STP Institute


Five Reasons to Reconsider Outsourcing Operations (Against a Backdrop of Compounding Market and Economic Challenges)

January 2023

Historically, strong bull markets, like what we’ve experienced over the past decade, have enabled and masked high fixed costs within the asset management space. But bull markets don’t last forever. And for firms whose revenue streams are tied directly to market activity, the recent market downturn has driven significant margin pressure and exposed high fixed costs.

Add to the volatile markets the impact of the ongoing Great Resignation, and these firms are left with the loss of both revenue and experience, resulting in compounding pressure on remaining employees to shoulder the operational and client service burdens.

As we saw in 2000 and 2008, when market cycles like this occur, firms looking for ways to reduce fixed costs turn to outsourcing, particularly of non-core activities with middle office activities being an obvious choice.

What they discover if they choose the right outsourcing partner is that there are distinct strategic advantages to outsourcing operations that transcend margin management during a financial cycle and create distinct competitive advantages.

Learn more about why investment operations outsourcing counts. Get our ebook: Creating a Stable Port in a Global Storm.

Optimizing Margin During a Market Downturn

Advice to investors during times of market volatility is to hold steady, because the market will correct itself over time. For firms whose fees are tied to AUM, the latter part of that statement may be true, but market downturns can still cause significant, painful and risky revenue loss in the meantime, especially if additional revenue secured during the bull market has already been allocated to tech, people and processes in fixed-cost capacities. The problem for firms with fee structures that oscillate along with market movement is that there will always be another downturn. Outsourcing operations is a compelling, cost-effective and stable alternative to trying to ride out the market’s inevitable ups and downs with high-cost technology stacks and human capital.

Executing Business Strategies Quickly and More Efficiently

Middle office outsourcing has evolved beyond simply being a solution for moving to a variable cost model to a strategic platform for executing business strategies faster and more efficiently than can otherwise be done on an internal infrastructure.

For example, if a firm wants to move into offering derivatives and global securities, but their current infrastructure isn’t equipped with complex security and multi-currency capabilities, then the capital outlay for technology solutions and human expertise (coupled with time to implement) represents a large expense to bring that strategy to market. Working with an outsourced model offers the ability to tap into existing systems to accelerate product launches and expansion into new asset classes or jurisdictions.

Eliminating the Business Risk of Hiring In House

Losing in-house employees only adds to instability caused by external market and economic factors. When firms face significant talent and knowledge gaps, tasks are often overlooked or rushed through, resulting in less-than-ideal client experiences or costly errors. What’s more, when employees resign, firms also lose the industry expertise to solve client challenges and operational problems. And trying to replace those employees with new full-time team members – which requires recruiting, onboarding, and training, and doesn’t come with any guarantee of retention, is costly and resource-intensive. Not only can an outsourced partner drive efficiencies that eliminate the operational burdens left behind by former employees, but outsourcing can also provide access to industry experts prepared to help your team solve complex challenges.

Enabling Focus on Core Competencies

For most investment managers, the lifeblood of their business is twofold: choosing the securities that drive investment performance, and gaining and servicing new clients. Time spent managing the middle office comes at the expense of these core competencies, which can have a lasting negative impact on overall business performance. In addition to reducing fixed costs, outsourcing can accelerate performance and profitability by enabling firms to spend time on revenue-generating tasks instead of operational processes.

Stabilizing Operations and Client Service

Whether it’s market movement, employee turnover, acquisition activity or technology outages, a number of factors disrupt a firm’s day-to-day operations, which in turn affects the standard of service provided to their clients. Outsourcing middle office operations adds systemization and stability, eliminating the internal uncertainty, upheaval and fragmentation these interruptions can cause and allowing your workflows to continue as usual.

Why the Time is Now to Move to an Outsourced Model

Even when the market corrects, as it usually does, and as the Great Resignation levels off, outsourcing investment operations remains a strategic, cost-effective way to ensure stability and flexibility to drive efficiency for your firm no matter the market, economic or global conditions, with the added benefit of bringing flexibility and modern infrastructure to your business strategy.

Learn More About Outsourcing Investment Operations with a Partner You Can Trust

STP Investment Services offers stability, cost savings and operational efficiency for investment managers. Find out how we can help your firm navigate even the most difficult market and economic environments. Let’s talk.

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