addition to a higher effective fee rate, a dual provider model comes with incremental technology and data maintenance costs along with extra oversight/vendor management costs.
What’s the Answer?
There is no set answer! Asset management is not a one-model-fits-all industry. Firms have different service provider approaches across their middle- and back-offices. There are benefits and disadvantages to using each. Single provider systems tend to cost less and are easier to manage. Dual provider models can result in less error, higher quality and greater resiliency. However, if dual providers are preferred, the next step is to determine which format to use: complete shadow book or split book.
What is best for your firm? Your outsourcing guiding principles help determine what is right. And Accenture can work with you to crystallize the decision based on your prevailing issues and goals.