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Service Providers Could Profit in Downturn

While declining markets have diminished many fund companies' assets and revenues, the market conditions are a boon to many third party back-office service providers who are generating new business as funds outsource back office functions in an effort to cut costs, according to industry executives.

"We think there is more propensity to outsource right now in the current markets," said Bill Tomko, a president of investment services with The BISYS Group of Little Falls, N.J. "As markets have turned, many in the money management side are sticking to their core competencies and there is less of a focus on back office service and operations."

That has meant strong revenue growth for third party back office service providers, he said. In fact, BISYS reported strong revenue growth for its fiscal third quarter ending March 31. Revenues for BISYS' investment services increased nearly $13 million to $89 million over the second quarter ending Dec. 31, 2000, according to BISYS.

"We now exceed $400 billion in assets serviced, which is healthy growth this year," Tomko said.

In the past 12 months, the firm has added approximately 12 new fund companies as clients, which is about average for the firm, but that should change in the coming months, Tomko said.

"We think that the decisions to outsource are picking up steam now and our expectations are to add more clients at a more rapid rate," he said.

While that is good news for BISYS, outsourcing back office functions often means the loss of jobs for people in fund companies' back offices. However, back office service providers will often hire a fund company's back office personnel to service that account, Tomko said.

Increasingly, fund companies are outsourcing accounting positions, according to Mim Allison, president of Sunstone Financial Group, a back-office service provider in Milwaukee. Because it is the focus of their business, third party back office service providers are often more skilled than funds' internal back offices at providing services like accounting, Allison said.

Market volatility in the past year has increased the likelihood of mistakes in simple accounting functions like calculating net asset values, she said. Rather than dedicate the time and personnel needed to those roles, several firms have decided to outsource them, she said.

Since markets began declining over a year ago, Sunstone has seen more advisers interested in outsourcing some of their back office functions such as accounting services, said Allison.

"We are definitely seeing more interest and it makes sense," she said.

One such firm that recently decided to outsource was Lindner Funds of St. Louis, Mo., a family of seven no-load funds. It outsourced several of its back-office and client-support roles to Firstar Mutual Fund Services of Milwaukee last month. The move meant the elimination of 15 of the firm's positions, but will allow the firm to reduce costs, said Hank Boerner, a spokesperson for Lindner at the time. (MFMN 4/16/01)

Lindner's decision is not uncommon among smaller firms. Small- and mid-sized firms are more likely to outsource back office and customer service functions because outsourcing is more cost-efficient than handling those functions internally, said Fred Marius, president of Quant Funds of Lincoln, Mass.

The growing need for third-party back-office service providers prompted Quant Funds to begin marketing those services to small fund complexes, he said. The firm made a "significant" investment in technology that will allow it to offer shareholder services to small firms with $2 million to $2 billion in assets, Marius said.

While most back office service providers charge a minimum fee between $25,000 to $100,000 per fund, Quant Funds will charge a complex-wide fee for its service which should allow it to provide the services at a lower cost than most other back-office providers, Marius said.

Although the firm has not signed up any clients, it will begin actively marketing its back-office services this week, according to Heather Dondis, director of marketing for the firm.

New business is coming from other sectors of the fund industry as well as from small- to mid-sized companies, said Jonathan Boehm, a vice president with DST Systems of Kansas City, Mo. Although the small- to mid-sized fund companies have traditionally been most likely to outsource their back-office functions, large companies are beginning to outsource too, Boehm said.

Those firms want to outsource some functions in order to focus on the investment side of their business, but also to improve their bottom lines, he said. In the past year, DST has been negotiating with several large firms interested in cutting costs through outsourcing, he said.

"Funds are looking at their own operations and it's my perception that those kinds of conversations are accelerating," he said.