09.23.2022

Trade-Desk Outsourcing Providers Prepare for Boom

09.23.2022
Trade-Desk Outsourcing Providers Prepare for Boom

As Wall Street contemplates layoffs and hiring freezes, the outsourcing industry is preparing for a boom, according to Anup Kumar, EVP, Head of Global Services at Linedata.

The outsourcing industry has matured since the Covid-19 pandemic began as firms have learned to operate remotely, Kumar said.

“Outsourcing is no longer a taboo word that needs to be masked as operating model redesign,” he told Traders Magazine.

According to Kumar, clients want breadth and depth expertise, predictability and consistency of service, transparency of metrics and reporting, on-demand scalability and automation – “all delivered at an optimal cost”.

He thinks that the talent shortage, investor and regulator demands, the macro environment, private market growth and underlying complexities have all created a “perfect storm that funds need to navigate”.

He said that outsourcing is an imperative for funds of all size, stages, and strategies. “It is much harder in the current macro environment for funds to support the middle- and back-office operations all internally and assume the entire execution risk,” he commented.

Outsourcing provides optionality for firms to tap into the specialized resources and technologies of service providers, while they can continue to focus on what investors and regulators are demanding around investment returns, investor reporting, regulatory compliance and cybersecurity, Kumar said.

“The private markets boom is a tail wind as well given private credit firms take pride in bespoke credit arrangements, which is great for the front office, but creates significant stress in the back-office to support those arrangements,” he added.

According to Kumar, the industry is expected to grow over the next several years aided by three dominant trends:

  1. The macro environment is unpredictable and challenging as we stare into an imminent recession combined with inflationary pressures, uncertainty around Ukraine and continued supply chain disruptions. The markets are likely to be choppy and will put enormous pressure on investment returns. Investment firms will have their back against the walls and will need to do cost transformation and optimize expenses.
  2. Private markets continue to grow explosively in search of higher investment returns, and the bespoke nature of the industry puts significant stress on the back-office. Outsourcing needs to be a key component of the operating model to sustain the growth and deal with the underlying complexity of operations.
  3. Talent is at a huge premium particularly for specialized roles like non-standard loans, valuations of illiquid assets or complex asset classes like crypto. These skills are hard for funds to attract and harder to retain. While outsourcing providers are facing similar challenges, they have mastered the art of recruiting people with adjacent skills and leveraging the training engine.

Kumar argued that technology is driving digital transformation and automation for sophisticated service providers and enabling funds to scale rapidly and focus on the core business of driving investment performance.

Funds can grow their business without linearly adding headcount while also improving underlying controls and reporting and insights that investors and regulators are demanding, he said.

“For instance, the flow of data between the borrowers and a private credit firm is extremely manual, bespoke and prone to errors – making the task of portfolio monitoring a lot more challenging,” Kumar said.

He added that progressive service providers are leveraging AI to automate the extraction of data and generating meaningful insights.

“Strategic outsourcing enables firms to focus on growth and key stakeholders (investors and regulators) while an effective partnership with the service provider supports growth, reporting and control objectives,” he stressed.

Kumar believes that choosing the right partner, the right engagement construct and governance is “critical to success” of the outsourcing initiative.

A partner needs to bring in proven expertise, transformation capabilities, depth of talent and methodologies to bear to deliver the right outsourcing outcomes, he said.

Kumar added that incorrect partner selection could turn out to be very expensive to unwind and can create regulatory exposures, damage investor confidence, and create distractions and expenses that no one wants.

“Equally, you want the partner to bring in flexibility and operate as an extension of your organization. Unlike the simplistic asset classes like long, short equity that lends itself to a factory model, firms need a much more higher touch approach to execution and a partnership construct and governance that they are comfortable with – we call that co-sourcing,” he said.

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