The pressure to cut costs is prompting more investment firms to consider outsourcing tasks as an alternative to doing them in-house. But many firms are looking beyond traditional outsourcing arrangements. While investment management firms commonly turn to a vendor to help them with tasks like building software analytics or managing their back-office technologies, business process outsourcing - in which investment firms turn to an outsourcing services provider to manage a job function normally handled in-house - is garnering wider attention on Wall Street.
"All firms outsource [business processes] to some extent," says Gene Kim, a senior analyst at the research firm Financial Insights. A recent study by Financial Insights found that 75 percent of investments firms use some form of outsourcing. But it's a small portion of their spending - less than 10 percent of their total IT budgets.
A study by KPMG notes that outsourcing isn't expanding as quickly as the publicity surrounding it might suggest. Still, it predicts greater outsourcing to come. Twenty-five percent of the 300 global investment managers surveyed say that outsourcing has allowed their firms to reduce costs and make costs more variable. An equal number of respondents expect to use outsourcing in the next two years to achieve similar results.
The study further found four categories in which investment managers plan to outsource: marketing, distribution, investment and administration (see table at right). "Cost is certainly one reason," says James Loewen, a partner in the Canadian investment funds practice at KPMG. "It's a question of doing business versus running the business - managers realize that they can only focus so much on running the business."
But cost savings aren't the only advantage to business process outsourcing, says Joe Gawronski, COO of Rosenblatt Securities in New York. BPO can also offer instant access to expertise, he says, part of the reason it has found a home at Rosenblatt, which outsources human resources functions, including hiring and the maintaining of W2 forms, among other processes. Rosenblatt's HR outsourcer, ADP, also offers special rates on health insurance, provides administration of 401(k) plans and customizes an employee handbook.
Rosenblatt also relies on BPO providers for storage and compliance functions. For e-mail and instant messaging archiving and retrieval, the company uses a system from Five Points and IM Logic, and for certain compliance tasks, such as trade data archiving, it uses an optical storage system from its order-management systems provider. In each case, the vendor delivers an ongoing service component, such as storing the data off-site.
Gawronski suggests that smaller firms need to focus on trading strategies and clients, not compliance systems. "We're a trading firm, not a software firm. By outsourcing, we get a cost-effective solution that doesn't burden our own staff," he says.
A third area in which Rosenblatt outsources business processes is networking and connectivity. Like any brokerage firm, Rosenblatt needs to reach certain destinations, whether it's the New York Stock Exchange or Archipelago or Instinet. Rather than build and maintain those connections, it uses Transaction Network Services of Reston, Va., for its connectivity. Connectivity, Gawronski says, "is not the business we're in."
Rosenblatt didn't go as far in outsourcing billing and reporting. It outsourced development of its system to a company that customized an off-the-shelf product, which it hosts and for which it provides the ongoing support. "That's the business they're in," he says. "I get the benefit of learning from that experience and expertise."