Outsource or Insource? Asset Managers Can Have the Best of Both

Jun 17, 2021
Brian Stone
6
 min read

In today’s investment management industry, it seems “to outsource or not to outsource?” is an all-or-nothing question: either fully outsource your firm’s tech to a solutions provider that can manage it for you or fully insource to maintain complete control over your systems and your data.

With advantages and disadvantages to both approaches, how do you choose?

We have talked with hundreds of asset managers since starting Ridgeline in 2017, many of whom either currently outsource or are considering it for key parts of their operations. No matter a firm’s priorities and requirements, Ridgeline believes the right answer is “you can do both.” A newly-possible combination of outsourcing and insourcing lets you have the best of both worlds — modern, industry cloud software-as-a-service with third-party, value-added services expertise.

OUTSOURCING PROS AND CONS

Outsourcing your tech can make financial and operational sense, especially if you run a lean and efficient firm. It makes even more sense if you are still using 20- or 30-year-old legacy technologies that require regular upgrades, significant maintenance, and customization. You are in the business of generating alpha for your clients; managing long upgrade cycles, worrying about cyber security, and prepping for disaster recovery is likely not your core competence.

Plus, few firms like the idea of hiring full-time operational and technical support personnel only to confront headcount reductions when the economy takes a sustained downturn.

Therefore it’s understandable that outsourcing value-added services has become more prevalent across both the back and middle office for everything from portfolio accounting and performance reporting to trading operations and client-facing reports. The strategy can be cost effective and allows small or mid-size asset management firms to compete with larger firms.

But what do you sacrifice when you fully outsource your middle- and back-office operational investment systems?

  1. Control and access to your fine-grain client and trading data. With your systems fully outsourced, a third-party has control over your accounting, performance, and trading data. Your relationship managers, portfolio managers, and traders need immediate and comprehensive access to their data to do their jobs successfully and drive better performance for your clients. If your data is difficult and possibly restricted to access via a third-party services provider, your team cannot react quickly, analyze and generate insights, obtain revenue intelligence, or even conduct on the fly investment performance analytics. In speaking with asset management firms, we repeatedly hear that fully outsourcing can make operations very happy while impeding the ability of your front office personnel to drive better performance for your clients.
  2. Timely responsiveness to your clients for their requests. When clients request specific performance data and custom reports, being reliant on your outsourced services partner to respond to the request in a timely and accurate manner can be a recipe for frustrated clients. Time is money when servicing your most demanding and profitable clients, and often it can take days or longer to get what you need from your outsourced services partner.
  3. System integration quagmire. Your outsourcer likely has their own preferred accounting, trading, or performance reporting tech that they host, license, and offer as a service to your firm. You may not even have the credentials to log in directly to these outsourced systems, or you might have dated portal access. You may also have your own client relationship management, portfolio construction, compliance, and/or trading systems that you manage in the front and middle office. The result is frequently a mishmash of client, portfolio, and security identifiers between systems that often need to be reconciled via scripts to support daily and weekly file-based batch updates between these systems. The use of third-party market pricing data that needs to find its way into many of your disparate systems may complicate this mishmash. Is this solvable? Yes, but it requires the same technical and operations support you hoped to avoid hiring internally.

So, if there are significant pros and cons to fully outsourcing versus fully insourcing your mid- and back-office and technology, what should an asset management firm do?

THE BEST OF BOTH WORLDS

Ridgeline is developing the industry cloud platform for investment management and serving as a partner for asset management firms’ digital transformation. We deliver a single platform for client engagement, portfolio management, trading, compliance, double-entry accounting, and reporting with a single data orchestration engine. Ridgeline is a fully-integrated software as a service built on an enterprise-grade platform natively in the AWS cloud.

With Ridgeline’s industry cloud platform, your firm maintains agility and flexibility to outsource or insource value-added services around the platform — so you experience the advantages of both strategies without their drawbacks. You can utilize a state-of-the-art, front-, mid-, and back-office system while contracting with your third-party outsourced value-added services provider for your start- and end-of-day operational activities as well as customized performance reporting. Through it all, you maintain control of your systems and data without having to manage technology upgrades, software maintenance, and systems integration.

With Ridgeline there are no upgrades — ever. The system is continuously updated every week for all users (akin to Netflix). Release notes with feature improvements are published to the Ridgeline Knowledge Base along with user job aids and an API portal to access Ridgeline’s 600+ APIs. Our APIs include related documentation for ease of integration and access to your data. Updates, maintenance, system disaster recovery, high availability, and SOC 2 Type II security is 100% maintained by Ridgeline’s 200-person (and growing) cloud engineering team.

What does this look like in real life?

  • Your portfolio managers, traders, and operations team as well as your third-party value-added service provider(s) can all securely log in to Ridgeline via multi-factor authentication to equally access your accounting, trading, and reporting data. No more arguing about who has a license.
  • Your value-added service provider can conduct exception-based reconciliation, post-trade settlement, and start-of-day processing while also initiating corporate actions, interest and dividend posting, and more in Ridgeline.
  • When your most valuable clients call with a critical information or trading need, not only does your team have the tools to respond quickly but they see the same data and source of truth. Ridgeline’s composite management and performance reporting tools enable you and your outsourced services provider(s) to configure reports via pivot tables with export to XLS and PDF so that everyone is able to respond to client requests in a timely and efficient manner.
  • Best of all, you own and control your client, trading, and reporting data. Whether you build your own data mart or work with ours, or you apply your own analytics and insights or leverage ours, your team and your third-party services providers have the flexibility to meet your clients’ current and future needs.

HOW TO MAKE IT WORK FOR YOU

The industry cloud boom includes a growing list of success stories that solve their industry’s problems in a new way: Veeva for life sciences, Guidewire for insurance, and Vlocity (now Salesforce Industries) for telecommunications. And now Ridgeline is bringing industry cloud benefits to investment management, combining best-of-breed, fully-integrated SaaS with the outsourced value-added services partners you trust to conduct your day-to-day operational activities. This effectively does away with what had been an all-or-nothing outsourcing proposition. This approach can satisfy your most critical internal stakeholders in portfolio management, trading, and client engagement as well as your operations and accounting teams that want to outsource back office functions.

If you are an institutional or high-net worth investment management firm or an outsourced value-added services providers who wants to learn more about applying this best-of-both-worlds vision to your business, contact us at hello@ridgelineapps.com.

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