Rebooting the global asset management industry

36 Rebooting the global asset management industry Back Office Outsourcing Targets Operational Alpha In the asset management industry, the outsourcing of discrete stand-alone activities in the value chain started in earnest at the start of this century and has progressed in three successive waves. The first wave covered back office activities; the second covered middle office activities and the third covered front office activities (see Insights on the next page). This evolution reflects how technological advances have served to turn former core activities in the value chain into non-core. The aim is to create a variable cost operating model that links costs directly to the volume of activity, so as to ride out the ups and downs of market cycles. Outsourcing marks a decisive shift from capital-heavy to capital-light operations, improving capital efficiency as much as business focus. The process has advanced furthest with those back office activities that are routine in nature and highly amenable to automation. In this third wave of outsourcing , they target operational alpha. It is achieved by optimizing resources, reducing costs, and improving data management , client service and ultimately leading to more efficient and profitable operations that feed into lower fees and better asset returns. Technological advances at the service provider end have been one of the key contributors. Such advances have served to streamline processes and improve data management through seamless integration. Better use of data has given asset managers and their clients much greater visibility over their investment portfolios and up-to-date detailed insights, as such portfolios have become increasingly complex. As a result, a raft of back office activities have been outsourced (Figure 3.3). A number of noteworthy points emerge. First, every notable back office activity has been outsourced at varying scale. The ones outsourced on the biggest scale are high- volume/low-touch and lend themselves to hyperscaling, thus delivering a demonstrable win-win: cost savings for asset managers and good ROI on technologies for service providers. Outsourcing marks a decisive shift from capital- heavy to capital-light operations, improving capital efficiency as much as business focus. Figure 3.3 What is the current state of play with regard to outsourcing back office non-core activities in your organization? Source: Citi/CREATE-Research Survey 2025 % of respondents Custody & settlement OTC derivatives administration Valuation of illiquid assets Investor services (inc. proxy voting) Securities lending & cash management Derivatives pricing & processing Portfolio accounting Collateral management Tax planning Trade processing & execution FX management Data management Vendor management Remain in-house Will be outsourced Has been outsourced 23 27 33 34 34 37 38 42 42 55 64 74 22 10 8 9 6 6 5 7 8 9 7 9 8 6 67 65 58 60 60 58 55 50 49 38 27 18 72 “Assetmanagement is a fixed-cost business that cannot be leveraged in a downmarket, unless these costs are turned into variable ones.” “Outsourcing has helped to trim our cost base due to scale economies at the service provider end. ” Interview Quotes