Increase profits and operational efficiency. Expand product lines and markets. Asset managers strive to achieve these objectives at all times. It’s especially challenging at this time: in a low-return environment with increasing regulatory burdens and changing investor preferences.
Under these conditions, to grow the business, they may seek to develop more capabilities, faster. To become more profitable, they may seek to cut costs. In our work with asset management firms across North America, we see them focusing on one phase of the investment management lifecycle to derive the results they desire—middle office services.
Before going further, let’s understand what we mean.
What are middle office services?
The investment industry defines middle office services by its functions: “all post trade-execution processes.” The most descriptive word is “all” because these services encompass myriad steps. The processes start with a strong technology infrastructure and proceed with the critical details to support trade processing, reference data, portfolio accounting and reconciliations. They extend to what’s needed to manage enterprise data to comply with regulations, manage risk and finally deliver information to the front-office decision makers and other downstream consumers who need it.
These wide-ranging functions play an integral role. However, the last bucket—information delivery—is the current focus of attention and potential area of differentiation among investment firms and their service providers.
In information delivery, speed and accuracy rule. What used to be an acceptable length of time to get data to the front-office team has contracted appreciably. Only five years ago, T+1 delivery prevailed for start-of-day position data. We’ve seen that window compressed to three hours after US market close. Some asset managers are insisting on nearing real-time.
Today, the middle office is moving front and center
With all eyes on middle office services, what are asset managers and service providers up to?
Asset managers have several options: (1) keep operations in-house and make strategic and tactical investments/changes, (2) outsource operations or (3) do nothing.
This is what we’re seeing:
- As a start, asset managers are launching middle office strategic reviews
To select the right course, managers first perform a strategic review to determine how best the middle office can serve as a fulcrum for the enterprise’s overall plan. The review takes into account the processes, current capabilities and future requirements of a firm’s middle office services; and it focuses on the full spectrum of resources and ways of doing business. It audits technology, functions and even step-by-step procedures. Is the technology capable of handling new instruments? Is the flow of work efficient or are there duplicative tasks? Is information delivery poised to meet custom processes, data and timing requirements?
In many cases, the review comes up with a plan that pinpoints opportunities to improve operations. The team then designs a roadmap to reengineer this platform to help drive the firm’s business objectives.
- After a strategic review, some asset managers outsource middle office functions
Asset managers may decide to outsource some or part of the middle office. In selecting this option, they leverage a service provider to gain speed to market, scale or off-load significant technology upgrades to support growth plans, new products or trading strategies. Early outsourcing deals to full service providers were “lift-outs” of an investment firm’s internal operations, including staff, technology and office space. For the service providers, these transactions focused on enhancing their own market share and gaining an anchor client. Circa 2007, service providers began the transition to converting clients onto their strategic platforms that offered higher scalability and a more integrated solution.
Service providers now focus on information delivery; this is where they are spending their investment dollars. Delivering the data back to asset managers in a timely manner in a “fit for purpose” format is critical.
Key: Understand requirements and the outsourcing market
Keeping middle office services in-house or using a service provider is based on a firm’s overall strategy; the analysis incorporates culture and core competencies. The decision of which approach to take is complex. It should flow from a comprehensive understanding of current and future requirements and the competitive outsourcing landscape.