Middle and back office managed services provide flexibility in Asia
Buy-side investment managers in Asia-Pacific (APAC) countries face specific infrastructure and talent conditions for the middle and back office. When they compare insourcing versus outsourcing or managed services, they often focus on challenges such as staffing, know-how, infrastructure cost, low investment returns, and regulatory requirements.
In APAC, staff turnover is prevalent, which creates pressure on management teams to ensure staff continuity, cohesion, and development. The cost of hiring operations personnel for middle- and back-office (MOBO) functions, including the challenge and expense of finding talent, is often relatively modest. However, today’s economic environment presents other demands, such as pressures for increased transparency from investors and fund managers.
When considering an external provider’s role, it is important to distinguish between outsourcing and managed services.
|Operation||MOBO processes handled entirely or partly by a third party||Managed Services teams act as an extension of client’s MOBO|
|Delivery||Services delivered at arm’s length||Collaborative, “co-sourcing” partnership|
|Responsibilities||Execution of defined activities and processes with a focused approach||Identification and help with activities and processes with a strategic, holistic approach|
|Data management||Lack of control of data||Hands-on access to data in real-time|
|Supervision||Need for shadowing by internal staff or an additional third party||Data governance: accessibility, security, quality and ownership|
|Flexibility||Challenges to scaling based on the outsourcing agreement||Ease of adding and removing resources to handle peak periods|
When looking at all the different possibilities for the MOBO including insourcing, managed services provide a unique middle ground. As a result, Asian investment managers who leverage managed services enjoy three main benefits: optimized staffing, shared information platforms, and transformational insights. Combined, these benefits help managers achieve cost-effective efficiencies while tapping into world-class technology and talent.
It takes time and effort to establish a team that has the requisite familiarity with ongoing work processes. Outsourcing allows you to delegate tasks, but the relationship is typically distant, using a team without a deep understanding of your firm and objectives. While you can outsource the tasks, you still own the responsibility to your investors. At the same time, outsourcing cannot guarantee that the work will be performed to the level of accuracy required. Expertise and experience cannot easily be replicated, and many providers themselves experience high staff turnover.
On the other hand, a more robust relationship means your managed services team has “skin in the game,” committed to your success. It also enables managers to scale up or down quickly to the current appropriate capacity with a flexible team. “It’s helpful not to have to find and retain staff for the middle office functions by building that team yourself,” says David Lau, Director of Operations, Anatole Investment Management based in Hong Kong.
The growing trend toward Separately Managed Accounts (SMAs) in APAC also plays a role. With as little as $0.5M, investment managers can create portfolios that require individual accounting and reporting, customized for any particular client or segment. A managed services approach provides the scalable infrastructure for this type of operational complexity: managers can scale up and down in size and offerings, without incurring additional fixed labor costs, by using managed services resources to handle the overhead of SMAs.
A dedicated team mitigates “key man” and business continuity risks as well. In today’s climate of job mobility, investors and fund managers want to make sure potential senior staff departures don’t disrupt service or investment returns. Using managed services also reduces managers' day-to-day exposure from individuals who may be absent for reasons such as leave, holidays, or illness.
Finally, leveraging a managed services partner allows managers to redirect in-house staff towards more value-added activities. Liberating managers from the burden of routine operational tasks enables them to allocate staff to a wider range of critical responsibilities, from trading, portfolio management, and risk management, to accounting and reporting oversight. “Most managers see the middle office as a cost center, but the managed services model can transform it to more of a profit center, as personnel are freed up to pursue other areas,” said Lau. Staff may even be deployed to other business departments, such as administrative or clerical work, helping reduce the expense of human resource cost centers.
Shared information platforms
With everybody working in the same investment management and accounting system, a shared work environment improves the synergy between the internal and service provider teams. The service provider becomes a natural extension of the client’s internal operations. Clients interact in real-time with their managed services colleagues, taking a collaborative approach to achieving goals and objectives. “What makes our managed services provider unique is that they are working on the same system as us and see the same data we see,” said Lau.
Shared information platforms deliver better operational integrity. When all the data resides in the same underlying platform and dataset, operational processes become more streamlined removing operational risk. Moreover, operating in the same environment means that the data is not handed over to a third party which could lead to potential security or data breach risks. At the same time, managers retain full control and real-time transparency of data and compliance functions, such as a complete audit trail in the system or permission setup. Drop-offs are accordingly less likely to occur during data hand-offs. Managed services staff who are dedicated to the manager’s account are not only experts at cumbersome tasks like reconciliations, but are also more likely to avoid errors that occur in manual conversions. Rather than outsourcing, clients and providers take a “co-sourcing” approach, working side-by-side to complete tasks and resolve issues.
According to Billie Miric, Executive Director, Head of Managed Services at Enfusion, “Having MOBO managed services teams in your environment, working with the same golden data and operating as an extension of your team allows you to streamline your entire front-to-back process. They take care of your operational workflows - freeing you to focus exclusively on your portfolios and the execution of your strategy.”
Finally, because both client and provider have access to the same underlying system and data in real-time, they can each see results in real-time as changes are made. Transferring data between systems raises the risks of data degradation and loss. Operating from a single source of truth, with full access to internal records, enables to rectify transaction issues and breaks directly. It then becomes possible to reconcile any breaks and simply confirm approval from the manager instead of receiving a list of breaks that need to be addressed separately.
Delivering transformational insights
A managed services partner with the right expertise should be able to effect a more profound transformation that goes beyond operational efficiencies to generate strategic value. Managers can rethink their target operating model to achieve more scale while relying on managed services to help with the MOBO. A managed services provider’s best practices can be parlayed beyond the task at hand. For example, the provider might make suggestions to a client for improving service from counterparties, or make recommendations regarding accounting, regulatory requirements, or renegotiating contracts in an effort to improve reliability and reduce error rates.
Allocating more resources to value-add areas like front office trading and research helps investment managers run lean as well. By depending on a provider to complete daily tasks, the COO can play a more supervisory role, focusing on matters such as regulatory compliance and investor relations reporting. “I don’t have any operations assistants, so I rely on my managed services partner for daily functions like reconciliations,” says Benny Ho, Chief Operating Officer at Platina Capital Management based in Hong Kong. “ That means I don’t need to spend extra time on routine workloads.”
“With a high-powered and strategic managed services model, Asian firms can skip over many of the things that slow down their peers in other regions,” says Bob Feng, Director of APAC Business at Enfusion. Investment managers in APAC can achieve a significant competitive advantage with the right combination of technology and managed services. The key to success is looking beyond the immediate pressures of finding and retaining staff by considering MOBO managed services as a strategic capability.