Tag Archives: Investment Bank Outsourcing

Introduction

Around the globe, there is a trillion-dollar business of investing in all sorts of assets like equity, both public and private, real estate, and upcoming assets like cryptocurrencies. Once the investment is made, the task on the part of the investor shifts to investment management. There are many activities of investment management that could be outsourced and that is what leads us to analyze the stream of investment management outsourcing. Investment management and hence investment management outsourcing takes all forms depending on the asset being invested in, and the prime business of the asset or investment manager.

Here we take a look at major activities of each type of investment manager or asset manager which could be effectively outsourced to save on costs and improve quality.

Who Should Outsource Investment Management and How?

Outsourced Investment Management for different types of Asset Managers

Private Equity and Venture Capital firms

The underlying asset that a Private Equity or a Venture Capital firm invests in is equity. Sometimes it’s for stocks listed on exchanges but most of the time these are private investments, the target of which are start-ups are unlisted companies.

In the PE/VC value chain of investing, there are activities like Fundraising, Deal origination, Deal execution, and Portfolio Management. Quite a few activities in these departments are outsourceable. For fundraising, the activities like investor reach-out, investor profiling, CRMs, newsletters, white papers, and data management jobs could be effectively outsourced. Regarding, Deal origination, the deal pipeline management has a great potential of outsourcing along with initial due diligence. Deal execution processes like valuation and financial modeling are templatized and could be considered. Portfolio management has varied activities and outsourcing potential vary as per the nature of the business of the portfolio companies. Most activities related to Strategy and Marketing have great potential for outsourcing when it comes to Portfolio Management.

Hedge Funds

For the most common type of hedge fund out there, that is a long-short equity hedge fund, multiple activities should be considered for outsourcing. Equity Research is the foremost one. The research that is done for the investors is almost always best to be outsourced. Apart from Equity Research, Fund Administration and Fund Accounting are better done when outsourced. It makes sense from the cost and expertise point of view. Marketing activities almost always have great potential for offshoring.

Real Estate

Managing a real estate asset after the investment comprises standardized work-streams. Most of it relates to collecting data, analyzing it, making reports, and raising red flags if any. Accounting and administration along with research has a great potential for outsourcing

Investment Banks

Investment Banks are into all sorts of assets directly or for their clients. For the varying types of their work pallet, there is varying potential for outsourcing. For investment banks, activities that are commonly outsourced are Equity Research, Security-based Investment Research, development of excel or other automated models, investment research for private investments, marketing, deal origination, and deal execution. In fact, 30-50% of all activities performed by an investment bank has a solid potential for outsourcing that may be explored

Asset Management Firms

These are for specialized asset managers like managers managing a portfolio of crypto or commodities. There is no one size fits all approach to outsourcing for these asset managers. As a thumb rule, everything related to technology like platform development, automation, website development, or software development can be outsourced. Also, anything that is of support function’s nature like Strategy or Marketing could be looked at.

Models of engagement with the outsourcing vendor

Once you have made your mind to explore outsourcing, the biggest concern is around the way an outsourced vendor or the service provider would work with you and your team. There are three established models of working while outsourcing. These are FTEs, Retainer, and Ad-hoc. Some progressive vendors like Magistral are signing up success-based contracts too.

Investment Management Outsourcing Engagement Model

FTEs

FTE the most common engagement model for investment management outsourcing.

FTE stands for Full-Time Employee equivalent. It’s like a virtual employee who is operating from a different country. This virtual employee could be coordinated with, on email, video calls, WhatsApp, chats, or any other mode that is suitable to the client and is convenient as per time zone differences. It looks like a person is aligned with the client full time and he works seamlessly with the client. That is always the case, but the vendor, his processes, training, supervision, and culture play a big role in ensuring the continuity of services. A vendor enables the FTE to perform optimally by providing training and desired supervision. The vendor’s processes ensure that the client is insulated from the bad performance of FTE as the work is supervised by more senior resources. In case the individual decides to leave the organization, similarly, qualified and trained professionals are available on the bench for the replacement. That is the reason it makes sense to work with individuals through the service providers who may be an established name in their industry. Working directly through freelancing websites or hiring directly exposes clients to manage costs and risks, which is not the case while dealing with an established service provider.

This also is the cheapest model on per hour basis. But it is inflexible as there may be contractual obligations for a minimum period of support. This case is more prominent when resources are specialized in niche skills

Typical jobs that require FTE engagements are operational, where the offshored team works with the onsite team seamlessly. So, if a task is part of your ongoing investment management operations, mostly it will be outsourced on FTE-based engagement.

Retainer

You know there is a need for outsourcing tasks. At the same time, you think a full-time individual working on these jobs may be overkill. In these situations, where tasks just require some hours every month, the retainer model of engagement comes in handy. Say rather than hiring an FTE or a full-time virtual employee, you would only want 100 hours’ worth of tasks outsourced every month. A retainer is far more flexible than FTEs but costs higher on per hour cost basis. Typical jobs that are suitable for retainer-type outsourcing are newsletters, MIS, reports preparation, and other marketing-related tasks.

Ad-hoc Projects

As the name suggests the engagement is for one-time projects only. A client gives out the scope of the project. The service provider or the vendor provides a proposal that carries, scope of work, timelines, and commercials. The project kicks off after the client signs off the proposal and is paid after the delivery of the project. Almost any project that is strategic and is not expected to be repeated on an ongoing basis is an ideal candidate for ad-hoc based outsourcing. Also, it’s an ideal mode, if you would want to test the services of a vendor before signing a longer-term contract. It is the most flexible outsourcing arrangement as projects may start or end at your convenience, but at the same time, it is costliest in terms of cost per hour basis.

Success Based

Most traditional service providers shy from signing a success-based engagement. The fear stems from the trust deficit, performance fears, and the complications of defining a success scenario. Magistral signs success-based engagements with clients, with whom it has existing relationships. Existing relationships take the risks related to trust deficit and performance. A mutually agreed “success” scenario could also be defined in those situations. The tasks that are outsourced under these arrangements usually relate to fundraising, deal sourcing, and meetings’ set up

Magistral has helped more than 100 clients in outsourcing and offshoring multiple activities related to the Investment Management process. To start a conversation drop a line here.

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 Modeling, Portfolio Management and Equity Research

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

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

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

Investment Banking as an industry relies on the brightest of the minds in the financial world. So when the concept of “outsourcing” is discussed, it is frowned upon by some as being unreliable and low quality. Doing everything in-house is a matter of “Unique Selling Proposition” for the bank.

Is it really so?

In this article, we will build a case for outsourcing against doing everything in-house.

Here are the reasons that you should consider before deciding ‘for’ or ‘against’ outsourcing.

If you are growing, doing everything in-house will bring down your pace of growth: For any organization, whether it’s an Investment Bank or any other, growth is a piece of good news. But it also brings with it, the huge uncertainties in terms of cash flow. You secure that big client that you were chasing for months and you sign a contract. You hire and then realize that the client has shelved the project. Now new hires sit there in your cost bucket without any revenue against them. If you let them go, it is usually bad for the brand. Hiring bright associates then becomes difficult once you are out again for hiring. Outsourcing here acts as a temporary patch. You get the project, you outsource it till the client stabilizes and then decide what to keep in-house and what to outsource. It brings down the cash flow risks dramatically. Outsourcing keeps pace with your project flow and you don’t wait for months for the new associates to join you. Read further, if you think handing an important client to outsourcing may be detrimental to your business.

Quality concerns around outsourcing are unfounded: Another factor that is sighted against outsourcing is quality concerns. I encourage you to see the work that the Top 10 global investment banks are getting done in India. All of the top 10 banks have an India connection. Some have their biggest global delivery centers or captives based out of India while others have big contracts with Indian vendors, but no one thinks the quality is bad and avoids India altogether. Do you think this scale would have been possible with sub-standard delivery quality? You need to think again!!

There are unmistakable advantages in terms of costs: The complete business case of outsourcing is usually built around saving costs, and it is very difficult to miss the details. Depending on your location in the US, Europe, the UK, or Australia, outsourced analysts are cheaper in tune to 30% to 80% of the costs of onsite analysts. There are further savings in terms of lower supervision time, costs of databases, skill bandwidth of the whole outsourced team as compared to a few onsite analysts and the flexibility with which new resources could be added or removed

If you are small, you can’t do without outsourcing: It is understood that outsourcing will bring mighty savings on top of the headcounts in thousands. Though that is correct, there are immense benefits for small setups too. A small set up sometime may miss some of the critical skills that bigger banks have. Outsourcing plugs in that skill gap in smaller banks. Also with purse strings tightened for smaller banks, outsourcing sometimes is the only option for operational continuity without breaking the bank.

Not all Investment Banking jobs are strategic: There is absolutely nothing strategic about entering expense voucher details in excel or making the fund pdf editable, but these are the jobs that still need to be done and possibly at the lowest cost. Outsourcing is not only an alternative but the best one for these mundane tasks.

Selling “Outsourcing” to your clients: There is still a notion that Investment Banking clients will frown on outsourcing operations as it is perceived to be low quality. If a bank does everything in-house, it sends a signal that Bank has too little to do on its own. What advantage does it bring to do mundane jobs in-house? On the contrary, it’s perceived that the team is inefficient and has high maintenance costs. Who foots this bill? Your clients!! Say your management fees might come down by a few percentage points due to outsourcing and see the perception of outsourcing change. Keep the critical tasks in-house and outsource the non-critical ones.

Assignments move at double the pace: Outsourced team acts as an extended team to the onsite team. With time zone differences, it is like the combined team is moving at double the pace working in the day and the night as well. So an assignment that would have taken 30 days to complete may see itself being finished in 15 days’ time. Agility does have value in the marketplace.

No exit barriers from contracts: If you are not happy with the quality, timeliness, and responsiveness or have any other issues with your own business or the quality of services, the contracts have a swift exit clause. You can terminate the contract with a few days’ notice.

Competitive pressures regarding outsourcing: As suggested earlier in the article, the top 10 global banks are outsourcing work to India. It gives them an immense advantage in terms of costs and hence pricing their services to their clients. Someone who is doing everything in-house will be costlier without adding any additional value to the client. Competitive intensity regarding outsourcing is huge, and it may force everyone to outsource at some point. Early movers may rope in significant rewards though.

Hiring an individual Vs. Hiring a team: When you outsource, you don’t hire a single individual, you also hire the expertise of a team that is working across investment banks for years. This means an Investment Banking standard quality being delivered on day 1 as compared to months for an onsite hire.

Data Security and Privacy: Data security is a big concern for outsourcing. For this, it is suggested that outsourcing contracts should carry a penalty in case of a data breach. Usually, outsourcing players are organized on the basis of support teams for each client. There is little interaction between teams on assignment related issues. One analyst works with only one client at a time and hence there is safety in terms of sensitive news leaking to other clients. There are IT arrangements as well in terms of secured workplace access, IT firewalls, and inspection of all outgoing emails and online activity of each analyst.

If you are still tentative about outsourcing, please get in touch with Magistral Consulting (www.magistralconsulting.com). We support dozens of Investment Banks in outsourcing critical and non-critical work. We have a step-by-step, no-risk approach for Investment Banks to reduce their operational costs. A typical conversation starts around our capabilities. Our work samples are provided to the clients. Clients also get to talk to our references in their home countries, who have used our services. Further, we will ensure you get a pilot done to see the quality of our work before deciding on a long term engagement.

This step by step method ensures there are no financial or quality risks associated with you deciding to outsource your operations.

The author is the CEO of Magistral Consulting. Magistral has helped dozens of Investment Banks based out of the US, the UK, Europe, and Asia in outsourcing operations. He can be reached at Prabhash.choudhary@magistralconsulting.com in case of queries, observations or business inquiries.

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