A year ago, outsourcing was spoken of only in whispers. With a stigma of sending jobs offshore, and possibly sacrificing data security, it was nearly impossible to get data managers to examine the practice. In the past year, however, outsourcing has made great strides. As Tim Lind, a senior analyst in the investment-management practice at TowerGroup, points out, "Outsourcing is so hot it has become a discussion point in the presidential election."
While many securities firms are realizing the benefits of redistributing many non-competitive-advantage processes elsewhere, there still remain areas where outsourcing is not quite ready for prime time. Little by little, though, the strategy is gaining traction in data management.
"Outsourcing is still relatively unproven as a concept, so a lot of firms will dip their toes in the water and outsource pieces of functionality or processes," explains Jim McDade, executive director of equity operations at UBS Securities. McDade adds that cost is one driving factor in determining when - and what - to outsource. He contests, however, that cutting costs with outsourcing is about cutting head count. Instead, he says, "It's often about redeploying resources throughout an organization."
Under McDade's watch, UBS has outsourced much of its corporate-actions processing. It uses the Depository Clearing Corporations' Global Corporate Action (GCA) validation service. The service takes in industry market-data feeds from vendors, then scrubs and validates the data, and delivers it to UBS. The process, in McDade's opinion, was "not competitive in nature," and one faced by most firms on the Street, making it an ideal area to outsource.
McDade concedes that the undertaking had its drawbacks, as liability for the data ultimately falls to the firm. Using stringent service-level agreements, however, UBS contracted a deal with the DTC that ensured UBS' comfort. "As an early adopter of the service, we had a strong hand in determining service-level agreements and controls that the DTC needed to give us to consider their service," McDade says. For example, certain corporate-action events required the DTC to notify UBS well in advance of the action. "If the DTC couldn't commit to doing that, they would need to remunerate us. When engaging with an outsourcing provider, closeness shouldn't be just up to the point where you sign the contract."
David Paris, global head of information-management services at Deutsche Bank, agrees that a close relationship with an outsourcing partner is the key to success. "There's a number of different means to retain control, sensitivity and almost real-time knowledge of what is going on [at your partner], even though it may be far away," he says.
Deutsche Bank uses a Bangalore, India-based company called DSL Software for various reference-data business processes. After Deutsche Bank has done its "know-your-customer" research on its customer data, DSL is contracted to open accounts and set up cross-references to its customers' hierarchical relations. Although not entirely captive to Deutsche Bank, the vendor has evolved from a Deutsche Bank-owned subsidiary to a third party in the last five years, Paris explains, making it a trustworthy partner of the firm.
Paris points out that the firm maintains additional confidence in DSL by using "an end-to-end control tool that integrates [the partner] into the know-your-customer process and forces us through certain types of assurance steps before we can go on to the next stage."
Contrary to the belief that outsourcing partners lack the market expertise to operate business processes, Paris says that its Bangalore partner has proven its worth. "Their quality standards and cycle times are often better than we can do in-house," he says.