By Gurvinder Singh, CEO, Indus Valley Partners
Coming out of 2018 alive was no small feat for the average asset manager as funds began adapting to rising fee pressures through various consolidation endeavors and a crackdown on headcount. Not only have these struggles carried into 2019, they continue to grow in severity as the growth of funds are being largely derived from market value. In order to best prepare for 2020 and beyond, managers must shift their focus and resources to reducing operational costs if they want to survive in an environment of market uncertainty and continued AUM stagnation.
In a recently published report, Boston Consulting Group (BCG) sampled 30 global asset managers with a total of $39 trillion AUM to examine market performance’s impact on profit margins. Comparing the current market environment to what a potential downturn scenario could look like for asset managers in 2023, findings point to serious margin compression, with the best-case scenario being 32% profit margin and the worst being 25%.[1] Taking this possibility of a market correction into account, funds need to reduce their costs by 20%-30% per year on average moving forward to retain a traditional high margin typical of the asset management industry.
As macroeconomic pressures continue to mount and the squeeze on margins becomes tighter, a fund’s ability to adapt to changing environments has become vital. In the aforementioned BCG report, it is noted that a firm in the $250 billion to $500 billion range typically incurs average costs of 19 basis points, which is more than both of their larger and smaller peers.[1] With smaller players having the ability to make quicker shifts and the larger ones capitalizing on their operational scale, the medium-sized asset manager has been facing tighter competition on all fronts – until now.
A viable alternative to monolithic outsourcing – hyperoutsourcing and data management
Hyperoutsourcing: verb
hyperoutsource, hyperoutsourced, hyperoutsources. Digitally unbundling a fund’s specific operational processes by harnessing “digital-first” providers to exchange key data sets on an intraday basis.
Asset managers implementing traditional outsourcing programs have found their outsourcing options to be “monolithic” and slow. With their platforms deeply rooted in a well-defined set of processes, traditional outsourcing providers do not possess the agility to provide asset managers with access to technology and innovative products, leading to a potential downward spiral in terms of product innovation and growth.
It once made sense for an asset manager to harness a monolithic outsourcing provider for a scenario where they had a vanilla, static business or where their own internal inertia was so large that it blocked any change management programs. However, the advent of “digital-first” outsourcing providers now enables managers of all sizes to implement a scalable hyperoutsourcing strategy for better results than what the traditional monolithic outsourcing providers have to offer.
With technology at the heart of their operating model, “digital-first” outsourcing providers are entrenched in the concept of “audit anytime.” By providing clients with full systematic access to core processing systems that the outsourced managed services teams use, “digital-first” providers tend to be more nimble and agile in embracing efficiency through the enhancement of technology in comparison to their larger counterparts.
A fund that sits between the $250 billion to $500 billion range can significantly lower their costs from 19 basis points to 12 or less by leveraging a “digital-first” operating model, which involves hyperoutsourcing and digitalization throughout the value chain. In fact, according to a Q2 2019 PwC insights report, margin compression has already forced many asset managers to consider outsourcing their back- and middle-office functions.[2] As a result, technology platforms and teams that were once built out internally have shifted over to less costly third-party providers, allowing for a greater focus on core capabilities around managing money, client experience and product innovation to generate and retain AUM.
The flexible and scalable approach of hyperoutsourcing allows a fund to start with a focused offering and create visible efficiencies. From here, these efficiencies can enable the next phase of evolution by setting a sustainable, long-term operating model transformation in motion. For example, you could choose a provider for loan settlements, one for providing a golden copy of data (i.e. reference, security, etc.) and add other functions-as-a-service all while leveraging a core data management capability in-house to stitch the data sets together.
The path to calmer waters
When strong data management is paired with hyperoutsourcing and “digital-first” providers, funds can achieve their ideal state in which they have full control of all internal data, including both historical and current. With this strategy, funds can be equipped with an unbeatable combination of flexibility and control, both of which are often sacrificed in an irreversible manner in traditional monolithic outsourcing models.
[1] Boston Consulting Group, “How Asset Managers Can Win in a Winner-Takes-All World,” May 6, 2019.
[2] PwC, “Deals from PwC: AWM Deals Insights Q2 2019,” 2019
