By Daniel Hook
In recent years, the asset management industry has been confronted by a changing environment with increased fee pressures, new regulation, and a greater need for real time data and transparency.
Reduced fee schedules along with a requirement to provide enhanced reporting both to investors and regulators puts pressure on an asset managers’ bottom line. These market trends require asset managers to further develop technology solutions to create efficiencies and reassess their operating model to meet internal, investor and regulator demands. Some firms may choose to solve these challenges internally while others may choose to rely on a trusted partner to assist in this process.
Partnering with the right service provider can prove to be a strategic move in achieving success. Successful partnerships require dedication and commitment from both parties, but the potential benefits can be very rewarding.
While the industry has seen rapid AUM growth, the challenges noted above reduce a manager’s margin, which impacts their ability to further invest in technology and people to overcome the market disruptions. As such, when the growth subsides, those that have wisely invested in their operating model, managed costs well and protected their margins are the ones that will triumph. However, the reality is that not all managers can achieve this success individually. Faced with these scalability challenges, some managers have had or chosen to take a more strategic approach by leveraging a service provider and forming a strategic partnership.
Partnerships can be formed for many reasons and in many ways, but in all cases, a partnership should be viewed as an extension of the manager’s team. Partnerships may either be created formally, through a joint venture or another form of agreement, or informally, where over time, the manager leverages more of a service provider’s capabilities. Some examples of why partnerships may be formed are: co-development of a technology solution, outsourcing a function such as administration or custody, outsourcing of people to alleviate the costs associated with maintaining a full onsite team and leveraging a service providers’ technology or other core solution to provide scalability and defer ongoing technology costs.
When choosing a service provider to partner with, a manager should consider factors that make a successful partnership and follow a structured process that can be measured in order to gauge the success and the value-added through the partnership. The first step is assessing your current capabilities and future needs to determine which tasks or technology requirements can be outsourced from and which make more sense to maintain in-house.
Assess your current capabilities and future needs
Managers should appraise their own capabilities and understand which operations are better performed internally and those processes that could be comfortably outsourced to your partner/service provider.
There are certain functions that will need to sit with the manager due to skillset and efficiency gains, whereas many operational functions are better suited to be outsourced.
The days of performing all tasks in-house are gone, in fact, investors are generally as comfortable with the outsourced model accompanied by a strong oversight and governance structure. A service provider’s main focus is to build out an efficient and scalable platform for its clients and to provide them with the ability to ingest data easily – it is beneficial for a manager or asset owner to leverage this.
The result of this assessment together with the business goals should be clearly defined and kept in mind when assessing service providers. Successful partnerships rely on more than just prior experience and technological aptitude; they require aligned goals and an understanding of the strengths each party brings to the table.
Assessment of the service providers’ organization
As part of the decision-making process in determining who would be the best organization to partner with, it is extremely important to assess the entire organization. Managers should not only be thinking of the current need but future needs and if that service provider will be able to deliver long term. Some questions you may ask yourself are:
- Does this organization offer a wide variety of products and services where cost efficiencies can be gained through the packaging of services?
- Do you trust the leadership team that is shaping the direction of the organization?
- Will the service provider be there for you during challenging times?
- Is the organization in a growth phase or simply content to keep the “lights on”?
- Does the organization continue to invest in its people and technology?
- Does the organization have a strong track record for service?
- Do I feel comfortable in leveraging my service provider more and will they have the appropriate controls in place to mitigate risk?
The process of evaluating prospective service providers should not only include service level track records, client referrals and demonstration of capabilities but also evidence there is a clear understanding of the investment manager goals, challenges, and market pressures. This is critical to achieving a prosperous partnership.
A trusted partner is extremely important when you are relying on that organization for a technology solution or taking a process that was previously performed in-house and designating an external party to take it over. By partnering with a quality service provider, a manager can not only leverage economies of scale but given the unique nature of a manager’s business, both parties can work together in building solutions for an ever-changing and challenging environment.
Developing, maintaining, and growing the partnership
Partnerships only work if both parties are committed to maintaining and growing the relationship. Two key components of success are trust and communication. To develop an effective partnership, trust between a manager and a service provider must be mutual. Partnerships do not always see instantaneous success. It is important, however, to trust the process that has been outlined and mutually agreed upon at the start by both parties.
Managers should ask their service provider what steps will be taken to facilitate ongoing oversight and steady communication. A mutually agreed upon SLA is critical to the success of the partnerships and should be discussed during the initial communication to set expectations as well as on an ongoing basis to ensure service levels are being maintained.
It is also important that the parties build a strong oversight and governance structure so that challenges can be addressed through ongoing communication. If the manager trusts in the process and the service provider continues to deliver, then the scope of their relationship is likely to expand and become a true partnership and success on both sides will be achieved.
Reaching partner status
The strongest indicator of when a firm and service provider has developed a partnership is if internal discussions and thoughts about outsourcing have changed. When a manager is faced with a challenge or a business need, do they first look to solve this internally or reach out to their service provider to discuss possible solutions or guidance? Having this open dialogue initially suggests that a partnership has been formed.
Reaching this level of comfort with a service provider does not happen overnight. While service providers can be better suited for operational tasks and leveraging wider technology platforms, relying on an outside source for support is easier said than done. As long as investment managers properly assess their own strengths and needs, communicate their business goals, and trust a well-vetted service provider, the idea of outsourcing operations or technology can become less daunting and even an afterthought. This then allows managers to focus on what matters – running a business that is focused on investment returns, capital preservation, and investors.