Four dimensions for asset & wealth managers considering outsourcing

30 August 2017 Consultancy.uk

In a bid to bolster efficiency, agility and value-added to business activities, asset and wealth managers are increasingly contemplating outsourcing their Middle and Back office functions to Third Party Administrators (TPAs). Finding the right outsourcing partner is however no easy task – Jeroen Bolsius and Arie Verburg, both consultants at Alpha FMC, reflect on four key dimensions asset and wealth managers should take into account when considering an outsourcing transition.

Cultural Fit

Can both parties eventually work well together on an operational level? Cultural aspects must be respected in order to meet the overall business goals of the clients, the asset manager and the TPA. Matching servicing location, language, importance of the relationship to a TPA, continuous investments, etc. are hugely important in building a successful partnership. Therefore, trust and the strength of the relationship is one of the key selection criteria for selecting a TPA.

Capital Fit

Is a TPA financially fit? To what extend do they find themselves liable to a client in case of damages? Are their capital ratios in line with the industry and in compliance with regulatory requirements (e.g. Basel III, UCITS V, AIFM-D)? Questions that need to be asked as TPAs are usually responsible for implementing and funding any changes required by: (a) applicable law or regulation or convention of any regulatory body, market, exchange, securities system, depositary or other similar component of market infrastructure, or (b) instruction addressed to either the asset manager or the market in which the asset manager operates.

Four dimensions for asset & wealth managers considering outsourcing

Capability Fit

Which value added services are TPAs offering? In which do they excel? Questions that very much require a solid view on the (future) strategic business requirements of the Asset Manager. If most of the business is or will be done in the USA choosing a US based TPA might be the right choice of action. However, it’s not only location or time-zone related, but also transition and change capabilities of a TPA are key. A structured engagement with reference clients and site visits as part of a due diligence process are vital in getting beyond the marketing and sales chatter. 

Cost Fit

Obviously, cost is still a very important element as one of the pillars of outsourcing is to gain cost efficiencies. During the pre-contract phases it’s important to be able to compare apples with apples and therefore a closer look at the proposed services and commercials is required. However, in the end the focus should not be to bring down the price to the bare minimum as this could very well turn out to be more expensive down line as TPAs will have to charge more for additional services. Moreover, in terms of partnership both parties should feel they have a fair deal and it will protect both sides as much as possible from changes in circumstances.

Conclusion

The four key dimensions are obviously high-level dimensions and going down the path of outsourcing requires a whole lot more strategising and operational streamlining before going to the market. It is clear that TPAs are today far more sophisticated with their platforms, products and services than ever before. Given the current market conditions, in which it’s difficult to create alpha and pressure on cost reduction are ongoing for most asset managers, it is key for players in the industry to review whether or not to keep their Middle and Back office activities in-house. 

Related: 100 largest alternative asset managers grow collective assets beyond $4 trillion.

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Outsourcer Interserve's rescue plan sparks share slide

13 December 2018 Consultancy.uk

Embattled government contractor Interserve has announced a plan to reduce its debt by issuing new shares. The material dilution for current Interserve shareholders has prompted a further collapse in the firm’s stock value – which fell by more than 50% following the news.

Almost a year after Carillion fell into shock administration, the shadow of the collapsed government contractor still hangs heavy over the outsourcing industry. At the time of its demise, Carillion was involved in the HS2 high-speed rail line, the management of schools and prisons, and was the supplying of maintenance services to Network Rail. Such was the extent of its influence at the Ministry of Defence – for which it maintained 50,000 homes – that news of the collapse forced Defence Secretary Gavin Williamson to trigger a meeting of the Government's Cobra emergency committee to discuss the situation.

The events of early 2018 put thousands of jobs at risk, while the outsourcer – used by the Government to theoretically save money – ultimately cost taxpayers £148 million. Following that, in a bid to safeguard public services and funds from a future collapse of an outsourcing provider, the British Government has since called on a number of professional services companies to draft IT cheat-sheets to be used in the event of their administrations. Volunteers Capita, Serco and Sopra Steria are understood to have created so-called ‘living wills’ already, with others to follow suit.

Outsourcer Interserve's rescue plan sparks share slide

That news will do little to calm the fears of observers that a second Carillion has long been on the cards, however, in the shape of beleaguered outsourer Interserve. One of the UK's largest providers of public services, the multinational support services and construction company based in the UK previously boasted a revenue of £3.2 billion in 2015, and a workforce of more than 75,000 people worldwide – 45,000 of whom are based in Britain. In October 2017, however, the firm’s shares tanked sharply in what has proven to be a protracted crisis for the company.

Thanks to increasingly competitive markets, the cleaning-to-building group has been grappling with poor trading results and climbing costs which initially provoked a stock value slide of more than 30%. This followed the embattled firm’s suggestion that it might breach its banking covenants – as operating profit in the second half of the year was set to be around 50% lower than previously expected. In February 2018, this led to the UK Government enlisting professional services giant Deloitte to keep watch over Interserve.

Since then, the firm managed to evade further negative press for the bulk of the year, but it has now emerged that share prices have once again collapsed – this time following the revelation that Interserve is seeking a ‘rescue deal’. Details of the plan are yet to be finalised, with a concrete outline expected to be announced early next year.

With the situation currently balanced on a knife’s edge, creditors are cautious about their next steps. According to the BBC, sources close to Interserve's creditors have said that they may have to write off some of the loans to ensure the company's survival, while lenders also described talks around the company's future as "extremely fluid." However, with a figurative millstone of £500 million in debts still hanging around Interserve’s neck, the firm announced that it would issue new shares as part of a long-term recovery plan endorsed by the Government.

Rescue plan

Shareholders reacted badly to the news that the value of their stake in the company was in line to be slashed, in what Interserve terms a "material dilution for current Interserve shareholders." Interserve’s shares initially fell as low as 6.5p, and while they rallied to an extent to close at 11.5p, this represented a 53% fall. One year ago Interserve's share value stood at 100p each.

While the company’s future would seem to hang in the balance, some factors point toward certain quarters thinking Interserve is too big to fail. In line with Carillion – which received multiple new contracts from the Government even after a number of profit warnings – Interserve has been boosted by a number of lucrative engagements. Following its 80% stock slide in 2017, the firm secured a five-year facilities management deal worth £227 million with the Department for Work and Pensions. In December 2018, meanwhile, Interserve was awarded a new £25 million contract for the redevelopment of Prince Charles Hospital in Merthyr, Wales.

According to a number of media outlets, Interserve is expected to imminently announce it has secured new public service contracts on top of this. Thanks in no small part to this influx of business from the public sector, Interserve claims its prospects are improving, and it will increase profits this year. At the same time, the UK’s opposition party has insisted that no new government contracts should be awarded to the company while it is in a parlous financial position. The Labour Party's position has been criticised within the industry as being detrimental to the future of a company that employs a large number of UK staff; however, the party argues it would save money and bolster standards of provision to simply move those roles back ‘in house’, rather than risk paying outsourcers with patchy financial outlooks.

Commenting on the situation, a Cabinet Office spokesperson said, "We monitor the financial health of all of our strategic suppliers, including Interserve, and have regular discussions with the company's management. The company successfully raised new debt facilities earlier this year, and we fully support them in their long term recovery plan."

Related: Growth in UK outsourcing industry nears 20%, cloud main driver.