Introducing the first episode of Prodktr Spark Podcast, powered by Prodktr ‘Everything About Outsourcing’
The Prodktr Spark podcast is aimed at people who work in the capital markets, in particular those involved in the process chain from the front office all the way to settlement. We will be inviting guests who have first-hand experience of the challenges of processing multiple assets classes from multiple markets, either in a bank, asset/investment manager or third party service provider.
If there is a topic you would like us to cover please get in touch via the Prodktr website, and if you would like to appear on our podcast get in touch too.
Episode 1
In this episode of the Prodktr Spark podcast we are joined by Torquil Wheatly from Coremont, and Bryan Kelly from SS&C to talk about the current state of the outsourcing market. Is the scope for outsourcing changing to new functions inside a firm? How competitive is the market when selecting an outsourcing provider? What are the risks of outsourcing, and how does that affect your organisations ability to react quickly?
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Time points
• Introductions
• Outsourcing in general (1m 00s)
• Risks involved in outsourcing (4m 56s)
• Outsourcing and distribution (6m 51s)
• Organisational agility (9m 29s)
• Take up of outsourcing in the market (15m 17s)
• Top tips for firms considering outsourcing (18m 34s)
Transcription
1.Section: Introduction
Bill Hodgson:
Welcome to the Prodktr Podcast Series. My name is Bill Hodgson from the OTC Space, and I’m here today with John Read, Bryan Kelly and Torquil Wheatley . I’ll let them introduce themselves so you understand their voices.
Bryan Kelly:
Hello, my name is Bryan Kelly. I’m the managing director of SS&C and I head up the middle office outsourcing group for EMEA.
John Read:
I’m John Read, and I’m founder of Prodktr.
Torquil Wheatley:
And I’m Torquil Wheatley , and I head up business development for Coremont.
Bill Hodgson:
So in today’s episode, we’re going to talk about outsourcing. And it’s everything to do with whether or not you should give some of your operating model, for a word, to another organisation to run. So I thought we’d kick off with Bryan. Maybe talk about whether people are outsourcing things like the front office and middle office, compared to outsourcing the back office, which is more common.
2.Section: Outsourcing (1m 00s)
Bryan Kelly:
Absolutely, Bill, and thank you. There’s no component of anything, I think, within the industry today that one couldn’t conceive to outsource, maybe save the physical investment decision from the portfolio managers. But if you take a step back and you look to see where outsourcing has evolved, if one was to, in today’s world, say that, “I’ve outsourced my custody,” [inaudible 00:01:36] would say, “No, you haven’t. You’ve just employed a custodian,” because that’s their job.
Bryan Kelly:
Similarly, too, when you look to fund administration, the majority of the world now is actually outsourced in fund accounting and then transfer agency. Whilst it still exists in-house for certain firms, the mainstay seems to be to go to the major players in the market to get that outsourcing arrangement there.
Bryan Kelly:
So, I don’t know, John and Torquil, what you guys think about that, but that’s the way I feel that it has evolved over the last 15-odd years.
John Read:
Yeah. I think I very much agree that the phone inquiry of what you said, Bryan, I think thea needle’s moved into trading, as we know, and that feels a little bit like the prime brokerage market 15, 20 years ago, what we’re seeing. We’ve been trading or spinning up outsource desks. And again, people are looking at two persions, either buy build is really do you outsource all, you outsource trading, and then you’ve got your middle back office. And again, some folk might be outsourcing.
John Read:
But, I think the important piece is that outsourcing is being used as supplementary rather than you’re outsourcing. So outsourcing being this term that we used to think was straight away jobs gone offshore, no. Now it’s being used as part of the toolkit, part of product capability. If you outsource your FX, if you outsource fixed income trading, it’s a supplementary. It means for the firm, that you can have a capability around multi asset without necessarily investing in technology and people in certain regions and all the rest of it.
John Read:
So, that’s what we see. I think it’s interesting to talk about second, third generation. I think the word “outsourcing,” what is the differentiator around outsourcing middle back office? That’s a real challenge, I think, for the providers.
Bill Hodgson:
But then it leads to levelling the playing field, so that if you didn’t run all these teams of people doing all these functions post-trade, as it were, meaning almost everything beyond the point where you make a trade, then what’s left for a company to actually make a name in the market?
John Read:
Well, trading can focus on investment, right? But the game has changed a little bit where you can do your trading on all the post-trade with outsources. It used to be middle office post-trade. Now it’s become to a point trading. But there’s lots of good firms that have been able to run 100 billion, 200 billion with investment managers, most other things outsourced.
Bryan Kelly:
And just to comment on that point very quickly, I think that you’ve asked what is the success criteria of the outsource. I think to be viewed as an extension of the business that you’re providing the service to, that’s the key. And for those that outsource not to view the provider as a provider, but as a partner, that’s what it is. You’re not breaking apart the business, to John’s point, it’s still very much joined at the hip and everybody understands that intent.
3.Topic: Outsourcing Risks (4m 56s)
Bill Hodgson:
But then, Torquil, that leads to risks, though, because I know it’s a bit like anything you put outside your organisation for a contract, you’ve got to manage it, performance, behaviour, capacity.
Torquil Wheatley:
Yeah. But that’s fine. To John’s point, I think there is a fundamental re-evaluation going on of what is it that’s our competitive advantage? What’s actually worth putting in-house? And you’re seeing this model, as you say, I think it’s exactly right, the idea of you’ve had this creeping outsourcing model going from the back office, the admin, the custodian, et cetera, creeping into mid office. And it’s absolutely now pervasive, but it’s a question of trying to identify what are the five key areas that firms break down the various silos into?
Torquil Wheatley:
And yeah, it’s investment management, so you have all your traders and your CIO, it’s all your risk guys with a CRO at the top, it’s all your operations guys with the COO, your compliance guys, your IR guys, and then your marketers, your distribution guys.
Torquil Wheatley:
And I think what people are seeing, or certainly what we’re seeing now is that you can look at everything in the middle there, and you could outsource most of your … you need a CRO, but what does the CRO’s team do? They just go and produce risk reports. Well, could that be outsourced? Why, absolutely. The COO model, you could operate with just a COO and you can outsource some of that.
Torquil Wheatley:
And I think that it’s really interesting that I think prior to the pandemic, there was a temptation to say, “No, I really like having people in the office that I can speak to and look in the eye.” And I think that that leg of the argument against outsourcing has fallen away, just because most institutions actually found it a productive experience in many ways.
Bryan Kelly:
I think that’s actually a really, really good point, is that post the pandemic’s probably something that I didn’t think about, is that, to the opening statement, I don’t think there’s anything that you can’t outsource other than the physical investment decision itself.
4.Topic: Outsourcing and distribution (6m 51s)
Torquil Wheatley:
I think distribution also is something that’s an alpha piece as well.
Bryan Kelly:
Correct, 100%.
Torquil Wheatley:
Because I think that’s the one thing that sets people apart, is the quality of distribution, you look at these third party marketers and in general I think people have a better experience when they have their own marketing sales force, they can sell it better, they know the product more intimately. And they’re not subject to having a menu of things to sell and they’ll just sell what the best performing product is for them.
Torquil Wheatley:
But I think those are the two key things in my eyes that make a difference, and everything else in the middle, you can just outsource.
Bryan Kelly:
You mentioned compliance there, actually, which I think is a really interesting one, because it drifts into the pre-trade and the post-trade. And there’s been some requests in the market that rather than do pre-trade, that there’s post-trade but pre-settlement instruction and market instruction. So, it’s a post-executed trade, then you do your post compliance on it before you release it to the rest of the street.
Bryan Kelly:
Again, it’s a different slant on the traditional view of how the market generally operated. And I think, again, if we look at any of these components of outsourcing, pick one, and you can probably make it work.
Bill Hodgson:
But I know of a software vendor who sells some parts of the pre-trade compliance check both for MiFIR and EMIR, as to where you can trade, who you can trade with, but then also, assuming it is compliant, the cost and where you could trade with. So you’re optimising a whole bunch of things.
Torquil Wheatley:
I think it goes back to your point earlier, that I think-
Bill Hodgson:
But that’s in effect outsourcing to a FinTech firm.
Torquil Wheatley:
Yeah, no, no look, there are no rules around who you can and can’t outsource to at the end of the day, and the landscape is changing as we see it. But you can look at these things in different granularities, and I think your point earlier about, well, there is no one outsourcing model. Every firm has a different … they want to keep some things in-house and they’ll want to outsource various others. So I think the key thing is if you’re looking for partner, they need to be flexible in terms of what they’re willing to take on. It’s not a be all and end all, buy everything or nothing approach.
Torquil Wheatley:
And I think the partnership approach is just primordial. If anything, you need to take it a step further and you’re actually selling trust. You’re not selling software or a service, you’re selling trust because they’re giving over a huge part of a very important portion of their business over to you. And it’s critical.
5 Topic: Organisational Agility (9m 29s)
Bill Hodgson:
If I were an investor, for instance, and I’m looking for you, my investment manager or fund manager, to take me off in a different direction, does the choice of outsourcing affect the agility and speed with which you could launch new products for instance, or move to meet investors demand?
Bryan Kelly:
100%. Yeah.
John Read:
I think it does, Bill, actually. I think we all know that outsource relationships mean service providers have big breadth of clients, and like all firms have priorities, so there’s the whole client experience and improvisation that has to go on as a dependency. And obviously there’s, as we talked about, FinTechs and all the rest of it, there’s different options on those tables. So I think that speed and quality and accuracy and all those things …
Bill Hodgson:
Because I could say, I mean, you two are outsource providers. I could say, well, because I’ve outsourced to somebody like you, when I come to you for some new thing, because you’re spreading yourselves across multiple customers, it might be harder for me to get you to deliver what I need, when in fact, if I had my own team of people, I can do whatever I like whenever I like.
Torquil Wheatley:
Well, that you solve just through having a proper service agreement, a well-defined service agreement that you have to adhere to.
Bryan Kelly:
Yeah. And I think it touches on the age-old problem of who do you choose? So, Torquil has mentioned agility and flexibility. Do most of you outsource absolutely all of your business? No. You should be allowed to pick and choose. Larger managers might want to outsource the full back, others might just the scale issue within their business that they need a partner to do that, and then there’s a lot of managers out there that are either in the startup space or just in a specific space themselves, and they don’t want that tech cost in terms of an IT overhead of running, go back to compliance again, just even running an OMS that’s got a very integrated pre-trade compliance set of rules. Go flip to the other side. Why have agreements with market utilities for matching when you don’t need them?
Bryan Kelly:
So there’s scale across the whole board. So in choosing the outsource provider, and I’m focused on middle office at this stage and we leave admin and custody as the more traditional side of things, but in choosing that, you’ve got to have somebody that is willing to work with you, willing to want to grow your business, because the benefit from a service provision is that as the client’s business grows, so do our middle office business. It’s a very simple format from a revenue perspective.
John Read:
Right. We’ve kind of coined the phrase “business operating model” rather than toggle pricing model. So, the way I see it is that clients need to know whether it’s a bank, asset manager, hedge fund, or tech companies as well, startups or big guys. It’s defining the sweet spot. So it’s assessing where you are, where you are versus your peers, and then drilling in to where the sweet spot, where you are now to where your vision and principles are. So I think that’s really important.
John Read:
So, that becomes back to their accountability, going right back to the board of the firm or the owner of the firm, et cetera. And it doesn’t matter if you’re small or large, that’s where you need to be. So if you know your sweet spot from an investment point of view, what you’re spending to where you want to be to where your clients are, then that, to a point, determines do you need a footprint in a certain location? Do you need a capability? So, a lot of it is defining the sweet spot, the service hierarchy, and then essentially all these other pieces that we’re talking around around tech investment and operating model, they all follow on.
John Read:
Back in the day, we’d been focused on tog operating model, put some nice slides together and make the IMS speak to the EMS and speak to the back office. I think the opportunities that are out there around data has changed that, Bill.
Bill Hodgson:
Well, your flow diagram would have some interesting boundaries, where data goes out to provider, provider adds value, data comes back. It’s like getting served at a counter. You give them stuff, they do something to it and give it to you back added value.
Bryan Kelly:
I think the word “boundary” is the one that I’d like to hone in on there. I think that’s what we’ve got to get over. If somebody employs me to be the service provider for a middle office, there is no boundary. They’ve got complete transparency into absolutely everything. And so should they, because it is their data, it is their work, it is their everything. We just so happen to be a custodian, but not in the true term of custody. We’re just doing that. They still own it.
Bryan Kelly:
So, that I think is the key success factor to outsourcing, is removing the boundary. It’s not you’ve sent it to your provider, it is now for them to deal with it and I won’t see it until tomorrow. You should be able to see it whenever you want to.
Torquil Wheatley:
Which goes back to what you’re saying earlier, in terms of you want to feel that you’re simply an extension of their existing firm, and ideally if they feel that you’re in the room next door, then you’ve done your job.
Bryan Kelly:
100%.
6.Topic: Take-up of outsourcing in the market (15m 17s)
Bill Hodgson:
What sorts of firms are generally outsourcing? Is it on the buy-side? Is it mid-tier banks? I assume it’s not the tier one banks, but which ones are doing and which ones should?
John Read:
I think all firms are. I think buy-side, outsourcing’s been a capability for a long while. And the banks are outsourcing as well. I think it’s not often publicised, but there’s lots of BPO arrangements in place, and different things that happened with onshore offshore. So I think it’s a regular. And even for technology companies, we’ve seen lots of integration around SimCorp and BlackRock, Aladdin, all these things and the banks, they’ve come along and disrupted their business. So, used to sell their own eyeball capability, used to sell their own post-trade capability. What have they done?
Torquil Wheatley:
I think just within the buyer side alone there’s no rule, everybody, whether you’re a startup or whether you’re a trillion-dollar asset manager, everybody’s looking at outsourcing some part of the business.
Bill Hodgson:
So, from a outsourcing provider’s point of view, how has the market changed in the past few years? Is the more competitors or a bit more demanding? Is it more difficult marketplace or …
Bryan Kelly:
They’re always more difficult, though. Every day is difficult. But now jokes aside, it has changed because it is now coming from all angles of it. Definitely some of the, to John’s point, the banks are starting to reconsider what is to take away from what was a target operating model, they’re re-evaluating what is their business operating model, and should they be in that particular facet of that business?
Bryan Kelly:
And you can look at that from a collateral space, from a compliance space, from any space that you want, to be perfectly honest with you. And the execution space, we want to get into the brokerage arm of things, but that’s on the bank side. Then the buyer side as John and Torquil have both said, that that is kind of more mature in terms of the outsourcing decision, but we’re also seeing now is some of the sales sides are smaller. Primes are starting to look at this and say to themselves, well, what is so different between what they actually have to go through from an operational standpoint versus what it is as an offer from an outsourcing standpoint.
Bryan Kelly:
So I think it’s coming from all angles and I think the tech disruptors, I should say, that have entered the market in the last 10 years have definitely changed the landscape from being a mainstream provider of your Citi’s and your BoNY’s and stuff like that from an outsourcing provision to much more across the board, be it just supporting a hedge fund or indeed a traditional asset manager, which is a more difficult space.
7.Topic: Top tips (18m 34s)
Bill Hodgson:
Okay. Well, before we wrap up, I thought I’d ask each of you to chuck in a top tip for somebody considering outsourcing. One each should be fine. What would you think would be a tip you would hand on to somebody who’s not done this before?
John Read:
I think there’s a couple of things to think through there, Bill. The first one I would think about is, again, what is it you need? What is the clear requirement of what you need? What locations you want to be in? Then obviously fees. But also scale and depth. If you’re going to outsource, your clearly looking for scale. Otherwise you might just do it yourself. So, you’re looking for scale, breadth and competitiveness.
Bryan Kelly:
Yeah. I 100% agree with that. Fees, obviously, nobody should do anything and then be flat on fees. The decision should produce a cost saving. But key thing for me in the space is really simple. Outsourcing is catch, match, record, reconcile. And in more recent years report, you’ve got to be able to deliver the data back to whomever wants it. And you deliver on that, you get a partner, and I emphasise the word “partner” that you trust and you can scale with, that should solidify your deal.
Torquil Wheatley:
Sure. I think the only other point is really just to be absolutely ruthless in identifying the areas. If you’re looking to outsource, you need to be absolutely ruthless in identifying the areas where you as a firm can add value. And make sure you identify the areas you can add value, but be utterly ruthless in being honest and totally honest with yourself after those areas that you can’t.
John Read:
I think one of the questions we always pose is what is the R&D? So what is the R&D for the provider, or outsource-
Bill Hodgson:
What do you mean by R&D?
John Read:
Research and development investment. So what is your spend on R&D? And we ask the provider, we ask the firm themself, so you get a taste straight away. If they know the number, you feel comfortable. If they don’t know the number you think, “Well, who’s in charge of the firm?” And then underneath that, some companies that run very well, inevitably they’ll run venture this, but they’re very on what they invest in into, and also here they’re doing the sustainable piece of interacting to that as well.
Bill Hodgson:
Well, thank you, guys. I think that was a good discussion about the whole topic. And thank you for listening. We’ll see you in the next episode of the Prodktr Podcast Series.
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