Rising number of managers outsource middle and front office functions as pandemic prompts review of operations, finds white paper

Investment managers are choosing to outsource “core” functions including in-house dealing, foreign exchange and transition management, after reviewing their operations as the Covid-19 pandemic compounded existing cost pressures, according to a white paper published today by Northern Trust.

The whitepaper ‘From Niche to Norm’ finds that while cost savings remain a core driver, outsourcing has become part of the target operating model in moving toward the ‘Optimal State’ for many investment managers. The focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience,” according to the whitepaper.

The pandemic has challenged a range of operational assumptions,” says Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets. “Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service, stating: “Instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.”

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets says: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognised that outsourcing to a well-capitalised, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which echoes the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

Paulin explains: “Recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”