Outsourcing in the digital age has emerged as a potent tool for change in the ever-changing context of financial services, where agility is critical to survival. Asset servicing has gone through two distinct outsourcing cycles, each driven by distinctive industry drivers. The emphasis in the 1980s was on back-office functions. The focus switched to the middle office in the early 2000s. Now, the asset management business is on the verge of a third wave of outsourcing, with the front office taking center stage as it deals with rising pressures. This oncoming wave, in the digital age, has the potential to reshape the industry’s “status quo” and bring much-needed cost efficiency.
No Longer Just Cost-Cutting
The asset management industry is no stranger to market ebbs and flows. As bull markets drive asset growth, they frequently have an unintended consequence: growing costs. When the market tide inevitably recedes, these expenses become more obvious, forcing management to reconsider their business models. During these times, the natural tendency is to focus on core functions and, when possible, outsource non-essential activities to suppliers with scale solutions. It’s a survival strategy out by the need to streamline operations.
The historical precedence is illuminating. Following the flourishing ’80s bull market, the market crash fueled the expansion of back-office outsourcing. Similarly, the early 2000s saw the pinnacle of the internet bubble, which fueled the trend of middle-office outsourcing. Today, we are witnessing an unprecedented convergence of events: a recent market slump, the inexorable march of cost-conscious passive funds, increasing regulations, and rising technology costs. This combination could pave the way for a large increase in front-office outsourcing.
The Front Office: A Golden Opportunity
The front office’s increasing vulnerability distinguishes this third wave. Unlike its colleagues in the back and middle offices, the front office has mainly remained resistant to outsourcing tendencies. However, the rapid speed of change and innovation has pushed the front office into the forefront as a major disruptor. Trading is shifting from an internal activity to an outsourced service in the age of disruption. This move is suggestive of a bigger industrial transformation.
In summary, front office outsourcing provides an unprecedented possibility for cost savings. When faced with the pressing need to reduce their cost base, asset managers recognize the value of outsourcing high-capital-intensive or non-core services. Because of this strategy realignment, they may refocus their efforts on key alpha-generating operations.
The Third Wave of Outsourcing
Outsourcing’s rise in the finance business parallels that of cloud computing in the technology world. In the field of information technology, corporations frequently keep their intellectual property in-house while outsourcing high-capital, intensive, and non-core operations to secure, professional, and well-capitalized hyper-scale providers such as Microsoft or Amazon. A similar trend is occurring in asset servicing, where market participants are increasingly seeking outsourced solutions that ensure operational resilience from trustworthy and conflict-free counterparty.
Front-office outsourcing is still in its early stages. While managers have the option to avoid outsourcing, they cannot afford to ignore the factors driving this shift. One thing is certain as asset servicing enters its third wave of transformation: outsourcing is here to stay. It’s a strategic instrument that allows asset managers to react to the ever-changing dynamics of the digital era while also saving money. As we navigate this new era, those who embrace outsourcing as a means of keeping ahead in the fast expanding world of finance will be the industry’s pioneers.
Outsourcing has evolved as a critical approach for adaptation and survival in the ever-changing world of financial services. Asset servicing, a firmly established sector, has seen two earlier rounds of outsourcing—first in the back office, then in the middle office. As the financial landscape faces increased pressures, it is on the verge of a third wave, with the front office at its hub. This upcoming wave has the potential to be a game changer, changing industry traditions and bringing a new “status quo.”
The front office’s increasing vulnerability distinguishes this third wave. Unlike its back and middle office competitors, the front office has largely escaped the effects of outsourcing. However, due to the rapid speed of change and invention, it has emerged as a disruptive force. In this age of disruption, trading is rapidly becoming an outsourced service rather than an internal function. This move is indicative of a bigger industrial transformation.
Front office outsourcing, in addition to streamlining operations, provides a unique possibility for cost savings. Asset managers are seeing the strategic advantage in outsourcing high-capital-intensive or non-core services, which allows them to refocus their efforts on key alpha-generating activities.
The evolution of asset servicing reflects the evolution of cloud computing in the technology sector. Companies frequently keep their intellectual property in-house while outsourcing resource-intensive operations to reliable, professional, and well-capitalized vendors. The trend is similar in asset servicing, with market participants looking for reliable and conflict-free counterparties for outsourced solutions that assure operational robustness.
The nascent wave of front-office outsourcing is just beginning to crest, and while managers have the option to opt out, they must not ignore the factors underlying this transformation. Outsourcing is a valuable instrument that not only reduces costs but also enables asset managers to negotiate the ever-changing dynamics of the digital era.
As we enter this new era, the industry’s forerunners will be those who embrace outsourcing totally as a strategic strategy of keeping ahead in the fast-expanding world of finance. The third wave of the digital revolution is here, and those who adapt will not just survive but thrive.
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