Outsourcing in the securities services industry stands poised for a period of explosive growth. Over the next five years, our own research indicates that some 25-30% of fund managers can be expected to outsource core administration functions to the new generation of securities services providers.
The best of these offer as their core business a wide range of stand-alone or complementary services, from trusteeship and custody to trade execution, automated foreign exchange and internet delivery. These services allow asset managers to focus their attention and skills on their own core business, asset management and maximise their clients’ wealth.
The underlying fundamentals are today more compelling than ever. Outsourcing the administrative and reporting functions allows fund managers to concentrate on their core competency. Consolidation of the financial services sector appears inexorable and is driving intense competition within the asset management industry. In this environment the value and benefits provided by an outsourcing arrangement become even greater.
This steep change in demand has been matched by a dramatic supply side change which has seen the evolution of a new kind of institution in the banking world, the independent provider of administration and support services.
So whilst outsourcing means many things to many people – in the investment management industry the term generally refers to the middle and back office – the administration, valuation and reporting services. How is outsourcing defined in the context of modern securities services?
Once it was simple: custody and income collection. Today there is a new sphere of complexity, with the definition differing from organisation to organisation. The spectrum ranges from simple global custody to the entire back office function, from trade confirmation to settlement and beyond, encompassing decision support, trading, data management, messaging, accounting, asset servicing and reporting.
The pace of change varies too. Some fund managers might prefer to take a measured approach with the aim of outsourcing everything gradually over a period of several years. Others may want to move more quickly.
What is crucial at all levels of outsourcing is the need to be able to have a single integrated platform from which the whole range of services can be built either on an incremental or single stage basis. With this single platform an investment manager has the confidence in knowing that they will be able to reap all of the benefits that outsourcing will provide now and in the future.
Total functionality requirements encompass all back and middle office services, picking up the administration trail from the moment of trade confirmation; it must also manage the custody process in its entirety, irrespective of the identity of the custody provider itself.
Since custody has increasingly developed into an information-driven business; the future success of global custodians will depend to a large extent on their ability to build harmonised and integrated links and interfaces between various parties. This needs to include the investor, the fund manager, the counterparty, the sub-custodian, the clearing agency, the depository and the payment clearing system. This multi-level communication requires major investments in systems and software development and support.
Constant adaptation of systems to meet clients’ needs is also required, ranging from basic reporting and instruction processing facilities to tailor made solutions.
It remains our resolute belief that only the worldwide providers are in a position to fund, resource and develop the technology required for what we regard as true outsourcing successfully.
The size and number of major fund managers interested in discussing outsourcing’s possibilities suggests there could easily be $2-3 trillion of readily outsourceable assets. This highlights fund managers’ recognition of the competitive advantage to be gained through outsourcing – an advantage that is available to everyone. And many are taking the leap of faith. Three years ago fund managers were simply dipping a toe in the water. Today they are taking the full plunge.
Outsourcing is moving into this exciting new phase with a new momentum. For perhaps the first time in financial service’s history, quality suppliers exist in the industry to meet the increased demand for outsourcing.
Jeffrey Tessler is executive vice president and general manager of the Bank of New York in London

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