Asset Managers Reexamining Outsourcing Strategies

Whether it's Form PF, Form PDQ, Aifmd, Fatca, or some other acronym representing a new regulatory mandate, the buy side has been working to try and figure out how best to handle new reporting requirements. At the same time, asset managers are under increased fee pressure, which is resulting in more competition, and technology is evolving rapidly.

It's a perfect storm that has forced firms on the buy side to reexamine their outsourcing strategies, according to panelists at this year's TSAM NY event.

Take, for example, Putnam Investments, which manages nearly $150 billion. Stephen Gouthro, head of investment services and operations at Putnam, said the firm is in the early stages of digitizing operations across the company. When accessing third-party providers to help fill in certain gaps that Putnam can't handle internally, it has to more strictly examine that access and control over data.

"It's a critical question and it needs to be looked at with a whole new mindset in this day and age," Gouthro said. "We will not be successful if we can't get our hands on the data. Beyond whatever the specific service is that people are providing, you need access to that data and you better understand what the technology strategy is of that service provider—can they grow with you? Can they give you access in the way that you want to consume it so that you can remain nimble? That's huge."

Putnam outsources many of its back-office administration needs, as well. But Gouthro said the relationship is more of a partnership, since there is expertise and risk that cannot simply be handed off to a vendor. So firms, when examining their third-party providers, need to choose vendors that are flexible and can fill in those gaps, rather than simply take on the entire process.

"In this day and age with so much change happening so fast, their current expertise is not necessarily enough," he said. "You have to ask the right questions to find out if the vendor can keep pace with your firm as changes come about, whether regulatory or internal changes. Rather than outsourcing something to a third-party provider, it's now more about who am I going to partner with to fill in the gaps where we don't have the capabilities?"

Build a Program

Sean Graham, director of investment operations at General Motors Asset Management, which manages $76 billion, said firms need to be more detailed in creating and running a vendor management program. He also echoed Gouthro, saying that you can't outsource expertise and you have to be prepared to take on some of the risk.

"There are plenty of things that can sink a relationship. So you have to have a program and be very deliberate about the different things that you need," Graham said. "You have to understand what your needs are. Also, you need to understand that you can never outsource expertise—that's the beginning of the end. And you can't outsource the problem; you need to have some ownership inside. And you want to make sure that contractually, you do hold them accountable, but you can't totally outsource the risk."

Gouthro added that in many instances, new regulatory burdens can offer opportunities to improve the company's technology and workflow, when done right. As an example, he pointed to new mandates that require that firms have a more formalized liquidity program that is actively monitored.

"What we'll want in terms of capabilities is to know exactly what that liquidity profile as defined by the Securities and Exchange Commission looks like as we're trading throughout the day," he said. "If we do this the right way, the reporting is downstream and not a big deal at all. You need to get the foundation right, and you can't outsource that."