Taking the first step: what key parameters must be considered when designing fund outsourcing initiatives?
Earlier this year I chaired a two-person panel as part of Clear Path Analysis’ Fund Outsourcing 2014 report. The report has now been published – you can access it here – and I thought I’d share with you a couple of extracts from the panel – which featured Mike Tumilty, Director of Operations for Standard Life Investments and Melanie Panter, Head of Supplier & Change Management at F&C Investments – looking specifically at procedures for assessing the value of outsourcing and the sole-sourcing/multisourcing dilemma…
Jamie Liddell: What procedures would you advise companies put in place to accurately gauge the true value of outsourcing certain parts of their business?
Melanie Panter: You firstly have to understand what you’ve got and how your business fits together. This can bring up surprises when you try to put some of it outside unless you’ve gone through the interdependencies, people, data and systems thoroughly. Costs can suddenly pop up when you didn’t realise that they were shared across multiple teams. One also needs to look at the level of bespoke process and development, and compare that to standard market offerings and what you are trying to achieve on this side of things. It is worth taking a good look at the market and how you stand up against that to almost benchmarking your own service first.
It is also important to have a clear view of how your operations fit into your strategy and what your unique selling points are because sometimes what you are going to get from outsourcing and even what you are trying to get from outsourcing don’t align to your strategy.
It is worth putting in some SLAs and KPIs between your operations and business as although this seems quite formal and bureaucratic by having a measure of service you have an accurate measure of how your outsource service is doing against how the service used to be. From experience the rose-tinted spectacles about the old world tend to come on quite easily and this sudden assumption that everything pre-outsourcing was perfect, where it wasn’t, is such that by having the metrics there you can back up the reality.
Although it does seem a strange thing to do, I would recommend that almost two years before you are going to go into an outsource, if you haven’t got it already, you need to put in place that serious level of MI that you would have once you are outsourced so that you do have this proper comparison.
Mike Tumilty: Companies need to start with a very clear understanding of what exactly it is that they are outsourcing so that there is no ambiguity in terms of the function and services that ultimately you are looking to get from a third-party service provider. It is only when you have a clear definition of what the services are that you can then do some form of value assessment as to what it is that ultimately can be outsourced and the value that may be gained from that.
It should also not be thought of purely from a financial perspective as clearly activities ultimately are outsourced because it is more efficient and cost effective to do so. There is however an ongoing cost associated with the provision of services on an outsourced basis but it is also about thinking for example, say in the fund accounting space, what the costs might be to keep systems up to date, and to continue to train and develop your employees over a period of time. This is value that can be banked because you no longer in effect need to consider upgrading core technology or training and developing staff when in reality you have handed over the associated activity to a third-party provider.
You shouldn’t lose sight of the fact that oversight in particular will be required in regulated industries like asset management where quite clearly the responsibility for what an outsourced provider does absolutely lies with the asset manager. You need to make sure that when you are creating a business case that you take into consideration what costs you will incur from establishing an appropriate oversight framework and regime. There are a number of different elements that need to go into the business case to ensure that you’ve captured the true value of outsourcing the component part of the business which may or may not seem evident from the outset. It is ensuring that you think holistically about the services that you are trying to outsource.
In identifying costs you need to consider not only basic salary costs, but total compensation so there will be additional costs that you will need to think about for services that are done by employees in-house which then have to compare with the costs that you pay third-party service providers.
JL: What measures would companies need to implement to ensure their outsourcing programmes are sustainable and can evolve with the needs of the business?
Melanie: It is a challenge and in a selection you need to pick somebody with a culture of developing on their own account rather than just being client-reactive. If you have an organisation that is trying to look for the next trend and develop for this trend then although what they develop may not be perfect for you and you may need to tweak it, they will have a mind-set to be moving their product forward.
Anything that you’ve got that you know about now, you need to build those strategic requirements into your plans, timelines and make sure that you’ve got commitment to support with those. A lot of the contracts these days have a pre-paid element of change within the contract so you get so many days of support. You need to make sure that you’ve got a sufficient amount of support to be able to do plenty of change, and with a lot of the organisations you also need to ensure that you’ve your own road map for change, so that you are making change every year yourself and that your own road map is consistent. By expressing this clearly it builds into the supplier expectations that you are going to change things. Doing nothing for two years after the outsource because of fatigue and then suddenly wanting to do a whole load of change in year three is not going to go as well as you would hope.
You can also consider using multiple parties in different time frames. The idea of handing everything to one party is in some ways convenient but not always straightforward in terms of some of the oversight issues that are out there at the moment. It can be helpful to have more than one partner but equally in terms of making sure that you have people who are focussed on developing their business in certain areas. Connectivity and managing these relationships is a skill that you will have to build but it is feasible. And actually if you have multiple parties, although getting change to happen can sometimes be a little bit more complicated, you have more opportunity to continue building your business out because there is multiple organisations building different parts of it and you aren’t overburdening one organisation.
JL: Yes, that is quite a key advantage of the multisourcing model: when you get back to looking at the evolution aspect of the business, if you are tied down to that one provider than you are just as tied to their ability to evolve and I guess the opportunity to remain agile and deal with different changes at different times is much enhanced by working with multiple providers. At some point you have got that service integration and management layer and you need to take a stand on who is going to be operating and running that. What are your thoughts on that layer to keep your business agile and flexible?
MP: You have to accept the overhead of that and it may well not be a skill set that you have in-house and is something that you may need to bring in. Whether you bring that in on your own books or whether you look to partner with somebody to do some of this with you will obviously depend on your own culture and way of doing things but it is a critical piece and if you don’t invest enough in that then the multi supplier isn’t going to work.
MT: Post the global financial crisis there has been a sharp focus on ensuring that you don’t have all your eggs in one basket. From a risk perspective it doesn’t make sense to have a business be completely reliant on a single service provider. With a small number of providers there is the ability to introduce some competitive tension between the respective providers and there is also the ability for us as the asset manager to try and identify between the providers that we deal with what we would deem to be best practice and ultimately try to share and learn from at least two providers so that we do have a more considered view around, for example, the interpretation of new regulation, or what would deem to be an effective control environment.
There is a genuine opportunity with multiple providers to really establish what is best-practice rather than to simply default out a single way of doing things as that just how your provider has chosen to interpret a new piece of regulation or market practice.
To access Clear Path Analysis’ Fund Outsourcing 2014 report, click here.