When was the last time you thought about service provider oversight? If you’ve experienced a significant error event, noticed a decline in service quality, anticipated a cost-benefit that hasn’t materialized, or have existing SLAs and KPIs that could be more clearly defined, then you’re probably thinking about oversight, and you’re not alone.
At Olmstead, we spend a lot of time talking to clients about outsourcing and service provider oversight has become a recurring theme. The topic has gained prevalence as more asset managers are exploring outsourcing, considering expanding the scope of what is already outsourced (including front office) or looking to improve the efficiency of an existing oversight model in the face of increasing cost pressure. Service providers also seem to be taking notice as we are starting to see them position oversight support capabilities and tools as differentiators in response to RFPs.
Given the increasing importance service providers play in the investment lifecycle, we have seen a heightened focus from asset managers on risk mitigation and building effective oversight models. To gain further insight into the current trends, we issued a survey to a group of asset managers of various sizes and profiles. Our findings suggest that oversight models vary greatly and are still evolving.
Key Survey Findings & Trends
- Increasing demand for more real-time data – 90% of survey respondents are monitoring service provider activity retroactively vs. intraday. However, an increasing demand for more real-time data and dashboards suggests that the concept of intraday monitoring is likely to become the norm, especially as asset managers adopt more front-to-back offerings from service providers.
- Replication of outsourced tasks is being limited to high risk areas – While all survey respondents are taking some proactive measures to detect and prevent errors, slightly more than half are fully replicating a subset of outsourced tasks. The most common areas of middle office replication are IBOR/portfolio accounting, security valuation, and corporate action calculations.
- Quantifiable KPIs alone are not enough to measure service provider performance – Asset managers are taking on more qualitative metrics to create a holistic view of the overall value the service provider brings to the firm. The most meaningful measures include quality and frequency of communication, employee effectiveness (understanding of the asset manager’s business, ability to navigate complex operating models, accountability, etc.), and stakeholder satisfaction.
“Most KPIs are geared towards transactional volume and STP metrics. I am also interested in a measurement of exception-based processing, e.g., quality of work and supervision.” - Asset managers rely heavily on self-reported performance metrics from service providers, but few are satisfied with the data they receive – 60% of survey respondents rely on self-reported data from service providers while the remainder use a combination of self-reported and independently sourced data. However, only 10% said they are satisfied with the metrics they receive from service providers.
“I would like to see more alignment between the metrics that the service provider views as important and the ones that matter most to us. I’ve tried for years.” - More asset managers are exploring the use of emerging technology for oversight – Half of the survey respondents are actively exploring artificial intelligence and machine learning as a means of automating error detection, issue resolution, and predictive analytics to evaluate current and future trends.
We anticipate a significant shift in the broader adoption of outsourcing, which is supported by the fact that over 60% of survey respondents are considering outsourcing additional functions in the next 1-3 years. As a result, we see the following industry challenges for asset managers in rightsizing their oversight models to effectively manage the increased risk.
Challenges & Opportunities
- Optimization of people and technology – With fewer resources, it will be nearly impossible for asset managers to justify replicating tasks that the service provider is being paid to perform and a “hands-off” approach is not an option. They must find the right balance between internal risk-based activities and external controls that effectively work together to detect, prevent, and ultimately predict errors. This introduces a new staffing dynamic as it will require people with expertise in data analytics as well as a background in investment operations.
- Data provision and utilization – Service providers will have to get on the same page as their clients in terms of data relevance and timing. It will also be mutually beneficial to ensure that clients are using data effectively and not getting lost in a proverbial sea of information. As intraday transparency increases, asset managers need to avoid the temptation of inserting themselves into the process and inadvertently adding latency to exception resolution – the focus should be on data and analytics to identify and ultimately address negative trends.
- Partnership – Asset managers and service providers need to adopt a holistic view of the operating model and ensure that they are mutually aligned on day to day handoffs as well as methods for measuring results. For the asset manager, this starts by engaging service providers early when defining an oversight model. It’s not a one and done exercise; therefore, the model should incorporate periodic reviews and allow for swift adoption of changes as needed. Likewise, service providers should be proactively engaging clients in terms of how they can help support their oversight function.
While there is no one size fits all approach to oversight, the most successful outsourcing arrangements function as a single ecosystem with the sole purpose of getting timely and accurate data into the hands of the end consumer. Historically, this has been done in silos without enough thought of how to achieve joint success.
Often, we find that this can traced back to a due diligence effort that focused on service provider capabilities rather than the holistic model between asset manager and service provider inclusive of oversight. This approach results in the asset manager and service provider being misaligned and in reaction mode post-implementation, which introduces risk, adds cost, and puts unwanted strain on their respective organizations and the entire relationship.
Given the macro changes across the industry, there’s no better time to be thinking about your oversight model. Whether you are evaluating new outsourcing opportunities, looking to expand the scope of outsourced functions, or seeking to maximize the effectiveness of a service provider relationship, Olmstead’s disciplined approach will guide your firm on how to optimize your operating model for outsourced solutions and implement effective service provider oversight.
For more information on Olmstead’s Oversight Survey and how we support our clients, please contact:
Joe DeRice