A new in-depth white paper by SEI sets out how the fund management industry can best address the often complex and challenging process of middle office outsourcing, particularly in the rapidly-altered Covid-19 working environment.

In light of the sweeping changes brought about by the coronavirus pandemic and the rise of remote networking, the paper – titled ‘Outsourcing the Middle Office: An Asset Manager’s Guide to Successfully Execute the Outsourcing Transition’ – examines how fund managers can plan, prepare and resource for a successful outsourcing transition, either immediately or further down the line in future.

Produced in partnership with consultancy firm Citisoft, which focuses on assisting the buy-side asset management industry with operations and technology challenges, the study builds on an earlier publication from 2017 which spelled out certain best practices for transitioning the middle office.

The wide-ranging paper delves into the various steps in the outsourcing process, from the initial guiding principles which will help shape decision-making during the initial stages, and establishing a vision for the future operating model, to the design, development, configuration, and testing process for the new model.

Describing how establishing guiding principles is the “bedrock” of a successful outsourced model, SEI suggested firms that do not dedicate the necessary time and focus “typically face considerable difficulties reconciling expectations and requirements in latter phases.”

The study also weighs up relative merits of a “big bang” approach – in which all in-scope functions and portfolios go live at the same time – versus a phased process, when certain functions are transitioned to the outsource provider at different times.

Acknowledging the scale of the challenge facing hedge funds and other asset management firms who have taken the decision to outsource middle office functions, SEI pointed to the size and scope of what it calls a “transformational project” for firms in a remote or hybrid working environment, underlining how communication is critical.

“The jarring effect of Covid-19 clearly demonstrated the inherent capabilities of most service providers to shift quickly to a remote environment through cloud-based infrastructures, handle unprecedented volume spikes and support a global, 24-hour clock,” SEI observed in the paper.

“This is a particularly persuasive proposition when coupled with traditional benefits, including the asset manager’s ability to focus on its core portfolio management and investor servicing competencies and focus areas while gaining access to specialised operations and technology without ongoing investment in platform upkeep and scalability.”

The report stressed there is no standard timeframe for a middle-office outsourcing transition for hedge funds and other asset managers, noting such complex projects can – and often should – be multi-year processes.

“The service provider will have a standard transition plan that they customise for each asset manager, but the asset manager should also have their own plan with their internal tasks as well; both plans should be compared and combined to create a programme plan that will ensure any dependencies or conflicts are accounted for,” the study said.

“Additionally, the service provider will work with the asset manager to catalogue and begin outreach to affected third parties – such as clients, brokers, custodians, other intermediaries and service providers – to inform them of the change in relationship.”

It also discussed how the pandemic has forced asset managers and technology providers to implement enhanced cloud-based, collaborative technologies which will continue to prove vital throughout the outsourcing process. 

“From videoconferencing to secure shared data, asset management firms are operating in a virtual world in their daily operations, and these capabilities and the corresponding comfort level will be beneficial in transformation as well.”

The paper recommended managers “stay active” in all stages of the process to “ensure the nuances of their specific requirements are met and all stakeholders are in agreement at every stage”, noting examples of less smooth and effective transitions where corners had been cut.

“Despite the challenges of navigating the pandemic and a new remote work environment, we have observed little impact on timelines and resources for middle-office outsourcing transitions,” the white paper concluded. 

“Regardless of how workplace culture and remote/hybrid situations evolve in 2021 and beyond, we anticipate seeing managers move full steam ahead into outsourcing transition programmes.”

Click to read online or download the SEI white paper – Outsourcing the Middle Office: An Asset Manager’s Guide to Successfully Execute the Outsourcing Transition

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Hugh Leask
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