Rebooting the global asset management industry

16 Rebooting the global asset management industry Theme 5: Outsourcing Is Linked with Organic Growth at Lower Costs This century has witnessed three severe bear markets: in 2000-01, 2008-09 and 2022-23. Each crisis has created fresh impetus towards a lean and agile business model with operating leverage in good times and bad; while also promoting cost-effective organic growth. The outsourcing of non-core activities in the investment value chain has duly taken off in three successive waves, starting with the back office, then the middle office and now the front office. A number of drivers have been at work. First, fat-tailed events are no longer rare, as shown by the 2008 global financial crisis, Covid-19, and the Russian invasion of Ukraine. They require a variable cost operating model where costs vary with the volume of activity in what has long been a skills-intensive fixed cost people business. Second, the rise of passive investing has reshaped the key points of competition. It has forced active asset managers to have razor-sharp focus on their core competency and outsource routine processes that can be readily scaled up by service providers. Third, thanks to technological advances, some service providers are turning into analytics powerhouses, as they improve the volume, variety, velocity and veracity of data that is the life-blood of the asset business. What started as tactical cost cutting has morphed into a strategic imperative, and turned arms-length relationships into strategic partnerships, as various tangible benefits have flowed; some related to the bottom line, others to organic growth (Figure 1.5). Taking them in turn, the top three reported financial benefits are: the reduction of unit costs with streamlined work processes (59%), an improvement in operating leverage as the business volume increases (53%), and enhanced quality assurance around data (48%). In turn, the top three benefits promoting organic growth are: it frees up top executives to focus on areas where they can add most value (57%), it offers access to state-of-the-art business processes (44%), it enhances the success rate in manager selection process (36%), and it promotes innovation via alliances with best-in- class service providers (33%). Each crisis has created fresh impetus towards a lean and agile business model with operating leverage in good times and bad. Figure 1.5 What do you see as the main benefits of outsourcing? Source: Citi/CREATE-Research Survey 2025 % of respondents Reduces unit costs of routine scalable activities Allows top executives to focus on core competency Improves operating leverage as the business grows Enhances data quality assurance Provides access to state-of-the-art business practices Features high on clients’ manager selection criteria Promotes innovation with best-in- class practices Provides a professional overlay to the craft industry 59 57 53 48 44 36 33 13 “Outsourcing reduces unit costs and acts as a brake on the operational bloat that often comes with business growth.” “Industry competition has turned from benign to malign. It has forced us to focus on our core strengths and outsource the rest.” Interview Quotes