Assessing all the ins and outs

About Beacon Consulting Group, Inc.

Beacon Consulting Group is a Boston-based operational strategy and systems integration firm that works with investment managers, third-party administrators, and technology vendors to improve eficiency, controls, and profitability of middle- and back-office operations. Its clients range from international industry giants to boutique niche firms. More information at http://beaconcgi.com.

About the author:

Girard Healy, Principal at Beacon Consulting Group Boston, USA.


William Beaulieu, Managing Director at Beacon Consulting Group Boston, USA.


Replacing an investment management legacy IT system or business model with a new solution always involves choices. But choosing between models is not an easy task. This article charts the course firms should take, stressing that the decision is unique to each firm, and highlighting the challenge of oversight if outsourcing is indeed the model selected.

When it comes to adopting a new investment management solution, selecting the right model is hardly a simple process. Some firms will decide to run an internal investment operations function to ensure flexibility, fixed future costs, specialization, and scalability. Those that choose to outsource will need to meet and support similar business needs but must also consider how the provider will manage the product effectively and subject to oversight.

The decision to outsource middle- or back-office operations all too often is portrayed as a canned ‘suitability’ exercise that fast-forwards to evaluating whether this or that service provider is up to the task. In fact, for investment managers that have either outsourced operations or kept operations in-house and done both well, the process begins with a thorough strategic review that may or may not result in a decision to outsource.

The assessment process typically begins with evaluating the firm’s business drivers, challenges, and the landscape in which the firm operates.

The ideal decision process consists of an analysis phase, followed by an open-minded consideration of various alternatives, and finally execution against the selected strategic direction. By adopting this process, investment managers will arrive at the decision point ready to make the call that will be right for their firm. Ideally, this evaluation process is undertaken well before a firm finds itself at a crossroads.

The best way forward

The assessment process typically begins with evaluating the firm’s business drivers, challenges, and the landscape in which the firm operates. This is the best way for a firm to assess which operational functions contribute to the firm’s core capabilities and strengths, and those that do not. The process ensures that firms take the critically important first steps to methodically answer the “Who are we?” questions like:

  • What are our key drivers?
  • What are our current challenges?
  • What do we do best?
  • Which of our current activities represent competitive advantages?
  • Where are we going in terms of growth (products, geography, acquisitions, etc.)?

The answers to these key questions are most likely found in the firm’s overall strategic plan. In the absence of a formal strategic plan, guiding principles can serve as the true direction to guide the process. These principles or strategic objectives for the operations functions of the typical asset manager might include:

  • Providing world-class front office support in an efficient and scalable manner
  • Maintaining a proactive, high-quality, high-touch client service culture
  • Enabling efficient and repeatable integration of new products and acquisitions
  • Retaining distinction as an employer of choice

Figure 1 highlights the leading challenges investment managers face.1 While these will differ for each firm, having a comprehensive understanding of them enhances the firm’s chances of making the right decision at the conclusion of the assessment process.

Asset Manager Challenges Journal SimCorp

Figure 1. Most pressing challenges investment managers confront. Source: Beacon PeerView – Investment Management Operations (Q2 2012).

The devil is in the details

Once the operating landscape and challenges are understood, an assessment is conducted to evaluate how the firm’s current operations are prepared to match off against challenges and new opportunities. This is the chance to answer the critical question: “Are we positioned to successfully execute on our strategic vision?”

This phase highlights current and potential future deficiencies in the operating model and technology infrastructure. The devil is in the details – it is important to review high-level workflows, and to compare actual processes and procedures for each critical function against the documented roles and responsibilities.

A critical step, and often the most productive, is to conduct interviews with key stakeholders and business sponsors to understand their challenges with operations. Stakeholders’ feedback is also used to define success criteria for the right solution.

Investment managers must combine analysis of strategic direction and assessment of core capabilities to reach a decision: To outsource or to keep operations in-house.

It is important to also review the existing organizational structure. A key factor in the ultimate decision may be whether the firm has the right model and capacity to implement the decision. Regardless of the course taken, does the firm have the people and the bandwidth to implement the organizational, technology, and process changes required to meet the strategic objectives?

Comparing each of the options

Technology is the core of every firm’s operations. This process needs to ensure that the technology platform keeps pace with financial innovations. Technology solutions and the operating models of service providers have advanced substantially over the past decade and continue to rapidly evolve due to industry and competitive pressures.

In effect, the right solution could be available as a result of the continued evolution of scalable and cost-effective cloud-based technologies. Opportunities to consolidate multiple legacy systems using data aggregation utilities can make either solution a less time-consuming alternative with more attractive ROIs.

The evaluation process concludes with a benefits and risks analysis that provides a comparison of each option under consideration, inclusive of a projected financial model. Figure 2 lists a range of options and some of the hypothetical benefits and risks a firm may pinpoint as factors that determined its chosen course.

It is important to consider the downstream and operating model implications of the selected course. For example, where outsourcing was selected, experience indicates that effective service provider oversight activities utilize a risk-based approach, ensure accountability, embrace comprehensive planning, and utilize skilled professionals.2

Options benefits and risks in choosing the right model Journal SimCorp

Figure 2. Options, benefits, and risks in choosing the right model. Source: Beacon Consulting Group (2013).

Arriving at the critical decision point

Once the analysis is completed, the critical decision point has been reached. Investment managers must combine analysis of strategic direction and assessment of core capabilities to reach a decision: To outsource or to keep operations in-house.

Regardless of the choice, a solid business case for change needs to be developed that highlights the operational and financial benefits. A communication plan to senior executives, employees, and clients should be crafted to communicate the benefits of the decision and the timing. Key messages to employees include the opportunities this presents. Clients will need assurance that current service levels will be maintained or improved.

A case to illustrate the point

A large asset manager recently completed this evaluation process and determined that the correct decision was to retain the back-office functions for its retail funds and upgrade the supporting technology, while simultaneously outsourcing the back-office functions for its alternative investment products.

This important decision was reached as a result of the disciplined evaluation process described above. The firm was vigilant about including all facets of operations and client support in the deliberations.

The firm’s cultural history was a critical consideration, as was the complexity of the products being supported. The firm’s key decision drivers for retaining the operations, discussed below, readily highlight how the evaluation process and ultimate decision is unique for each firm.

Institutional knowledge

The firm’s teams had a high degree of institutional knowledge and comprehensive understanding of the complex products that the firm did not want to lose. Retaining in-house servicing enabled the firm to maintain its intellectual property, which provided a competitive advantage and contributed to a higher degree of operational excellence. In both these cases, the firm determined they would be at risk if they were to outsource operations for all products.

Data stewardship

The firm sought to retain control over its data. The firm believed that access and control of its data provided it with a far greater degree of agility, enabling it to support the front office and external client touch points in a way that would be difficult for a service provider to match.

Unique working model

The firm’s operating strategy and model blended elements of middle- and back-office activities and blurred the lines typically seen at other asset managers. Operations personnel supported the front office with far more analytical activities and reporting than is typical of the traditional back office. The firm believed that this was truly a competitive advantage and contributed to the firm’s overall success.

Cultural influence

The firm’s people and its culture were at the forefront. The existing model and strategic direction relied heavily upon the embedded culture that the stakeholders did not want to alter or disrupt. The culture, characterized by inclusive decision-making, loyalty, and opportunity creation, in turn fostered a degree of confidence that made it easier to maintain independence and control over the people and processes that supported investment decision-making.

Homespun critical technology

Finally, the asset manager built and supported several indispensable and unique downstream technology platforms that consumed data from its accounting platforms. The firm was more comfortable feeding these platforms internally for certain products. The firm leveraged the new technologies to substantially upgrade the core platform to accommodate current operations and projected growth.

Determining the right option for you

Investment managers face myriad challenges including choppy markets, regulatory scrutiny, and technology challenges as they seek to deliver superior investment performance. In an era of limited resources, it is critical that firms make the right strategic choices to deliver investment results to clients and support to the front office.

When it comes to operational strategies, to meet these challenges, firms typically have two options: To maintain in-house or to outsource operations. Clearly, a ‘one-size fits all’ solution to these challenges is not the answer. This strategic decision requires a methodical and disciplined process.

In the end, factors such as the firm’s strategy, its core competencies, cost, culture, and technology capabilities are the primary factors in determining whether outsourcing is the choice for a given organization. Investment managers that invest in a disciplined evaluation process will ultimately make the call that is right for their firm and its stakeholders.