Implementing an Oversight Model for Outsourced Middle and Back Offices

Sarah Simmonds

Outsourcing has gone through a myriad of trends over the last ten years. From focus on back office, then to middle office outsourcing, and to consolidation of providers – what has become apparent is the need for a strong, risk-based oversight model. This has become ever more important over the last two years where ways of working have changed across third party providers as well as asset managers. There are multiple aspects of an oversight model which need to be considered, three of which will be explored in more detail in this article:

  • People and Culture
  • Evidencing and Key Performance Indicators
  • Continuous Monitoring and Evaluation

People and Culture

Whilst people and culture need to be at the forefront of a COO’s mind continuously, there are certain points in an outsourcing lifecycle which should be in particular focus.

If outsourcing for the very first time, employees can be defensive about work completed, and worried about job security. To add to this, there is a need for people to switch from thinking about the ‘doing’ to the ‘reviewing’, which can be a hard transition. There can also be temptation, whether through primary or secondary outsourcing, to move from a service provider’s standard operating model to a client-specific operating model, often leading to increased operational risk and issues in the long term.

There are a number of actions which can help to mitigate these potential issues, of which some examples are below:

  • Outlining project guidelines at the beginning which are agreed by the asset manager – this should include the use of the third parties’ standard operating model unless there are exceptional circumstances
  • Involvement of the asset manager’s operations teams from the requirements gathering phase – this can put pressure on an asset manager’s operations teams in the short-term as there is still the need to complete current BAU processes at the same time as implementing change. However, by socialising and involving the BAU operations teams from the beginning, knowledge transfer is more efficient and thorough. Whilst it can also seem efficient to employ contractors to support with the transition, it is best practice to backfill BAU staff so they can work on the project whilst contractors complete BAU tasks – this will maintain the knowledge transfer to staff who will be conducting the oversight in the long run.

Evidencing and Key Performance Indicators

A Service Level Agreement (SLA) framework should encompass Key Performance Indicators (KPIs), measured processes and a service statement. The framework requires approval at the most senior level from both parties to ensure those ultimately responsible for performance and the relationship can be held accountable. An optimal SLA framework will need to be demonstrably for Senior Management and local Regulators to know, with confidence, that both Business and Regulatory standards are being met, whilst KPIs enable further evidencing of the service provided, and can highlight critical processes.

KPIs are made up of a small subset of business-critical service metrics related to the third party deliverables, taken across all process areas covered in the SLA, often used for Management Information (MI). These KPIs must be measurable, tailored (a mix of standard, industry-wide metrics and company specific metrics works the best) and controllable. Additionally, a failure to meet an agreed KPI continually will often result in ‘Service Credits’ which can result in financial penalties for the third party. Although some managers believe service credits create the wrong culture/relationship, there needs to be a “so what” when KPIs are regularly missed.

Continuous Monitoring and Governance

There are three key areas of Best Practice for an asset manager to consider, and which are expected by the regulator to demonstrate that the asset manager is able to provide adequate check and challenge to a third party, whilst also able to identify and escalate issues in a timely fashion.

  • Process – documentation must include thorough step-by-step definition of business processes, activities, and roles and responsibilities between the asset manager and the third party. This documentation should be supported by an automated workflow tool. Best Practice is for an asset manager to have live access to the workflow tool, so they are able to monitor activity real-time
  • Monitoring – MI should flow through bespoke dashboards, created to highlight historical areas where issues have arisen, but also key risks which the asset manager has identified. Dashboards should be easily filtered, and clearly highlight areas of concern and where KPIs or SLAs have been missed
  • Governance – Governance forums should look to review the KPIs and SLAs regularly to ensure they are adequate given risk profile of both organisations, but also to maintain relevance through an ever-changing environment; however care must be taken to document the frequency of review (two-three reviews over five years, for example) in the contract between asset manager and third party provider. Governance meetings should be scheduled at a frequency which not only suits both the asset manager and third party, but also the nature of events and issues in recent weeks / months. More frequent governance forums may be needed when there has been an increase in severity / occurrence of events.

Implementing best practice across People and Culture, Evidencing and KPIs, and Continuous Monitoring should result in an oversight model which is able to identify issues early, and can determine clear actions whilst maintaining a harmonious working environment across the third party and asset manager. An oversight relationship where the two parties jointly agree to SLAs and KPIs and are transparent with one another in their oversight model is one which will be the most successful in the long run.

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About the Author

Sarah Simmonds
Senior Manager

Sarah is a Senior Manager at Alpha leading work across Alpha’s Operations practice. She has extensive experience leading numerous Operations Transformation projects. Her experience means she has a deep understanding of key risks and best practices in delivering large Operations transformations and ensuring transformation is embedded with controls in place to create a sustainable relationship between Asset Managers and Third Parties.