It’s about Scalability
A lack of communication and connectivity among the manager’s front, middle and back offices—“the silo effect”—is impeding access to quality data. A recent spate of mergers and acquisitions within the asset management sector is leaving firms with a multiplicity of disjointed legacy systems that further limit data access and require significant manual intervention that is subject to error.
As a result, managers are re-evaluating their operating models and looking for ways to unlock data. Some are opting to outsource middle office functions, driven by a number of factors as outlined in RBC I&TS’ survey of asset managers:
- “Scalability” is the top driver (51%) as managers set out to grow their businesses through new products, new markets or both
- “Margin/cost factors” ranks as the second-most popular driver (33%) as managers pursue a low-cost operating environment in these competitive times
- “Operational risk management” (29%) and the related area of “improved operational oversight and data access” (22%) together reflect the importance of having access to quality and timely data, providing the ability to identify and resolve issues before they occur—and meet regulatory requirements
Data. Data. And more data.
The Buck Stops Here
The RBC I&TS survey also indicates that the top challenge associated with outsourcing and the #1 benefit of continuing to insource are the same: The ability to maintain knowledge of middle office functions within the firm. This may be due to the fact that, regardless of the path taken to deliver these functions, responsibility for ensuring effective operational risk management and oversight of the middle office cannot be delegated and rests squarely with the manager. The high priority of maintaining operational expertise within the firm emphasizes the importance of the middle office to managers based on the potential negative consequences if something were to go wrong.
Establishing a Comfort Level
Managers must have a high level of confidence in any outsourcing solution, if they are to cede delivery of their middle office functions to an external provider and be able to focus on distributing their products and improving portfolio performance. Such comfort can only be established if managers have a thorough knowledge and understanding of the outsourcing value proposition and how this value aligns with their particular needs.
According to managers with firsthand experience in outsourcing their middle office functions,1 some of the key features that help build confidence in the outsourcing model include:
- Modular, ”plug and play” approach that enables managers to tailor the outsourcing solution based on their specific requirements and reduce the amount of planning required to integrate external processes
- Solutions that help managers streamline their internal operations through the use of best-practice workflows and market utilities
- Global time zone coverage
- Access to best-in-class technology, including artificial intelligence, application programming interfaces and other advancements
- Ability to break down silos and manage the reams of internal and external middle office data, providing insights that facilitate informed decisions across the firm, whether it be related to alpha-generation, cost savings or enhancing the client experience
- Nimble, agile approach to support the manager when issues arise, particularly those involving underlying clients
Building confidence and trust
Focusing on Your Strengths
The Insight Partners, a UK-based consultancy, reports that “the middle office outsourcing market is expected to experience significant growth in the coming years…as managers continue facing challenges to reduce overhead, enhance operational efficiencies and improve services to underlying investors.”2
The future growth and success of the outsourcing market depends on the ability of providers and managers alike to work together and build trusted outsourcing partnerships. Providers must continue to enhance their outsourcing solutions, including the latest technology and an open architecture that easily adapts to managers’ unique and evolving needs. This will require a spirit of partnership on the part of both parties but holds the potential to enable managers to focus on what they do best: Generating alpha and growing their businesses in these particularly demanding times.
What is the middle office?
A perennial question emerged during RBC I&TS’ recent interviews with asset managers: “What is the middle office?” According to Ben Pumfrett, Head of Middle Product Management at RBC I&TS, “If you talk to five different people, you are likely to get five slightly different answers. And some firms refer to the functions as ‘investment operations’ rather than middle office.”
So we asked Pumfrett for a simple definition of the "middle office" and here is his response: “At a high level, the middle office serves as a hub, stitching together investment data from multiple sources, including different custodians, to provide asset managers with a single, accurate traded view of their data.” He says the middle office currently includes post-trade execution activities (see side bar), adding that “in the future, it could expand to include pre-trade compliance, execution and client reporting, although managers tend to be protective of reporting, which is generally deemed to be bespoke and a key differentiator.”
The middle office primarily includes post-trade execution activities:
Source: RBC I&TS, Middle Office Product Management
The middle office sits between the managers’ post-trade and pre-settlement departments:
Source: The Insight Partners
Explaining what the middle office can do, and the benefits and value. That’s going to be the outsourcing provider’s biggest challenge. Many managers don’t realize what it can do for them.
- Stuart Alexander, Chief Executive, GemCap, United Kingdom
The business model that I look at is to concentrate on your core functionality—getting assets in the door—and, if there’s a quality service provider, I much prefer to manage the risk when it’s outsourced.
- Evelyn Foo, Consultant, Toronto
1 Based on the RBC I&TS online survey results and a series of one-on-one interviews with asset managers
2 The Insight Partners, Middle Office Outsourcing Market to 2027, January 24, 2020
