Succeeding in the New Investment Operations Dynamic: 5 Questions to Ask Your Service Provider

Investment management firms are dealing with new pressure points every day. These pressure points – increasing fee compression, evolving and uncertain regulation and new products and distribution channels – are prompting firms to consider outsourcing all or part of their operations functions. But while many investment management firms recognize that the benefits from external support, few know how to evaluate the potential partners that can help them.

It’s easy to understand why.

The role of outsourcers or technology providers is still relatively new, and “firms are only beginning to realize the opportunity in outsourcing more complex processes.”[i] Therefore, many managers aren’t familiar with the broader list of characteristics that makes a service provider a partner for success – it’s more than a balance sheet conversation. Cost-cutting may be a primary motivator for firms to work with a third party, but it isn’t the only factor. And it shouldn’t be the only topic asked about during the evaluation process. For investment management firms evaluating new providers – or outsourcing for the first time – below are five questions to ask to make sure you find the right partner.

1. Do they take a consultative approach to understanding our specific business needs?

It’s not enough for providers to treat the evaluation process as a simple checklist, only responding to the prompts as written. Investment management firms should look for providers who take on an advisory role, even before signing the contract. That means both responding to clearly identified needs and also taking a proactive approach in identifying potential new challenges, advantages or risks not covered by the statement of requirements. Any provider that thinks they know exactly what you need right off the bat doesn’t know you very well. Rather, you need a provider that immerses themselves in your business and works with you to determine how their services can be tailored to fit your exact needs.

2. Are they proven subject matter experts with the ability to innovate?

The best operations providers are also visionaries when it comes to the industry. They have their finger on the pulse of current trends and are able to speak publicly – through their own channels or others – about how they shape the environment. Investment management firms should ask about the “innovation strategy” of potential partners, as defined by Harvard Business Review[ii]. Companies with a track record and plan for consistent innovation are more likely to improve their service offering over time, which means that you’re investing in a dynamic partner who will evolve as your business evolves.

3. Do they have a comprehensive understanding of risk and plans to mitigate it?

Because of constantly changing regulations and the increasing impact of operational errors, more than half of U.S. investment managers identify risk management as the top priority of their operations systems[iii]. A partner should have a robust approach to risk mitigation that aligns with your firm’s internal standards. Nowhere is this more important than during the conversion process. Firms should ensure that their preferred partner has a road map of specific steps in place to limit risk during and after the conversion process.

4. Do they have a quantifiable track record of success in helping firms achieve their operations goals?

It’s one thing to tout success, but it takes a lot more to prove it and have clients validate it. Investment management firms should ask for empirical data – growth in assets, clients, asset strategies, etc. – throughout the evaluation process that proves the success of operations providers. Ask them to provide references of current clients that can be contacted to get a true sense of how their relationships generally work. To go the extra mile, ask for references from former clients so you can understand what didn’t work for them and ask how they plan to make sure those issues don’t come up in the future.

 5. Are they a culture and a personality fit?

Research dating back to 1975 has already proven that culture fit matters when it comes to employer-employee relationships. Individuals across the board performed better at, and felt more loyal to, companies that matched their personality[iv]. The relationships between investment management firms and their providers are no different. They are close-knit and typically long-term engagements, so firms need to evaluate whether the potential partner has a personality and values that align with their own. A true partner recognizes and affirms the magnitude of this relationship and operates with the understanding that your reputation is their reputation.

Portions of this article were featured in the March 2017 issue of Fund Technology.

[i] "Managing complexity and change in a new landscape" EY, 2014

[ii] "You Need an Innovation Strategy" Harvard Business Review, 2015

[iii] "Managing complexity and change in a new landscape" EY, 2014

[iv] "Consequences of individuals' fit at work: a meta-analysis of person-job, person-organization, person-group, and person-supervisor fit" Personnel Psychology, 2005