The Evolution of Outsourcing: What’s Driving Trends in the Middle-Office
By Dan Houlihan
Today’s institutional investment management firms are up against more challenges than ever before. Regulators continue to up the regulatory ante, operating costs are under increased scrutiny and the talent war rages on. At the same time, rapidly shifting macroeconomic expectations are influencing changes in investor demands that require nimble responses from investment managers. It’s against these constraints that firms find themselves increasingly looking for new ways to free up valuable time and resources in order to respond and optimize their business strategy.
The middle office is one of the most logical starting points we see when firms are starting to assess where efficiencies are to be made. For example, the investment book of record (IBOR) is a common target for firms to outsource and includes everything from post-trade execution to performance analytics and end-client reporting. Many argue the middle office is not a core competency and represents an opportunity to reduce costs and move to a variable cost model to drive efficiency and operating leverage.
Outsourcing the middle office isn’t a new trend – large deals in the late ’90s/early 2000s laid the foundation for today’s operations. This leaves lots of room for opportunity, with the potential growth difference for the middle office outsourcing market between 2023 and 2028 reaching $3.67 billion, according to the Technavio Middle Office Outsourcing Market Report.
While often missed, outsourcing the middle office should be seen not only in cost and core competency terms – but also as a strategic lever. The middle office solution is the platform on and through which a firm’s business strategy is executed. Whether it’s launching new products faster, adding new asset classes, or expanding to new jurisdictions, the middle office platform is critical.
Theoretically, an outsourced middle office provider allows a firm to execute that strategy faster and more efficiently than can otherwise be done on an internal infrastructure. As a simple example, a domestic, long equity manager looking to trade derivatives may not have the systems capability or human capital to do so. With an outsourced middle office – there is substantial cost avoidance and speed-to-market gains on outsourced infrastructure. Buying new systems or re-tooling legacy systems and hiring new expertise takes time and capital. In an outsourced model, you can essentially just test and turn it on with complete transparency into timeline and cost.
From a provider perspective, our view is that the long-term key is to enhance the value of client data through analytics with insights; delivered through a dynamic client experience. In many cases, firms outsource to impact the margin side of their business. The providers’ goal should be to provide insights to make the client smarter whether that is things like behavioral analytics, pattern recognition, etc. The question to ask beyond the obvious operational aspects of the middle office is what value will my provider give me in terms of operating insights now and into the future.
From a forward-looking perspective, there are many fintechs driving innovation in this space. Cloud-native solutions are pushing out technology faster and through lower costs than deployment models.
Lastly, what we do know is that bull markets tend to enable, if not mask growing fixed costs. These are exposed in a down market cycle. Sophisticated managers understand the strategic value of outsourcing the middle office; a flexible operating platform to enable strategy execution and a hedge against market cycles.
