Next: Moving Out Middle Office Functions
January 4, 2013
If you're in fund services, the next big growth opportunity is handling middle office functions.
This includes administering just about every administrative action after an investment is made, including confirming the trade, reconciling details of transactions with counterparties, creating and maintaining measures of performance all the way through creating reports and statements for fund firms' clients, according to Dan Houlihan, head of Global Fund Services in the Americas for Northern Trust.
Northern Trust Global Investments is Houlihan's biggest customer, right now, representing $750 billion in assets. But the Global Fund Services operation now provides middle office services to more than 40 customers other than its corporate brethren with a similar $750 billion in assets, worldwide. Among those customers: Allianz Global Investors, Artio Global Investors, and Queensland Investment Corp., in Australia.
The company sees serious potential for expanding that business. Roughly 20% of fund managers currently outsource their middle office operations, according to Bernstein Research. It's only a matter of time before that number hits 50%, if forecasts from hold true. Consulting firm Navigant says 80% of managers in the United Kingdom already outsource middle office functions. Citisoft projects 45% of firms will outsource middle office work by 2015. Bernstein puts the uptake at between 50% and 60% by 2021.
"The pace and cost and complexity of change are only going to increase," Houlihan says. Fund firms are finding outsourcing middle office functions to be increasingly attractive, if they want to invest in new asset classes, such as credit-default swaps, futures, options, real estate or private equity investments.
"What we're seeing is these traditional managers have to retool their infrastructure both from intellectual capital standpoint as well as systems infrastructure,'' he says.
Also driving the outsourcing of middle office functions: Margin pressures and ''human capital'' pressures. In a lot of cases, fund firms don't have either the financial means or the personnel, in effect, to move into the new classes of investment-and keep up middle office operations. If they do the first, they can't do the second.
"So we're seeing a lot of firms that," Houlihan says, "are looking and saying, 'Okay, I've got two years of an $X million build-out to be able to trade these securities, so market-wise we can't wait."
Some fund firms will just outsource the middle office functions of the new investment operations they're undertaking, he says. Others will outsource "the entire middle office across asset classes."
What's evolved about the business case over the last decade, he says, is:
1. Re-assessment of core functions. Firms no longer view administering the details of transactions as being a core competency.
2. Flexibility. Firms want to move away from a fixed-cost infrastructure to a variable-cost infrastructure.
3. Need for speed. "It's just as much about the ability to actually execute your business strategy faster and more nimbly than you historically could,'' said Houlihan. This matters whether a firm is thinking "about getting into alternatives or derivatives or developing new product faster or expanding globally."
Northern Trust has clients in all three major regions at this point: the Americas, Europe and Asia.
Critically, in Houlihan's mind, all the customers in all parts of the world operate on a single technical platform. So if they move into a new part of the world, Northern can turn on functionality, as soon as a new sales office is opened. No new coding necessary.
"We've got one instance of every system" involved in handling confirmations, reconciliations, client reporting or other functions, said Houlihan. "So we don't have a different system in Asia than we do for the U.S. for investment accounting. And that's key, because it gives our clients continuity of data certainly.''
If the system is missing a function, Northern Trust itself can move quickly, Houlihan contends. Because it only has to write the code once, then "implement it once for the benefit of all our clients.''
In some cases, potential clients come to Northern Trust when their accounting engine is reaching the end of its useful life.
They're looking at a major fresh round of spending over a two-year period and could use the money elsewhere. An existing, up-to-date, already in-place accounting engine-that they can, in effect, hire-then makes a fair amount of sense.
Developing and selling new products, however, can be another serious driver. One client, which he will not name, had approximately $4 billion in assets under management when it came on the Northern Trust platform.
And, because it could concentrate on sales, that firm got to $73 billion in assets in about two-and-a-half years.