Traditionally, the middle office was solely the domain of the asset manager. Due to the significant responsibilities of the middle office and the proximity to the asset manager’s client, it was viewed as too vital a component of the asset management process to be outsourced and not within the purview of the asset servicer. However, more recently a notable shift has occurred in how the market views these responsibilities and the role of their service providers. Asset managers must still maintain and demonstrate their oversight of middle office functions, but it is now considered a set of business functions that can be outsourced to enhance operational efficiency and improve capabilities. Asset servicers can act as delegates of the asset manager and leverage a best-of-breed approach to their middle office functions to gain efficiency, scale, and new capabilities.
The earliest incarnations of the middle office outsource were focused solely on targeting cost efficiencies through the lift out of systems and people. Later, middle office outsourcers focused on providing increased transparency to meet regulatory obligations and increased clarity on risks. More recently, asset managers began to look at middle office outsourcers as delegates, turning their attention to incorporating technology components and gaining data insights. Benefits of cost and scale remain key elements of middle office outsourcing; however, the rise in stature of the middle office is due to clients turning to service providers to help them leverage their data for commercial benefit. The middle office is transforming from a pass through of data into a mechanism that provides clients with actionable information, knowledge, and insights.
In addition to the increased emphasis on data and insights, asset managers are no longer interested in a one size-fits-all solution. Rather, most managers wish to engage with their middle office providers in a bespoke fashion and focus on the elements of the middle office that benefit their unique operating model and specific growth strategies. At a time when many asset managers are not investing enough in their middle office, this approach allows them to create a technology ecosystem best suited to their needs and to avail themselves of a number of benefits including:
- Technology: Engaging with new technology and understanding what the possibilities are
- Strategic solutions: Creating a best-of-breed solution specific to their own operating model
- Control: Maintaining control of their operating model
- Cost: Operating a “pay-as-you-go” paradigm without the need for large, upfront capital outlays
- Scale: Leveraging an asset servicer’s asset base to control cost
- Flexibility: Changing rapidly with a greater degree of adaptability
- Competitive edge: Providing real-time data and access to a range of formats from cloud to mobile
A modular approach to middle office and technology allows asset managers to connect with those systems that make the most sense today, and shift to another technology if something else becomes a more critical business driver in the future. Such a model takes the middle office space a step closer to an environment where asset managers no longer lack data and are instead reliant on the information, knowledge, and insight asset servicers can provide.
The transformation of the middle office is part of an evolution from the servicing of assets to servicing of asset managers, and the ability of asset servicers to move forward in the value chain through the provision of efficiency and scale. This change is driven by the ability to provide digital solutions, which were not possible just a few years ago. In the past, the middle office was disorganized and the solution was to outsource to a third party more inclined to manage large staff, pursue labor arbitrage, and boldly demand other elements of the asset manager’s business. Solutions are now about data connectivity, aggregation, transfer and quality, and contemporary, intuitive, networked applications built to leverage data.
Many asset servicers with middle office solutions remain mired in its traditional space, which necessitates manual work and is dependent on offshoring models. This works against managers’ agility, clouds their attraction to digital investments, and has created client dissatisfaction with their services. These providers still operate integrated platforms and are reliant on BPOs. Instead, asset servicers should seek to support clients by focusing on their horizontals and providing solutions that are multi-provider, multi-service, and multi-channel. Such a flexible and contemporary approach allows servicers to focus on the client’s enterprise and provide solutions that help them achieve front-and middle-office integration, impact back office supervision, and enhance investment analytics in a manner that provides actionable insights.
- How can you address challenges in my middle office operations, including aging technology, overloaded operational models, and oversight required by boards and auditors? my firm finds strategic and differentiating?
- How can you reduce the inherent complexity in the middle office?
- Does your IBOR integrate data maintained by different modules and counterparties? How can you help me define and grow my optimal operating model to minimize risk, offer more capabilities, and reduce cost?
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