Cost considerations and sustainability are driving managers to explore new operating modelsCerulli’s inaugural report on asset management solutions focuses on database providers, risk analytics, reporting, and other solutions that are being adopted by institutional asset managers to remain competitive. View the complete report here.
November 22, 2022, BOSTON—As asset management firms confront mounting fee pressure, increased regulation, and fundamental factors that interrupt long-term sustainability, they are increasingly outsourcing operational functions.
According to new research, The Cerulli Report—U.S. Vendor Management & Operations Outsourcing 2022: The Evolution of the Asset Manager Operating Models, 33% of asset managers outsource the full back-office function, while 20% outsource middle-office operations. Throughout the study, research participants describe outsourcing as more common and more acceptable in recent years. Increasingly, new firms are deciding to outsource middle- and back-office activities from inception.
Citing cost (73%), disparate technology systems (62%), and regulatory oversight (52%) as operating challenges, managers seek to deploy solutions that enable scale and efficiency. “Maintaining an operating model that is sustainable has become challenging due to growing regulatory burdens and by the breadth of products being offered by firms,” states James Tamposi, associate director. “More than ever, managers are interested in creating systems and infrastructure that enables them to operate more effectively,” he adds.
The Future Is Outsourcing
As asset managers consider the future state operating model, the main factors driving their decision to outsource are improving productivity and leveraging external capabilities. According to the research, 65% of managers cite improving internal employee productivity as a driver for outsourcing. The same percentage of managers cite leveraging external capabilities as a significant driver, followed by incorporating efficiencies (58%). “As investing becomes more complex and challenging, keeping a firm focused on its main mission of generating returns is critical,” Tamposi explains. “By leveraging an outside party, managers can fine-tune their focus on other necessary strategic initiatives while building greater scale from a specialist.”
Across the front, middle, and back office, more than three-quarters of managers intend to maintain their outsourcing activities in perpetuity. Outsourcing has evolved from a transactional relationship to more partnership-based. Firms are often increasing their outsourcing profile under the umbrella of an existing relationship; rather than employing a best-of-breed approach for each outsourced function, managers find it better to engage with one trusted partner on several operational fronts.
With the increased prevalence of outsourcing relationships, the research suggests that asset managers establish a risk management process to govern relationships. “There are inherent risks in any process; using an outside party to assist with a process invites additional risks and requires oversight in the form of due diligence and ongoing monitoring,” states Tamposi.
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Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.