Some people say that everything in life involves a trade-off: You have to give up something to gain something. But in every deal a few things are off the table.
When executives at New York-based WestLB Securities -- a registered broker-dealer and member of the NASD and SIPC that provides securities, trading, brokerage and advisory services for its parent company, Germany's WestLB AG, in the U.S. -- started looking for an outsourcing partner to handle back-office functions such as clearing and custody, they felt that any arrangement must not entail the firm giving up its self-clearing status. "Instead of going fully disclosed and under a correspondent relationship with another broker-dealer, we wanted to maintain our identity in the marketplace," says Eugene Chan, head of operations in New York for the firm.
To the layman, "identity" may sound like a synonym for branding, something emphasized mainly by marketing executives and salespeople. But for broker-dealers, it has a more concrete meaning. According to Chan, self-clearing broker-dealers have what is called "dealer time" -- an extra 15 minutes of clearing time.
"Losing [clearing time] by entering a correspondent relationship would adversely affect the front office and the way they perform and make money," Chan explains. "We didn't want to do that, so we wanted to maintain our full memberships to all the clearers and keep all the advantages of having dealer time." Those memberships include arrangements with the Depository Trust Company (DTC), a subsidiary of the Depository Trust & Clearing Corp., and Fedwire.
New York-based ADP Clearing and Outsourcing Services, Chan says, offered the firm an arrangement in which it could outsource the functions it wanted while still self-clearing.
Genesis of a Deal
In March 2006, WestLB approached ADP, which at that time had been its provider of back-office technology on a service-bureau basis for more than five years, according to Chan. But the fact that the two maintained a long-standing relationship did not mean ADP had the outsourcing contract in the bag, he adds, noting that WestLB conducted a formal request for proposal process with a number of the large broker-dealer players on Wall Street.
While cost obviously played a role in the deal, Chan says, it was not the most important consideration. Rather, the determining factor was achieving a more-efficient back office, a goal bolstered by ADP's expertise in the functions it was taking over, he relates. "[We] can leverage off ADP's resources, and they have a bigger bucket of resources than we would have," Chan explains.
The outsourcing transfer was completed in December, approximately 60 days after the contract was signed, according to Mike Alexander, COO with ADP Clearing and Outsourcing. Today, WestLB also uses ADP's Gloss for international trade processing, and Impact and Brokerage Processing Services (BPS) for its North American fixed income and equities processing, respectively. In addition, ADP distributes WestLB's confirmations, statements and prospectuses.
As with most outsourcing arrangements, a number of WestLB employees (both the firm and ADP decline to give the exact number) became employees of the vendor at the time of the deal. Alexander says ADP prefers to take on some staff in these deals, as they bring expertise of the firm's specific workflow with them, often resulting in a smoother transition. Those deals that feature takeover of a more-unique workflow can bring with them a larger number of employees, while assuming responsibility for a more vanilla procedure will usually require ADP taking on fewer workers, he adds.
"If we can keep some degree of their staff, then they feel good about it because those people know their culture," Alexander says. "We feel good about it for the same reasons."
Currently, Alexander adds, three Service Bureau clients outsource back-office functions to ADP and a fourth is signed. Alexander notes that while the arrangement is not suited only for existing Service Bureau clients, a firm that is using another technology platform -- either proprietary or that of a competitor -- would have to move onto the ADP systems. "The model is built to run on the ADP technology using the ADP operations staff," he says.
Making the Transition
While outsourcing, for some, may sound like off-loading in-house inefficiencies, leaving the mess for another may cost more in the long run. Experienced outsourcers and outsourcing providers both agree that transferring an inefficient or poorly documented workflow doesn't do anyone any good.
"The most important part of doing a project such as this is to analyze the workforce that you have and the cost that it takes for your workforce to be in line with expectations," advises WestLB's Chan. "One of our biggest questions was: 'What are we?' We're a bank, and as a bank you actually have to create revenue." By outsourcing back-office functions in the ADP deal, Chan says, the bank is better able to focus on that core mission.
ADP's Alexander stresses that well-documented procedures and ample access to the executive suite facilitate a smooth outsourcing transition process. "The more metrics they have in place, the easier it is," he says.
Alexander adds that it's important for firms to determine their business objectives, including looking at costs and the drivers of those costs "so that they can compare apples to apples." But, he continues, firms also have to look at how outsourcing might help grow core businesses. "It's about more than just cost savings," Alexander says. "It's about the kinds of capabilities you are getting, the kinds of growth and cultural fit." He advises that firms make sure that their outsourcing provider has similar views on risk mitigation, flexibility and innovation, among other factors.
For those that can't get comfortable with the concept of outsourcing and the perceived loss of control, Alexander offers comfort. "The clients still drive the decisions and they supervise us and dictate what gets done," he says. "They are doing the same things today that they did yesterday -- they just have our hands being the hands that are performing the work." <<<
A Few Common Clearing Service Providers
The Depository Trust Company