The Next Generation Of Outsourcing

The financial crisis has prompted some asset managers to outsource at least part of their operations to save money. In today's world of outsourcing, most fund managers are taking a cautious approach to outsourcing their operations. They are deciding to test the waters with one or two functions before moving to outsourcing all of their operations. Despite the potential allure of cost-savings, outsourcing does come with some risks. It is still the fund manager's reputation on the line and liabilities for errors cannot be transferred to the outsourcing provider. Despite these risks, this will become the trend of the future as more asset managers choose to focus on their core competencies of managing money and client relationships.

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Today, many asset managers are exploring component outsourcing in an effort to boost their bottom line. This has changed dramatically from a few years ago when asset managers demanded much more customization in outsourcing deals - they wanted providers to replicate all of their in-house technology and operations. The main strategies were lift-out or full conversion outsourcing. The shift today is a move from a fixed cost structure to a variable cost structure that rises and falls with assets or transaction volumes. Component outsourcing is an increasingly more common option for firms to be able to align costs with their overall revenues.

The "re-evaluation" of middle to back office functions is a direct result of the recent financial crisis and has shifted the way asset managers look at their investment operations. Those functions that are perceived to be "commodity" functions are the ones that are highly automated and are most likely to be outsourced. In this new financial landscape, alliances will be critical and partnering with the right firm will be necessary. With component outsourcing, the asset manager can focus on higher-value activities while transferring the commodity functions to experts who can do them more economically.

The question for most asset managers today, is which in-house operations to outsource and which ones to keep in-house?

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