TCW, a Los Angeles-based $85 billion asset-management firm, recently had its entire back office converted onto systems run by Mellon Global Securities Services (GSS).
The deal, involving the TCW Group's subsidiaries: Trust Company of the West, TCW Asset Management Company and TCW Investment Management Company, involves transferring 120 TCW-operations professionals to Mellon, where they will continue to be involved with the TCW account while enhancing Mellon's ability to take on new outsourcing clients.
Mellon GSS now supports all of TCW's investment operations, including trade communication, reconciliation, valuation services and client reporting. In addition, Russell/Mellon Analytical Services provides performance measurement and attribution services across all TCW client accounts.
TCW Group's Chief Operating Officer and Executive Vice President William Sonnenborn says that outsourcing its back office will allow TCW to focus on managing money, rather than technology.
"Nothing at TCW was broken," says Sonnenborn. "We saw GSTPA and T+1 (coming) and, at the same time, were trying to focus on portfolio-management capabilities, in terms of how to get the best performance. Those two focuses dilute each other."
So, TCW hit the market looking for a service provider that could meet its needs. After looking into outsourcing deals offered by State Street, Bank of New York and Mellon, TCW narrowed the search down to BONY and Mellon.
"BONY had robust technology but they were in the process of taking on J.P. Morgan," says Sonnenborn. "We were behind that and we didn't know what that meant."
Pamela Brewster, a research analyst with Celent Communications says that as the industry-imposed deadline of reaching T+1 by June of 2005 nears, firms will increasingly look to outsourcing providers for help. Unfortunately, their SOS calls may not be answered.
"As of now, a good many investment mangers have done nothing for T+1. They will go kicking and screaming into it," she says. "I think that you will see an incredible wave in 2003-2004 as they rush to do something but, at that time, they may be lost because providers only have so much capacity."
Though BONY had the technology TCW was looking for, the custodian did not have the capacity to absorb two major outsourcing deals at the same time, according to Sonnenborn.
So, he says, TCW decided to ink a deal with Mellon, with some of that ink requiring Mellon to either upgrade its proprietary technology (a batch-oriented mainframe-based accounting system) or hook up with a third-party provider.
"We basically had veto rights as to whether what they came up with met the criteria in the service agreement," says Sonnenborn.
Mellon did one better, acquiring Eagle Investment Systems, and with it, Eagle's Star (portfolio accounting) and Pace (data hub and portfolio management) systems.
Sonnenborn adds that TCW's daily-operating costs are "slightly lower" than before but, more importantly, his firm no longer has to worry about keeping up with developments in back-office technology. "We outsourced the whole technology race," he says.
Sonnenborn says that the TCW outsourcing arrangement is the most comprehensive of its kind to date, so there was no defined model of success to follow. "(Outsourcing deals) will soon be a science," says Sonnenborn, "but, for us, it was an art."