Two black swan events have unfolded in the space of just two years - sparking not just unprecedented market volatility but upsetting global supply chains in their wake. Consequentially, asset managers now need to re-think their technology outsourcing models if they are to insulate their businesses from extreme risks.
COVID-19 exposed a catalogue of structural deficiencies in financial institutions’ outsourcing models. In many instances, firms had delegated activities to outsourced providers operating in markets – such as India - which were badly hit by COVID-19. Strict lockdowns precluded staff from even going into the office while the lack of infrastructure (i.e. poor Internet connectivity, unreliable electricity, scarcity of laptops) meant that remote working simply was not viable to begin with.
Today, the brutal War between Ukraine and Russia – two countries which are home to a large number of the world’s technology developers and software engineers – is causing major problems for financial firms who have externalised technology support to both markets.
Unable to access technology engineers in Ukraine because of the instability or Russia owing to the sanctions, some asset managers and other buy-side firms have urgently attempted to port technology operations and development to other suppliers in different countries.
This comes as institutional investors and regulators increasingly scrutinise asset managers about their operational resilience and business continuity planning, especially as it relates to technology. Technology outages or business interruptions can have a serious impact on firm-wide processes, potentially even affecting investment decision-making or contributing to operational errors.
The UK’s Financial Conduct Authority (FCA) has been especially outspoken about asset managers and their outsourcing arrangements as it relates to third party IT vendors, amid mounting concerns that a failure at a key technology supplier (e.g. a cloud provider) could have adverse consequences for the industry.
So what should asset managers be looking for from their technology vendors?
Aside from a quality service and a deep pool of technology talent, operational resilience is absolutely critical following COVID-19 and the Ukraine War. A firm which is heavily concentrated in a single market could be badly exposed if problems emerge in that particular jurisdiction.
As such, asset managers are awarding more mandates to technology providers whose operations are spread out more globally. Should there be instability in one market, operations can simply be shifted to another country with little disruption or downtime. This multi-market outsourcing model is expected to become the norm moving forward.
Alternatively, other firms are near-shoring or onshoring technology support so as to mitigate the risk of disruption by gaining better oversight and control of their supply chains. While this was already happening to an extent prior to COVID-19, the pandemic and the Ukraine War has certainly accelerated the trend.
With regulators and investors closely examining firms’ outsourcing practices, asset managers need to demonstrate that they have excellent business continuity plans in place. While many firms have made major improvements around operational resilience since COVID-19 struck, the ongoing conflict in Ukraine has reinforced how important it is to work with technology providers who have best in class contingency measures in place. Such protections will be vital when the next Black Swan event – whatever that may be - strikes.