In the dynamic landscape of UK-based wealth and asset management firms, the paradigm of outsourcing is undergoing significant shifts, driven by a confluence of factors such as technological advancements, regulatory pressures, and evolving client expectations.

We have noted a growing trend among clients in the UK, towards requesting service delivery through diverse and hybrid outsourcing models. Traditionally, organisations have relied on legacy installations and on-premises maintenance models. However, even the most conservative financial institutions are now recognising the benefits of outsourcing, particularly in terms of cost efficiency, sustainability and enhanced service accessibility through cloud solutions. We believe that the pace of change may vary, but the direction towards outsourcing is well-established.

When referring to outsourcing models it meant a focus on back-office administrative operational tasks such as managing books of record, clearing/settlement and custody. These are repetitive activities that can be scaled more easily because they require uniform processes and are very similar for each firm depending of course on their segment i.e. whether wealth or fund administration or private banking operations.

However, other activities for instance for advisor or private bankers, such as client life cycle management, portfolio management and digital collaboration may be less open to operational outsourcing and are better suited for a SaaS (Software-as-a-Service) outsourcing model where the workflow can be tailored and personalised to the client and their advisor.

So we are of the opinion that the definition of outsourcing can be a hybrid combination of operational and SaaS outsourcing.

What are the main considerations for firms exploring outsourcing options?

As the discussion around outsourcing expands, we have observed a notable shift from being solely a concern of CIOs and CTOs to becoming an active dialogue led by COOs. This reflects a broader organisational recognition of the potential benefits of outsourcing across compliance, administrative, reporting, transactional, and account management areas.           
We are of the opinion that firms must consider their operational capacity, skills, return on investment, and the desired level of client engagement.

Depending on their size and business focus, firms may opt for different outsourcing models, ranging from custodial partnerships to comprehensive operational outsourcing. It’s crucial that outsourcing solutions are tailored to fit the specific needs and operational capacities of each firm. For firms managing less than a £1billion of assets, outsourcing operational and compliance responsibilities to regulated custodial partners can offer significant advantages in reducing regulatory burdens and capital requirements. Conversely, larger firms with diverse client bases may opt for a more selective approach, retaining certain operational functions in-house while outsourcing others to achieve cost efficiencies.

This is especially common in the area of front-office and client-facing operations where the need for competitive advantage is more intense. Hence firms need to differentiate their service more effectively and establish their uniqueness and value propositions over their competitors. It means these firms cannot give full control to a single outsourcing vendor, and will retain operational control, for example, of functions such as investment management, client account and life cycle management.

Thus, one partner might manage operationally the custody, books and records for a wealth manager but that manager will use another outsourcing partner to complement their advisor desktop applications like CRM and portfolio management in a SaaS model. 

A firm, therefore, must consider which components of their business can be outsourced as operations and which components they can outsource as SaaS.  Indeed, they need also to consider how different outsourcing partners and flavours interact with each other so that information flows seamlessly and bi-directionally between their chosen parties.

How to cater to different firm sizes and business needs in outsourcing?

While full lift-and-shift models offer immediate cost savings and scalability benefits, they also pose risks related to reputation, service quality, and future operational harmonisation, in addition to a potential reduction in flexibility and agility to adapt to change.

We acknowledge the potential benefits but emphasize the importance of careful consideration and planning, and of working with partners who have a proven track record in this area and who offer an elastic rather than rigid approach. As such, it means that applications across the entire value chain must be sufficiently open and modular, so that they can co-exist and interoperate with other systems.

For example, if portal technologies and external management of 3rd party services via SaaS are the initial area of outsourcing, the starting point for digital and operational transformation, we can create an integrated technology and operational managed service to ensure performance with innovation and cost management. 

As business and value propositional development evolve, perhaps extending into the manufacturing, maintenance, and distribution of investment products and services, we can extend the presence of its capabilities to cater to this requirement, in turn, improving the quality and depth of client reporting, and the operational effectiveness of investment management advisory services.  

Executing this evolution through SaaS, along with other operational services in areas like data management, tax reporting, and market connectivity management (for FIX, Swift, and Banking services for example) can be bundled into the offering, allowing further externalisation to be achieved.  

We can continue to expand this model into a fully managed business process service to support order management, and investment operations, but it can just as easily compartmentalise its contribution. This means that our customers can utilise which ever client money management model best suits their proposition, including both those that are best run with some internal ownership, as well as those where depositary banks, or wealth custodians will be using their own permissions to regularly report to the authorities on client money activities.

By providing phased and hybrid approaches to digital and operational transformation, clients of all sizes can align outsourcing solutions with their unique value propositions and business strategies.

What might the future hold for outsourcing in the wealth and asset management industry?

We anticipate continued growth in outsourcing adoption, driven by the need for cost management, operational efficiency, and regulatory compliance. We believe firms will choose to use multiple flavours of outsourcing partners offering best-of-breed components and solutions to firms that will decide which operations to outsource and which to retain in-house utilising SaaS.

Therefore modularity and interoperability are key aspects to consider when approaching outsourcing. By adopting open and modular applications that integrate seamlessly with existing systems, customers can design outsourcing solutions that align with their value proposition and operational preferences. They can also reduce complexity and cost, while enabling cross-border standardisation.

In conclusion, we envisage an optimal partnership model extending beyond technology to encompass comprehensive business process services, including order management and investment and client life cycle operations. This holistic hybrid approach will allow firms to externalise various aspects of their operations while maintaining control over critical and differentiating functions, ensuring a seamless transition to outsourcing.