Service providers can be strong partners in helping fund managers to become more efficient. Renaud Breyer and John Beavers of EY Luxembourg outline key elements in making relationships work.
Finance departments of alternative investment fund managers are currently in an operational turmoil due to ever increasing regulatory and framework requirements from regulators and industry bodies, such as Inrev, a real estate trade group. The new requirements significantly affect the quantity and quality of financial data to produce, while at the same time fund managers need to improve their cost ratios.
Historically, private equity and real estate platforms have grown very fast and focused on making deals. The rationalisation or automation of back office activities has not been a priority. However, many alternative platforms are now looking to outsource and/or streamline, and re-engineer their financial reporting process as well as reviewing any existing finance outsourcing strategy.
STRATEGY
Whether fund managers are considering outsourcing their finance function or looking to improve their existing outsourcing strategy, there are four key elements that should be considered to maximize the long-term benefits of outsourcing: establish clear objectives; select service providers; establish an operating model; and establish on-going relationship management.
Firstly, the act of outsourcing should have clear objectives, supported by a business case, which ultimately assists in achieving the company’s strategic objectives. The root causes for outsourcing remain relevant in current market conditions. Some of these causes are: cost savings; elimination of the need for future investments (for example, technology); reduction in the burden of staff management; and access to an international network of experts and more flexibility. New regulations, such as the Alternative Investment Fund Managers Directive, have forced managers to allocate more time and resources on risk and portfolio management and less on back office or “non-core” activities. Outsourcing allows fund managers to focus on its core activities.
Back office activities, such as computation of net asset values, consolidation, book-keeping, tax returns and corporate secretary activities can be considered as non-core and certainly more suitable for outsourcing.
For fund managers who are well organised, other activities could be outsourced such as asset valuations, support to budgeting and treasury management.
Secondly, to fulfil the objectives of outsourcing, the fund manager needs to identify and select one or more service providers, which will allow the goals and objectives of outsourcing to be achieved.
To do this, a clear understanding of the market for service providers is required. To evaluate potential service providers, fund managers should develop a detailed checklist of criteria that are required from a potential service provider.
In many cases, an outsourcing relationship is initiated without a proper evaluation of market alternatives, which can easily lead to higher costs and not achieving the objectives of outsourcing. Once the service provider has been selected, a careful and detailed service level agreement (SLA) should be drawn up.
The SLA should include Key Performance Indicators (KPIs), which define quantitative/qualitative benchmarks, such as on time delivery and accuracy of data provided, by which the fund manager and the service provider can identify areas of improvements.
Thirdly, once the service provider has been selected, fund managers need to clarify in detail the working relationship between the functions to be outsourced and those that remain in house. This is where technology can play a role.
Technology, such as data warehouses and workflow management tools can facilitate the daily collaboration between fund managers and service providers and allow these relationships to evolve from vendor-supplier arrangements to long-term partnerships that emphasise mutual benefits. Technology creates more inter-dependencies between vendors and suppliers and therefore it is important to clearly understand and implement the most appropriate technology solutions that eliminate communication barriers and deliver transparency into the relationship. Fourthly, the on-going relationship management between the fund manager and the service provider is fundamental for long-term success. As with any business relationship, communication and a common understanding of the business objectives and current business environment will allow both parties to succeed.
OBJECTIVES
Both parties should meet regularly to follow up on agreed upon KPIs, as defined in the service level agreement, and agree on changes and/or areas of improvements that need to be made. To encourage and facilitate this dialog, fund managers may request a recourse officer from the service provider who should ensure a sound relationship. There will always be some aspects of outsourcing arrangements that will be unpredictable and having a dedicated person will help facilitate the process.
OUTSOURCING CYCLE
Outsourcing can be viewed as a cycle, beginning with the decision process we described, followed by managing the contract, then evaluating results and finally re-examining the outsourcing contract, at which point you either renew the contract or select again from available alternatives.
Recently, some fund managers have moved to a new generation of outsourcing relationships with their service provider. This relationship is based on the service provider bringing added value by defining the way the reporting process should operate.
The added value lies on the expertise and innovations that can be brought in by the service provider and the ability of the service provider to support the fund platform in improving its reporting process. The service provider is, therefore, seen as a strong partner in helping the fund manager to become more efficient and enabling the company to focus more on core activities.
Renaud Breyer is an executive director and works within financial advisory, and John Beavers is an executive director working within accounting, compliance and reporting, at EY Luxembourg.
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