Tag Archives: Back and Middle Office Outsourcing

Middle office outsourcing has emerged as a strategic option for businesses looking to increase productivity and streamline operations in the fast-paced financial landscape of today. Serving as an important middleman between the front and back offices, the middle office handles trade assistance, compliance, risk management, portfolio valuation, and reporting, among other critical tasks. 

This article delves into the concept of middle office outsourcing, examines its benefits, highlights the challenges involved, and offers insights on how organizations can maximize the advantages of this approach.

Introduction to Middle Office Outsourcing

Middle office outsourcing involves entrusting specialized external service providers with the operational functions and activities of the middle office in a financial institution. The middle office serves as a vital connection between the revenue-generating front office and the settlement and custody functions of the back office. It encompasses a range of tasks, including trade support, risk management, compliance, portfolio valuation, and reporting.

Through middle office outsourcing, financial institutions can capitalize on the expertise, technological infrastructure, and scalability provided by external service providers. These providers assume responsibility for essential tasks like trade processing, risk analysis and management, compliance monitoring, performance measurement, and reporting. This arrangement enables the financial institution to concentrate on its core competencies, such as devising investment strategies, acquiring clients, and nurturing relationships. The outsourcing partner assumes responsibilities such as trade processing, risk management, compliance, and reporting, enabling organizations to reallocate resources and concentrate on revenue generation and relationship management.  

Benefits of Middle Office Outsourcing

Financial institutions can reap numerous benefits that contribute to their overall efficiency through middle office outsourcing, here are some common benefits:

Benefits of Middle Office Outsourcing

Benefits of Middle Office Outsourcing

Cost Savings

Financial institutions can realize cost savings by opting for middle office outsourcing. External service providers leverage economies of scale, specialized expertise, and advanced technology infrastructure, enabling them to perform these functions more efficiently and cost-effectively. This leads to reduced expenses related to infrastructure, technology, staffing, and training.

Focus on Core Competencies

Financial institutions can reallocate their resources to their core competencies by outsourcing non-core middle office operations. This covers topics including client acquisition, relationship management, and investment techniques. This increased focus on core operations frequently results in better performance and increased market competitiveness.

Operational Efficiency

Process automation, scalability, and standardization are made possible by middle office outsourcing. Service providers reduce errors, increase overall efficiency, and streamline operations by utilizing cutting-edge technology like robotic process automation, artificial intelligence, and machine learning. Decision-making that is better informed is made possible by the quicker trade processing, improved risk management, and timely reporting that follow.

Access to Expertise

Outsourcing middle office functions grants financial institutions access to specialized skills and expertise that may be challenging to cultivate in-house. Service providers employ professionals with extensive experience in various middle office disciplines. This ensures the execution of critical tasks with a high degree of quality and accuracy.

Risk Mitigation and Compliance

External service providers are well-versed in industry best practices and legal standards. They support financial organizations in managing operational and regulatory risks, assuring compliance, and navigating complicated regulatory environments. Strong risk management frameworks are frequently in place at service providers, supporting businesses’ risk mitigation tactics.

Scalability and Flexibility

Middle office outsourcing empowers financial institutions to swiftly scale their operations and adapt to evolving business needs. Service providers offer flexible service models that accommodate growth, facilitate the introduction of new products, and support geographical expansions. This scalability and flexibility can be achieved without significant internal investments or operational disruptions.

Challenges and Considerations of Middle Office Outsourcing

While middle office outsourcing offers numerous advantages, it is essential to consider the following challenges and factors before embarking on such a strategy:

Data Security and Confidentiality

Financial institutions must prioritize data security and confidentiality. It is essential to ensure that potential service providers have robust data security measures and strict protocols in place to protect sensitive information. Conduct thorough due diligence to assess the provider’s track record, data protection practices, and adherence to industry standards and regulations.

Vendor Selection and Due Diligence

Thorough due diligence is necessary in order to choose the best outsourcing partner. Examine the service provider’s standing, capacity for handling risk, technological setup, adherence to laws and regulations, and experience with the particular middle office tasks that are being outsourced. Decision-making can be aided by openness in the selection process as well as suggestions and references from colleagues in the field.

Transition and Change Management

Successful outsourcing requires effective change management strategies. Plan the transition meticulously to minimize disruptions to day-to-day operations. Implement adequate communication and training programs to prepare employees for the changes and ensure a smooth handover of responsibilities.

Maintaining Control and Oversight

Establish strong governance frameworks to maintain control and oversight throughout the outsourcing process. Regular monitoring, performance reviews, and robust service level agreements should be in place to ensure that the service provider meets the desired standards and fulfils contractual obligations. This helps to maintain transparency and accountability.

Cultural and Organizational Fit

Consider the cultural and organizational fit between the financial institution and the outsourcing partner. Alignment of values, work ethics, and operational processes contributes to a successful partnership. A collaborative and compatible relationship between both entities enhances the overall outsourcing experience.

Financial institutions should minimise risks and optimise middle-office outsourcing benefits by taking proactive measures to address these issues and circumstances. Thorough assessment, thorough investigation, and efficient administration are necessary to guarantee a fruitful outsourcing collaboration and attain the intended results.

Magistral’s Services on Middle Office Outsourcing

Magistral's Services on Middle Office Outsourcing

Magistral’s Services on Middle Office Outsourcing

Magistral Consulting Services is a renowned industry leader, specializing in delivering extensive and customized solutions for middle office outsourcing. Leveraging our deep expertise and vast experience, we provide tailored services to financial institutions aiming to streamline their operations, achieve cost savings, and gain a competitive edge. Our comprehensive middle office outsourcing services cover a wide range of critical functions, including trade processing, risk management, compliance, portfolio valuation, and reporting.

Extensive Industry Expertise

Our team consists of industry experts who possess a wealth of operational and fund accounting knowledge gained from over two decades of serving the asset management industry. Our qualified operations analysts and accountants have comprehensive expertise across top platforms, including our proprietary system.

Uninterrupted Operations

We guarantee round-the-clock availability, working tirelessly 24×7 to ensure 100% reliability, accuracy, and scalability. Our middle-office services leverage a skilled workforce, digital processes, and innovative technology to provide exceptional support. This empowers you to maintain control while dedicating your focus to core activities and investment decisions.

Mitigation of Operational Risks

Through utilizing our services, you can expand your business without recruiting more staff or taking on more risk involving significant individuals. In addition to helping, you select and deploy the most suitable technology for your particular requirements, we can provide a business process outsourcing solution that is customized to work with your current systems. We provide strong controls, improve transparency, and reduce operational risk by leveraging digital processes and audit trails.

Change Management Strategies

We offer efficient change management tactics, painstakingly organizing the shift to reduce interruptions and guarantee a seamless transfer of duties.

Partnering with Magistral Consulting Services for middle office outsourcing equips financial institutions with the capacity to streamline operations, reduce costs, enhance efficiency, mitigate risks, and focus on their core competencies. We place the highest priority on data security, conducting thorough due diligence, and providing extensive support throughout the entire outsourcing journey.

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research. 

For setting up an appointment with a Magistral representative: 

visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to  prabhash.choudhary@magistralconsulting.com

What is an Outsourced CFO?

In today’s outsourced and globally connected business world there are many functions of businesses that are being outsourced like accounting, payroll, operations, IT, and marketing among others. Unfortunately, not many companies are aware that finance as a function can be outsourced too.

Herein, comes the importance of an Outsourced CFO. An outsourced CFO is a financial expert who provides financial services on a part-time or full-time basis to companies. The role of an outsourced CFO is to provide strategic insights as well as provide expertise in areas such as formulating strategy or providing core financial services help. This includes areas such as support in finding cash flows, raising capital, implementing more efficient systems, or formulating growth strategies. Usually, outsourced CFOs have considerable experience performing high-level financial roles as they may have worked in corporate finance roles in other reputed organizations.

Why one should hire an Outsourced CFO?

Outsourced CFOs can lead up to 40-50% savings in costs. About 80% of financial services executives outsource or offshore some of their services.   Highlighted below are some of the top reasons for outsourcing this critical finance function.

Benefits of Outsourced CFO

Benefits of Outsourced CFO

-Currently undergoing growth – This is usually the case for companies that are witnessing a lot of growth. A common example could be growth related to the launch of new products or say when a company is entering a new market.

-Resolving key business challenges – This comes into the picture when a company for instance is trying to resolve challenges such as cash flow, cost cutting, or looking to improve operational efficiencies.

-Raising debt or equity capital – Outsourced CFO can be of great help especially when companies are looking to raise capital. They do so by assisting in strategy formulation for it, due diligence, and in raising capital in terms of debt or equity mix.

-Maximizing margins – By analyzing current spending and costs, the outsourced CFO can suggest improvements that can be made in spending.

-Need for an interim CFO – This normally is the case when there is a need felt to place an interim CFO, especially in cases where an organization is transitioning from one CFO to another or a need is felt to outsource an organization’s finance function simply because someone else can do it better.

-Taking advantage of consulting services- An organization can look to hire an outsourced CFO simply because they can do the task better.

How does an Outsourced CFO provide value?

We have already seen why companies should look forward to outsourcing their services to a third-party service provider. In this section, we will look at some of the key benefits that are provided by an outsourced CFO. It must also be mentioned here that there are cost implications associated with hiring a CFO. Smaller companies may not have the budget to hire a CFO. This means they can incur a lot of savings by outsourcing this function which can be at a fraction of the costs of the salaries that are paid to a CFO. Not to mention the availability of talent and global access to them without incurring many operational headaches. These talents are simply at a third company party’s disposal the benefit of which can be reaped by companies.

There are some of the other benefits which an outsourced CFO can provide. Some of them are:

-They help in financial planning and analysis by providing assistance in the form of budgeting, and forecasting future revenue or cash flows for a company.

-They can help an organization in assessing its strengths and weaknesses vis a vis competition.

-Help in designing complex business models which necessitate the use of techniques such as NPV and IRR.

-Help in analyzing spending and cost incurred by a company and thereby suggest improvements in cost cutdowns.

-Assistance with financial statement preparation.

-Assistance with yearly financial reporting.

Top 10 Outsourced CFO services

A question that arises naturally is what kind of services are provided by Outsourced CFO.

Listed below are the top 10 services –

Top Outsourced CFO Services

Top Outsourced CFO Services

-Financial Strategy – One of the key benefits of outsourcing CFO services is in designing a company’s financial strategy. These are designed both short term as well as long term.

-Forecasting – Forecasting for the future is one of the key functions of any finance division of an organization. Preparation of the details helps in planning an operational roadmap for an organization. It requires a strategic understanding of requirements, assessing current and future capabilities of a company, competition analysis, and mastery in building financial models

-Financial systems strategy and design – With growth, it becomes imperative for any organization to implement software and improve process that can match an organization’s growth strategy. An outsourced CFO can help address this pain point by redesigning systems and suggesting improvements in current processes.

-Budgeting – Managing budgets is one of the key functions of the finance function. Normally budgeting is done for a 5–10-year time horizon. Budgeting helps to plan spending and future revenues in great detail.

-Financial statement preparation – An outsourced CFO can help in preparing financial statements as well as interpreting their consequences. This is the most useful information for any organization.

-Raising capital – Here a person is introduced to a host of investors, people or organizations who can help a company in raising its capital.

-Capital structure – This is done by suggesting which would be a better route – debt or equity or a mix of both.

-Interim CFO services – This service is most useful to avail of in case there is a transition from one CFO to the next or in cases where low-cost outsourcing seems to be a better option.

-Cost cutting – Costs are an important factor in decision-making. Outsourcing its services to a third party can help in this.

-Complex decision making – This is especially true with companies where complex decision making is involved and which requires the knowledge and expertise of a person. Examples could be making models for Mergers and Acquisitions, management buyouts, etc.

How can Magistral help in providing CFO services?

Magistral offers Portfolio Management services for varied kinds of the portfolio of companies such as Private Equity or a Venture Capital fund. For all the investors who sit on multiple boards, it is a headache, to implement something in a company that worked in another portfolio company. The problem is more acute when all companies are in similar industries and are facing quite similar headwinds. Limited supervision time available to board members, unavailability of resources across companies, and implementation knowledge held in a single portfolio company, all play spoilsport. It’s like re-inventing the wheel every time for the same problem.

We help portfolio managers in centralizing their Marketing (mostly digital), Strategy (Fund-raising and Exits), and Finance at fraction of the cost required to have dedicated functions in each portfolio company, big or small. The off-shored extended team also ensures no knowledge is lost for similar projects across companies and multiple projects in multiple companies can run at the same time, prioritized as per the schedule of board meetings. Learning, of course, is cross-pollinated across projects.

Our service offerings for portfolio and other companies are:

-Strategy: Identifying add-on acquisitions and potential buyers, fundraising, exit strategy, growth strategy, and content marketing

-Analytics: Financial reporting and analysis, preparing dashboards, data visualization, text cleaning and mining, predictive modeling, KPI tracking, and web scraping

-Sales: List generation, CRM cleansing and management, competitive intelligence, and social media management.

-Financial planning: Budget preparation, forecasting, and competitive quarterly earnings updating.

-Procurement: Spend analysis, vendor identification and management, spend base cost reduction, category strategy, RFP support and procurement strategy.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is in Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research.

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is Authored by the Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com

Activities under Back and Middle Offices and their Potential for Outsourcing

Back Office Outsourcing has been around for over a decade and picked up the pace since the financial meltdown of 2008. Middle Office Outsourcing is something that is picking up now and is expected to gather pace after the Corona pandemic. So, what is Back and Middle Office outsourcing, and does it make sense for financial services firms like Investment Banks, Private Equity, Venture Capital, and Hedge Fund firms to outsource these activities?

 

What is a Back Office?

There are not many definitions that clearly demarcate back-office activities from middle-office. A front office at an Investment Bank or a Private Equity firm is the one that interacts with the clients. It comprises people who are in touch with the market like traders, deal makers, Investor relations, and rainmakers. On similar lines, back-office functions are ones that never interact with clients, like fund administration, accounting, record keeping, etc. Back Office has now long been designated as the right candidate for outsourcing to reduce operational costs.

What is Middle Office?

Middle Office are the functions that coordinate between the front and back office. Similar functions in similar financial institutions can often be categorized as Middle Office, back office, or even Front Office. So, there are lots of blurry lines between Middle and Back Office definitions. Also, an activity that will form a Back Office activity at an investment bank can be categorized as a Middle Office activity at a Hedge Fund. Technology is now getting all the more important than it was ever before. Biggest of Investment Banks now have more than 30% of their employees working in technology-related functions. Technology and Risk Management functions are commonly being categorized as Middle Office functions across financial institutions like Investment Banks, Hedge Funds, Private Equity, and Venture Capital firms.

Potential of Back Office Outsourcing

Back Office needs to be outsourced is a forgone conclusion. It was probably a matter of discussion a decade back. Almost all big Investment Banks have outsourced their back office. Private Equity, Venture Capital and Hedge Funds are playing catch-up when it comes to back-office outsourcing. The reason for them lagging behind is that their teams are comparatively smaller to start with, which leads to limited cost advantages of outsourcing for them. Hedge funds have rather taken the technology way to reduce costs with developments like AI, ML, and Automation. Traders on most trading floors have been replaced by robots now. The conclusion here is that if your firm has a well-demarcated back office, it needs to be outsourced, big, or small. As the industry has started to rely on back-office outsourcing defacto, it will be difficult to compete in the market for those who decide to keep it in-house.

Potential of Middle Office Outsourcing

Middle Office Outsourcing is a hot topic now. It is gaining ground with investment banks who were pioneers even in the back office outsourcing space. Increased capabilities of vendors, further pressure to reduce costs and improve bottom-lines, and competitive pressures are the major trends that are aiding the phenomenon. It’s not right to suggest that all functions of the Middle Office could be outsourced right away. It depends on the processes, culture, and cost structure of the financial institution in question.  In conclusion, Middle Office Outsourcing is something that is still taking shape. Though a lot of it could be outsourced, the moot subject is what and how much.

Outsourcing for smaller firms

If an Investment Bank, Private Equity firm, Hedge Fund or a venture capital firm is around 20 people or less, they are continuously caught up in the dilemma to outsource or not. A big firm with hundreds and hundreds of traders would save millions of dollars by outsourcing, the same could not be said about the smaller firms. Smaller firms operate in a niche and fear losing the competitive edge if they go for outsourcing. The low-quality perception of outsourcing does not help give them confidence either. It was so far so good. Some smaller players did survive the last financial meltdown on the back of their superlative services and the network of loyal clients. It’s debatable if they will survive the current pandemic too. In the changed scenario, it is almost imperative for a smaller firm to outsource both the back office and middle office if they need a worthwhile shot at survival. When we talk about the back office and middle office of a smaller financial services firm, it’s pretty much all of their analyst capacities. Thousands of one-man shops are thriving on the formula of outsourcing when the deal is there and conserving the cash when it is not.

Middle Office and Back Office Outsourcing Trends

Multiple trends are evident in the market. Some of the prominent ones are:

Back Offices at bigger financial institutions have been outsourced. A mode could be different in a way having owned captives in a low-cost country or giving a big contract to a leading vendor, but the fact remains, that the physical location of the back office now is a low-cost country.

Middle Office Outsourcing is in a transitional phase: A middle office is being planned to be outsourced. Some players have outsourced the junior positions with mid-level and senior positions in-house. Some are toying with outsourcing the simpler functions over the complex ones

Outsourcing is catching up with Private Equity, Venture Capital and Hedge Funds: Investment Banks definitely took a lead in outsourcing but now even typically smaller financial institutions like Private Equity, Venture Capital, Family Office, Hedge Funds, Real Estate, and Asset Management firms have also started to experiment with varying degrees of exposure to outsourcing

It’s not only about costs: Outsourcing has come a long way from being a lever of only saving costs. Vendors have developed advanced skills and now are in a better position to enhance the skill of the in-house team. It is possible because the vendor is working across geographies, financial institutions, and investment philosophies. A vendor can now bring a fresh eyes’ perspective to the operations and help the financial institution up its game

Pandemic will relay the rules: If outsourcing was just an option before the pandemic, it may not be so afterward. Financial institutions are expected to face cost-related headwinds that will force them to outsource to survive

Increasingly complicated assignments being outsourced: Assignments like Financial Modeling, Investment Research, Outsourced CFO, Fund Administration Process, Hedge Fund Analytics, Pitch Decks, Portfolio Management, etc. are increasingly being outsourced by Investment Banks, Private Equity, Venture Capital and Hedge Fund firms.

Overall back office and middle office outsourcing are at different stages of maturity across the financial institutions. While large investment banks are pared to the bone when it comes to taking advantage of outsourcing, the mid-sized and smaller investment banks have only started recently experimenting with the trend. While Investment Banks, in general, are more mature and warm towards outsourcing, firms like Private Equity, Venture Capital, Hedge Funds, Family Offices, Real Estate, and Asset Management are now opening more and more to the idea. What large institutions identified as a tool to maintain their profit margins, smaller institutions are finding that tool to be the key to survival and profitable growth.

Service Offerings of Magistral Consulting

Here are the service offerings that Magistral provides:

-Daily/Weekly/Monthly Review of NAVs

-Reconciling Cash Trades and Portfolios

-Monitor Trades and Corporate Actions

-Maintain Investment Book of Records

-Independently price the portfolio

-Performing Investor Allocations

-Reporting Profit and Loss

-Client reporting for funds

-Reviewing and preparing all financial statements

-Managing relationships with service providers

-Providing tools to monitor systems and processes

Magistral Consulting (www.magistralconsulting.com) is a premier outsourcing firm that has helped multiple firms like Investment Banks, Private Equity, Venture Capital, Hedge Funds, Asset Managers, Real Estate, and Family Offices in outsourcing their back and middle office. To schedule a free discussion without any commitment, drop a line at   https://magistralconsulting.com/contact/

 

The Author Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsulting.com for any queries on the article of business inquiries in general