Getting to a Global Outsourced Middle Office

An increasing number of investment firms are adopting a global, outsourced Middle Office model, with c. 60% of respondents in the 2023 Alpha FMC Middle Office survey outsourcing some, or all of its Middle Office functions. Every outsourcing relationship commences with good intentions to standardize processes and increase scalability, however, Alpha’s experience shows that there are cultural and practical challenges that must be overcome to avoid common pitfalls, from which inefficiencies re-occur or are simply moved elsewhere.

The change from local / regional operating models to a global one is a massive cultural challenge, requiring significant effort and supported by an organizational design that emphasizes global over local:

1. Place oversight at the forefront – The starting point for a successful global outsourced Middle Office is to appreciate the nuances of effective oversight using a systematic application of controls for both the investment manager and the service provider. The scope of responsibilities must be explicitly defined and explained to achieve understanding.
2. Create buy-in for the global model – Benefits of the global approach must be actively promoted in a transparent engagement program to avoid unsettling or alienating staff. Skill gaps need to be identified and adequate training provided to help with transition.
3. Engage your “superstars” early – Some team members will be invaluable for the successful implementation and operation of the new global model and becoming a champion of the global model. This is achieved most effectively by involving them in the design of the new model during the implementation project.
4. Foster global relationships – Relationships need to be created and strengthened across local / regional teams to foster trust and collaboration. This can only happen by investing in time and effort to bring practitioners together, ideally face-to-face.

Your firm must be set up to support the outsource model and not just to operate new processes or talk about a global culture:

1. Global processes – Local teams must be incentivized to work and act globally rather than locally, including in the way success is measured and rewarded.
2. Global handovers – Local teams must support actions originating beyond their ‘home’ location without prejudice, and handovers must be clearly identified and documented.
3. Clear organizational responsibilities – It is critical to avoid misconceptions on what responsibilities are performed in-house versus outsourced. Clear documentation and communication of responsibilities help prevent finger-pointing or confusion post-adoption across both the investment manager and the service provider.
4. Change governance – A transparent and fair change process that is location agnostic is paramount for a successful global outsourced model, ensuring that “small” regions do not feel overlooked over “big” regions to minimize bespoke, end-user solutions without considerations to the global model.

There will always be activities that cannot or should not be globalized for operational, relational or efficiency requirements. The difficulty is distinguishing what must remain local for valid reasons rather than a reversion to the familiarity and comfort of local approaches.

1. Establish a Design Authority – Any deviation from the global standard must be done with deliberate and careful consideration to ensure that requests for localization are assessed transparently and fairly within the global framework. Conversely, local solutions should be evolved to be applied globally when beneficial.
2. Don’t lose focus on local relationships – The Middle Office should operate with Global approaches, while being cognizant of local relationships, e.g. having local Middle Office and Dealing teams working closely to resolve problematic orders speedily.
3. Accommodate local language use – Clear guidance should be set for the use of local languages. A global business language is important but there are sensitivities and occasions where a local language, or local phrasing / terminology, is more appropriate when dealing with certain regulators or clients.