Sparked by a combination of growing institutional investor demands, increased regulatory reporting and escalating operational complexity, fund managers are having to make continuous improvements to their in-house technology. As business costs continue to expand, some managers are assessing whether outsourcing technology services can solve problems not faced by competitors who already outsource.
Investing into in-house technology has never been without its challenges. Internal systems are often costly, as the pace of technology change requires fund managers to make regular investments into upgrades and new infrastructure; the only way to ensure keeping up to speed with the latest developments and that their operations are fully scalable. Additionally, firms choosing in-house solutions need to continuously recalibrate their technology and reporting processes in tandem with evolving regulatory requirements, which further adds to their costs, time and investment in people. Infrastructure built internally can often be wholly reliant on just a handful of key personnel which exposes firms to operational business risks.
Recruiting digital talent can be a cumbersome process too. Although several big technology companies have been reducing headcount, demand for top digital talent is very high. Large financial institutions (i.e. banks) and AI (artificial intelligence) start-ups are hiring technologists in their droves, often on remuneration packages which small or mid-sized asset managers cannot compete with. Even if managers do attract the right people, training can be costly and time consuming.
Conscious of these issues, managers who have been using in-house tech solutions are considering the merits of outsourcing certain technology functions. Strategic outsourcing, probably most significantly, means managers no longer need to keep scaling up their technology infrastructure as their outsourced providers will do the bulk of the heavy lifting for them. Consequentially, this allows managers to allocate resources to revenue generating areas of the business. Outsourcing also helps negate key person risk as outside providers will have a deeper pool of human capital, meaning staff turnover has much less of an impact on fund manager operations. A partnership approach can be formed where both the firm and provider are part of the technology conversation, meaning regulatory and investor requirements are looked after effectively.
Managers do need to take a pragmatic approach towards outsourcing critical technology processes. As such, thorough due diligence on external vendors is absolutely integral to internal governance and risk. At a time when cyber crime is becoming increasingly ubiquitous and regulators are focusing more on operational resilience, managers need to ensure their outsourced providers adopt best practices in both of these areas. With ESG (environmental, social, governance) becoming a core staple of modern day fund management, it is equally vital that managers check that providers’ values are aligned with their own.
Investment managers are facing some challenging headwinds, which is why many are starting to embrace technology outsourcing. Although outsourcing can help firms realise their true potential, it is essential they work with only the best providers.
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