Accelerating Outsourcing Due Diligence: Fast Pass or Fiasco?


In the wake of the tumultuous post-COVID years, it’s not surprising that many asset managers are eager to migrate to a service provider’s robust operating model and reduce the risks and overhead of maintaining their existing operations. As a result, there has been a significant increase in outsourcing deals initiated from the corner office, with decisions being reached before thorough due diligence has been completed. However, when it comes to due diligence for middle office outsourcing, there really is no “fast pass.”

While we acknowledge the importance of buy-in from the C-suite for the success of an outsourcing relationship, it shouldn’t drive the breadth or depth of due diligence before signing a contract. There is a definitive amount of work required to determine suitability. Although some may believe that rushing to sign a contract will expedite implementation, it often has the opposite effect and can ultimately jeopardize the viability of the solution and longevity of the service-provider relationship.

The Foundation of a POC

The cornerstone of disciplined due diligence is the execution of a Proof of Concept (POC) exercise with a service provider. A POC can vary in terms of depth and scope, but at a minimum, it should involve loading client data into the provider’s target platform, simulating expected workflows and complex use cases to validate functional capabilities, and delivery of data back to the asset manager in the desired format to complete the end-to-end review. By using the client’s own data, this exercise not only identifies potential gaps that may not have surfaced during sales discussions but also provides the client with a unique view into a prospective provider’s service model and platform capabilities.

Benefits to Asset Managers

  • Critical view into a service provider’s existing capabilities and clarity over what functions will need to be retained or supported in a hybrid model.
  • Early detection of any potential issues or gaps in capabilities before signing a contract, ensuring managers avoid costly mistakes, rework, or selecting a partner unable to support their needs.
  • Simulation of critical or complex use cases on the service provider’s platforms, instilling greater confidence in the selection of a provider capable of satisfying all of their needs.
  • By sourcing the data required to support a POC, managers gain greater transparency into their operational readiness, including access and quality of data required for conversion.

Benefits to Service Providers

  • Loading a client’s actual data provides the service provider with greater insight into the complexity of account structures, volumes, or unique processing requirements, enabling them to ensure that the target operating model and infrastructure is equipped to manage and scale as needed.
  • Demonstrating commitment to meeting the asset manager’s needs helps service providers build trust and establish a strong foundation for a long-term partnership.
  • Engaging in these exercises allows service providers to differentiate themselves from competitors and increase their chances of winning new business.

We consider the POC as the most critical component of any middle office due diligence effort. Given the varying maturity of market solutions in this space, this crucial step allows the asset manager to lift the sales curtain and gain a clear understanding of existing capabilities that can provide tangible benefits to their business today, rather than relying on future roadmap items that may be aspirational down the road. The benefits far outweigh any perceived costs or efforts, ultimately helping to de-risk your conversion.

Olmstead possesses the expertise and a proven framework to lead asset managers through middle office due diligence efforts.  Reach out to us today to discuss how Olmstead can help your firm gain greater confidence in your selection process and ultimately position you for success in your middle office transformation. 

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