How to Optimise Outsourcing in Investment and Fund Operations

John Rolo, Senior Consultant

Outsourcing middle and back-office functions has become a key strategy for asset managers looking to enhance operational efficiency, cut costs, and scale operations, all while maintaining core capabilities effectively.

At Liqueo, we’ve guided numerous asset managers through their outsourcing transitions. Drawing from this experience, we’ve identified several critical areas that require focus to ensure successful integration of outsourced functions while avoiding common pitfalls.

Here’s what to consider:

1. Establish Strong Governance Structures

The foundation of successful outsourcing initiatives lies in well-defined and effective governance structures. Outsourcing introduces complexities in governance, operating models, and vendor management, and without a robust oversight model, these challenges can lead to costly inefficiencies and increased risks.

Poor governance and oversight can result in:

• Operational Disruptions: Lack of clear accountability and communication channels, leading to delays, errors, and misaligned priorities
• Cost Overruns: Inefficient processes and weak monitoring, driving up operational expenses, negating cost-saving goals
• Regulatory and Compliance Risks: Insufficient oversight risks non-compliance with industry regulations, exposing organisations to fines and reputational damage
• Quality Deterioration: Failure to monitor service levels producing inconsistent or substandard deliverables, impacting business performance
• Integration Challenges: Poor coordination between in-house teams and vendors, causing misalignments in workflows and disruptions to operations
• Vendor Dependency: Without structured governance, organisations risk over-reliance on vendors, reducing flexibility and negotiating power

2. Design an Effective Target Operating Model (TOM)

A well-designed TOM is central to any successful outsourcing project, aligning operational processes and governance structures with long-term business goals, thus minimising inefficiencies, and operational risks. When designing a TOM, it’s important to:

• Ensure the outsourced functions support broader strategic goals
• Reduce inefficiencies by streamlining processes early in the transition
• Minimise operational risks by clearly defining roles, responsibilities, and oversight mechanisms

3. Implement Robust Oversight Mechanisms

Successful outsourcing requires clear oversight procedures, including:

• Detailed Requirement Analysis: Creating a clear outline of required services and expected outcomes
• Provider Capability Assessment: Evaluating providers based on their ability to meet specific needs, their technology, expertise, and compliance with regulatory standards
• Performance Metrics and SLAs: Establishing clear performance metrics and service level agreements
• Regular Performance Reviews: Ensuring continuous compliance with agreed standards and making adjustments as needed
• Risk Management and Compliance Oversight: Adhering to stringent risk management protocols and compliance standards to protect clients from potential risks

4. Consider All Operational Functions

A successful outsourcing strategy requires careful evaluation of which functions to outsource and how to optimise them. With expert support, these key operational areas can be transformed to deliver maximum value:

Middle Office Functions:

• Trade Support: Evaluate how trade execution, confirmation, settlement, and reconciliation processes can be enhanced through sophisticated technology solutions
• Risk and Performance Management: Assess opportunities to implement comprehensive risk assessment frameworks and performance measurement tools that adhere to global standards

Back Office Functions:

• Fund Accounting and Compliance: Review how Fund Accounting processes can be optimised through effective oversight and standardised accelerators
• Financial Reporting and NAV Calculations: Consider ways to streamline complex financial and tax reporting tasks while ensuring accurate calculations of NAV and management fees to maintain transparency and investor trust

5. Select and Manage the Right Partners

To maximise the success of your outsourcing initiative, choosing and managing the right partners is crucial:

• Tailored Vendor Selection: Our due diligence process ensures that selected vendors align with our client’s operational aspirations and meet established performance indicators, essential for first-time outsourcers or those transitioning to new providers
• Operational Adaptability: We guide clients in choosing between custodians or technology providers based on specific needs, focusing on adaptability to market dynamics and innovation potential in asset servicing
• Long-term Relationship Management: Our strategy promotes sustainable vendor relationships that can evolve with our clients’ growth trajectories
• Transparent Communication: Maintaining open communication channels between clients and providers is crucial for transparency and comprehensive oversight of outsourced functions
• Future-proofing Operations: Regular reviews and adjustments to operating models align with future market trends and conditions, preparing clients to face potential challenges proactively

Case Study: An Asset Manager’s Transition to Outsourcing

Challenge: A mid-sized asset manager, previously managing all operations in-house, faced significant challenges as their existing operating model struggled to support increasing volumes and complexity, leading to inefficiencies, higher costs, and growing operational risks.

Solution: We implemented a comprehensive approach to address the asset manager’s challenges. This included establishing an oversight committee to align the outsourcing arrangement with the business objectives, selecting and integrating a scalable technology provider.

Impact: With our solution, we streamlined workflows with optimised KPIs and SLA monitoring and guiding internal teams through a smooth transition with effective change management. This led to a 20% reduction in operational costs and significant improvements in risk management capabilities, all within a year.

Accelerate Your Outsourcing Success

Most importantly, while asset managers can outsource specific functions, they cannot outsource their responsibility. It is imperative that there is no compromise when it comes to their regulatory obligations and ultimately no impact on their investors

We help asset managers to smoothly and confidently transition to an outsourced model. By building strong vendor relationships and staying flexible, we make it easier for firms to meet current challenges and position themselves for future growth.

Get in contact to find out how we can support your outsourcing journey and deliver a seamless transition for your business.