An asset manager’s decision to change their operating model and outsource their middle office to a service provider should not be made in haste. From building internal consensus to carefully designing an evaluation process, selecting the best fit for an outsourcing partner is a significant investment. 

An asset manager’s decision to change their operating model and outsource their middle office to a service provider should not be made in haste. From building internal consensus to carefully designing an evaluation process, selecting the best fit for an outsourcing partner is a significant investment. 

However, what happens when, despite completing a well-thought-out outsourcing evaluation and selection project, an asset manager concludes that their current processes and requirements cannot all be transplanted, as they are currently performed, to their selected provider? 


This brief will review key considerations for asset managers to successfully navigate the period between selecting a service provider and signing an outsourcing contract. By defining differences between customised and configured solutions and exploring the effect of each, informed asset managers can maintain momentum toward outsourcing while in the long term benefit from a more standardised operating model over the life of a partnership. 


Look at customisation vs configuration 


During the life cycle of an asset manager/service provider relationship, an asset manager’s leverage is at its apex during the period between selecting a service provider and signing a contract. Asset managers often use this leverage to negotiate perceived gaps surfaced during the due diligence process. By attempting to prescribe individualised solutions to requirements, asset managers risk creating a dissonance between their individual preference for a solution and the value gained by sharing the service provider’s technology platform, operational processes and controls with other asset managers. During the service provider evaluation process (and even during contract negotiation), the word “custom” comes up quite often in discussing requirements, when often what is really meant is that they would be considered “configured processes.” 


Customisation, by definition, is the act of modifying something for an individual. In the context of a shared technology platform, customisation is further defined as any modification that entails altering the native functionality of a system. For example, changing how a portfolio accounting engine natively calculates unrealised gain/loss is a customisation. Individualised customisations are inherently a high-risk solution with potential impacts ranging from losing the ability to take advantage of system upgrades, to increased costs for maintenance and regression testing over the contract period. 


Configuration, by contrast, is defined as any modification that does not require changing the native functionality of a system. For example, changing a report to display unrealised gain/loss is a configuration. From the creation of new report formats to replicating a manager’s existing pricing hierarchy, individualised configurations are the typical mechanism for solving the asset manager’s requirements in a platform made up of shared systems. 


There are many flavours of customisation and configuration and whether a request falls into one bucket or the other will depend on the service provider and their standard offering. The service provider needs to have a conversation with the asset manager to understand if the request will result in a configuration or customisation effort. By and large, if a request is considered an actual customisation by the definition above, these requests should be limited or avoided. On the other hand, service providers that offer flexible, nimble platforms make excellent partners as they can handle different configuration requests based on client-specific needs without incurring outsized effort, resource realignment or cost. 


The benefits of using the service provider’s standard, proven processes 


An important consideration for asset managers to keep in mind, especially those that are outsourcing for the first time, is that they should not assume their internal functional processes will remain the same – this includes front-office processes as well as any retained middle-office processes. Asset managers must objectively review and rationalise their current state functional processes in partnership with the provider’s transition team, which typically results in changes and compromises when designing detailed system-agnostic requirements for future-state processes. This could be as simple as adapting to viewing information in a different reporting format, compromising on timing for SLAs, or as complex as creating new front-office interfaces. 


The most successful asset manager transitions are the ones where the asset manager understands that the way they do some things internally may need to change. 


The incentives for aligning closely to the service provider’s standard and proven processes were discussed in detail in our 2017 brief, “Navigating the Middle Office Outsourcing Transition: A Guide for Asset Managers.” 


The record of accomplishment and expertise of the service provider results in a standard service and technology model that works for most asset managers. Furthermore, a provider’s standard service improves with each client implementation creating a virtuous cycle whereby the processes determined to benefit the greater good are typically incorporated into the standard service over time. 


In considering the need to customise or not, an asset manager should first ponder the benefits of staying within the bounds of the standard offering. For asset managers who implement the provider’s standard processes, configured to their requirements, it will ultimately maximise the inherent benefits of outsourcing: scalability, enhanced operational controls, seamless upgrades, overall operational efficiency, and potentially benefit from a self-improving standard service. 


When customisation is in order 


Asset managers may experience some reticence in letting go of legacy processes that have not been revisited in many years, especially in a first-generation outsourcing contract. In other instances, customisation is requested because there’s a true business goal that the asset manager deems critical. Regardless of the reason and despite the potential risks, customisation requests are not uncommon. In these circumstances, it’s essential that the asset manager, in partnership with the service provider, perform an assessment to determine why customisation is needed or whether there is a configurable alternative. 


Once the joint analysis is complete, and there’s a consensus between parties, there are five possible outcomes: 

1. The asset manager determines that they no longer require the customisation. 
2. The asset manager determines they should handle it internally. 
3. The asset manager determines that the standard service provider offering will ultimately work for them. 
4. Both the asset manager and service provider agree that customisation is in order. The service provider will agree to accommodate the request; however, in many cases there will be a cost (borne by the asset manager) associated with the request. 
5. The service provider agrees to make a change to their core offering. In some instances, a service provider may conclude that the request for customisation has exposed a limitation in their offering and implementing the change will be beneficial to their greater asset manager client base. In these events, the requesting asset manager and service provider may partner in implementing the enhancement, and the service provider will bear all or the majority of the cost associated with the implementation. 

To help determine if customisation is really in order, or if it can be avoided, ask the following questions during the analysis: 

• For custom processing, what is the business goal of the customisation request? Can the goal be achieved an alternate way through the standard service? Many asset managers find themselves very interested in the service provider’s process to meet the end goal. These asset managers should keep in mind that the service provider may have a different way of doing something, but this should not be a focus if the output meets their requirement. Looking at outputs vs. the process that is currently taken to get there can often result in finding an alternative to customisation. 
• Why doesn’t the service provider’s standard offering work? This can be linked to the question above; if the output is the same why wouldn’t it work? 
• Do other asset managers have a similar requirement/end goal? If yes, how are they accomplishing the result? Sometimes the answer will be that they are doing this in-house because it was determined that it was better suited for the asset manager’s internal operations group. In other cases, the provider may be doing it as a “custom process.”
• How important is the custom requirement? Does the customisation that has been requested result in a business differentiator for the asset manager? In some cases, the answer is that it is in fact related to either a front-office or an investor/client requirement, and the asset manager does not want the decision to outsource to disrupt either of these in any way. In this case, the service provider and asset manager should work together to come up with an optimal solution that may be delivered either by the service provider, the asset manager, or a combination of both.
• Would the customisation request benefit other asset managers? If yes, does it make sense for the service provider to incorporate it into their standard offering? Or conversely, is the customisation request better handled by the asset manager internally? Some might argue that the advent of data as a service resulted from a customisation request that was determined to be something that would benefit a larger client base. 

Arguably before the above questions are even asked, it’s important for both firms to agree on what the holistic operating model looks like for the outsourced middle office. 

Jointly discussing the combined future operating model, including where functionality is delivered from and who is responsible for specific data and integration points, may help to answer the questions and determine the best path forward for the requirement.

The asset manager/service provider relationship is first and foremost a partnership. Regardless of the result, both parties may need to compromise in some way, but it’s in the best interest of all involved that both parties are comfortable and confident with the result. While compromise is encouraged, the result should never introduce significant risk to the service provider’s process. Any custom requests that would introduce risk to the service provider would instead need to be delivered by the asset manager, as the service provider will never agree to perform a function that would jeopardise the integrity of services for other clients. 


Reasonability of requests 


There are no fixed rules on what is a reasonable customisation request vs. what is considered completely unreasonable. A service provider will reject any request that compromises their greater solution, introduce a significant amount of risk or a material change in their core processing workflow, or jeopardise/reduce their existing controls or security practices. 


While this is not an exhaustive list, the following are a few examples of unreasonable requests for customisation: 

• A change to the fundamental service provider platform; functions such as trade matching and settlement, portfolio accounting, and GIPS performance measurement calculations should never need to be customised. While the mechanisms (systems and processes) used to provide these services may differ from one provider to another, the underlying service and objective of the service will largely be standard across all providers. 
• A request for replication of an asset manager’s internal process, when the service provider has an existing process that delivers the same output. 
• A stringent deadline that would require the service provider to skip critical controls to meet. 
• APIs into the service provider platform by unapproved vendors (that is, vendors that do not have a partnership and an existing API with the service provider). 
• Ability to access and edit data in the service provider’s platform (outside of any standard portals that may exist). 
• Anything that would require interpretation of legal agreements (for example, interpretation of unclear terms in a Credit Support Annex). 
• Discretionary investment decisions. 

While asset managers are always encouraged to limit the number of custom requests, the following list includes examples of common configurations or customisations a service provider may deliver without modifying the native functionality of their systems. 

• Client-specified security characteristics or the ability to store external data in the platform. If this can be accommodated by the service provider, these are typically stored in user-defined fields; for example, data from a market data provider not used by the service provider, or client specified fields used by the front office or in client reporting. 
• Nonstandard performance calculations or groupings. Depending on the service provider’s capabilities, this may be configured in a performance engine, calculated manually, or calculated and stored in a data mart or warehouse for use in reporting. 
• Nonstandard fee calculations. Depending on the service provider’s capabilities, this may be configured in the fee billing system, calculated manually, or calculated and stored in a data mart of warehouse for use in invoices. 
• Custom client reporting layouts. Depending on the service provider’s capabilities, they may be able to configure templates within the reporting tool, or they may have to create them outside of the tool. 
• Custom interfaces for systems not currently supported by the service provider. This is a common development request for a service provider during a transition project; for example, an interface to a new system used in the asset manager’s front office, sales or client service team. 
• Client defined pricing hierarchies. Hierarchies for existing sources at the service provider are a standard configuration, whereas introducing a new pricing source may be considered a custom request. 
• Custom reconciliations (type or frequency performed). Custom reconciliations may be configured in existing systems or custom-built in a bespoke process. A tax lot reconciliation to the custodian, for example, may be accommodated but would likely be considered outside the standard model. 
• Report or dashboard views. Reports and dashboards can be generally configured to meet the asset manager’s requirements; however, in some cases a custom-build may be required if uncommon fields or external values are requested. For example, the asset manager would like to display values from the service provider’s accounting and performance, alongside attribution data that is calculated by the front office. 
• Custom manual processes or communications. Other ad hoc processes or requested emails or calls based on triggering events. 
• Stringent/nonstandard deadlines specified by the asset manager. For example, an aggressive accounting close period early in the month. 

It’s important to note that depending on the service provider’s standard model and core capabilities, the above examples may be considered custom over configure, or vice versa. Further, there may be an incremental cost to the asset manager associated with requiring changes outside of the standard model. 


Sometimes standard is better 


While client-specific configurations and customisations are typical for most outsourcing transitions, asset managers who strive to align with their service provider’s standard offering and avoid customisations stand to benefit the most. Requirements that are considered customised vs configured will vary from one service provider to another based on the provider’s core capabilities, nimbleness, and flexibility in their platform. As such, the asset manager should work with their provider to understand which requirements fall into each category, the cost to make such changes and determine the optimal path forward. Ultimately, even if the asset manager elects to outsource their middle office, they will need to retain a small in-house team that may be better suited to provide some complex, custom requirements. By viewing a service provider’s standard processes as a valuable culmination of know-how and experience, with ongoing upgrades and industry security levels, instead of viewing the acceptance of standard processes as a concession, the benefits of outsourcing can become fully realised. A good rule of thumb for asset managers to follow is: If the outcome of the service provider’s standard process is objectively the same when compared to the legacy process, then take the standard. Customising “just because you can” isn’t a good strategy and often leads to additional cost, risk and time to delivery. Sometimes an asset manager is surprised to find that the outcome is better. 
 

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