By Susan Fadil, senior director – fund & corporate services and Gregory Yianni, associate director – sustainability services at JTC Group
Outsourcing of a range of back-office services such as fund administration has been a staple of the investment management business for many years, but the increasingly competitive post-Covid environment has meant managers are consistently looking for greater operating efficiencies and, in many cases, have recognised that a range of middle office functions may best be handled by third parties.
While core to many decisions to outsource, cost savings arising, for example from reductions in in-house staff numbers, are by no means the only issue which is considered before any move is made. The increasing complexity of funds, managing capital flows and reporting requirements increasingly require partners who can deliver high levels of expertise on a global scale supported by top-drawer technology.
Reporting requirements, for example, those associated with the EU’s Sustainability-related disclosure (SFDR) regulation, are not, however, the only prompt for the increased attractiveness of outsourcing. More recent additions to the outsourcing spectrum require the involvement of trained personnel who, in some cases, may be difficult to recruit in house.
Corporate governance
A new outsourcing area is corporate governance which encompasses the rules, practices and processes that guide the direction and control of a company. It involves balancing the interests of various stakeholders, such as manager, shareholders, customers, suppliers and the community. Corporate governance principles ensure transparency, fairness, accountability and responsibility in the decision-making process. These rules are essential in shaping the dynamics and outcomes of outsourcing arrangements.
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Outsourcing corporate governance requirements provides managers with a much greater opportunity to focus on the growth and development of their core investment business while relying on the expertise and skills of a dedicated and qualified governance professional who can support business leaders by providing up to date, impartial, specialist expertise.
Risks can be reduced by providing another set of eyes to scrutinise operations, preventing or detecting errors, fraud or other issues earlier.
Studies have demonstrated that those entities that apply good governance processes, typically achieve their goals ethically and in compliance with regulatory expectations and best practices. In doing so, they will enhance their prosperity.
ESG and sustainability
Outsourcing is also regularly used by companies and managers facing ESG or sustainability challenges. ESG and sustainability is a rapidly evolving and increasingly regulated space; the labour-intensive reality of data collection and reporting proves daunting for most companies. Funds and companies caught by ESG regulation often choose to outsource their reporting obligations to third-party service providers, removing the need for internal recruitment or additional data collection and streamline the reporting process.
Some service providers are, for example, able to fulfil the required role of an outsourced chief sustainability officer. This can include advising, and in some cases, occupying board seats and/or executive committees, in order to support stakeholder engagement and recommend executive compensation.
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Funds and companies that wish to actively pursue net zero ambitions may also seek the help of outsourced providers in creating a realistic and incremental decarbonisation plan. By engaging with external resources, companies are able to set in motion their decarbonisation plan with credible and experienced partners. But also providing the relevant information that potential investors are requiring, particularly from a climate and net zero perspective.
Established names
The value of outsourced services is not confined to smaller asset management groups. Many established, larger operations particularly in the UK, continental Europe and South Africa, have also chosen to outsource a range of functions for a variety of reasons.
IT is one issue. An outsourced service provider can be counted on to offer state-of-the-art IT systems handling, for example, risk management and finance services thus avoiding the significant cost of regularly updating or renewing legacy systems. New regulations in a particular jurisdiction are another concern. Here again, it is the responsibility of an outsourced compliance officer – among others – to keep abreast of any changes in domestic or offshore rules where an inhouse officer, when time permitted, might reasonably have to consult legal advisers.
At the other end of the scale from established managers, new entrants into the asset management field are also well served by outsourced service providers. Here, speed and credibility are both consequential.
Credibility
So far so good, but credibility is also an issue, not so much from a regulatory perspective as from the viewpoint potential investors are concerned. In short, established asset management names with established track records inspire investor confidence but so too do established outsourced service providers.
