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More asset managers are hiring third parties to handle their middle- and back-office functions, as they redefine how they do business in the post-crisis environment. Managers of all sizes are outsourcing client reporting, performance reporting, compliance and trade operations in an effort to more fully focus on their core competencies.

“We have seen the most growth in middle office outsourcing over the past year-and-a-half following the credit crunch. Anything post-trade execution is in play,” says Ben Keeler, director at Citisoft, a consulting firm that provides both business and technological expertise to investment management firms.

“Any effort to reduce cost and help evolve from a fixed to variable cost model is compelling,” he adds. “Service providers that have developed more mature middle-office platforms have also grown as they give clients the opportunity to extend the current services they may have in place.”

One vendor that’s benefiting from the growth is relative newcomer STP Investment Services, an West Chester, Penn.-based financial and technology service provider. The firm provides middle- and back-office services including fund administration, cash management, trade processing, reporting, performance, technology management and disaster recovery.

STP launched a couple years ago when its founders left a larger provider, and signed an early client in Performa, a Bermuda-based investment manager with about $1.9 billion under management.

Performa first outsourced its back office operations to a big technology vendor in 1998, but switched to STP in June 2009. “We outsource pricing, performance measurement, attribution, fund administration, portfolio accounting and client reporting,” says Shawn Murphy, president and CIO. Performa also provided some seed capital to help STP launch.

“The reason we started outsourcing was for cost effectiveness,” Murphy says. “Hiring accounting personnel would have been a higher cost at that time in the Bermuda jurisdiction relative to the US.

Citisoft’s Keeler says one of the changes post-crisis is that more outsourcing vendors are offering their services on an a la carte basis, which is often more appealing to asset managers. “Firms may not want to outsource entire operations organizations, but may pick and choose,” he says. “Firms may only want to outsource over-the-counter derivative processing or reconciliation.”

Technology vendors offering back-office outsourcing services is far from new, notes Denise Valentine, senior analyst at research firm Aite Group. However, “it is certainly something more firms have looked at after the crisis,” she adds.

Valentine adds that the size of the manager doesn’t matter; what matters is what is being outsourced and what skill sets are available to the firm. For example, she says, “If a firm is trading derivatives but does not have a lot of knowledge in over-the-counter derivatives, the firm needs an outside vendor to help with the processing"

Aite says that over the next few years, much of the outsourcing activity is expected to occur in the areas of investment and portfolio analytics, over-the-counter derivatives processing, collateral management, corporate actions processing and reconciliation. Middle- and back-office outsourcing in the U.S. was a $3.5 billion market in 2009; Aite expects that to grow to $5.6 billion by 2013.

Sri Sundar, head of banking and financial services in North America for Tata Consultancy Services, says his team primarily works with clients from larger firms where asset and investment managers handle assets of $350 billion or more. He says these clients have significant needs in client, compliance and regulatory reporting.

“For an investment manager, compliance starts before a decision is made to place an order,” Sundar says. “If a client is a foundation or endowment, they may have certain rules that say no investments can be made in casino and gambling stocks, for example. Firms will have to prove that they don’t hold those types of stocks in a portfolio.”

“At the end of the day, while compliance and reporting is important, a manager should be focusing on getting clients, making money, and getting better returns.” He adds that it helps many managers to outsource these mundane tasks that are time consuming.

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