Buy-side firms have sought to expand their outsourcing options to include certain trading and middle-office functions, as they look to alleviate the operational pressures caused by the global pandemic.
A new report from Northern Trust has claimed investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models, and has led to an increase in outsourced dealing and other functions, such as foreign exchange and transition management.
The research from Northern Trust highlighted how the COVID-19 pandemic has accelerated the challenges faced by firms across the globe, compounding pressure from competition, fees, regulatory and compliance challenges, technology costs and shifting product demand.
These combined factors along with an increasing pursuit of greater efficiency and transparency, new client demands and data analytics as set to drive, what the custodian is referring to as, a ‘fourth wave’ of outsourcing.
“The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk,” said Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets.
“Previously considered essential, the pandemic has effectively forced firms to outsource their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”
The paper added that while cost savings remain a core driver, and indeed are one outcome of outsourcing, they are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers. It explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”
Northern Trust’s research also compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues”.
“The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors,” added Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets.
“Additionally, in the last two months alone, many firms have recognised that outsourcing to a well-capitalised, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”
In May, Northern Trust partnered with BlackRock as part of a new end-to-end investment ecosystem for both its asset manager and allocator clients that will encompass everything from trading services and operations to data insights and analytics.
The launch of Whole Office, an open architecture strategy, is aimed at providing clients with offerings at all points of the investment lifecycle through a combination of proprietary services and partnerships.