In our first article (link here) of this 3 part series, we discussed how Asset Owners in MENA are seeking to advance their operating models to better support the Front Office in their alpha generating activities. A great enabler of this is creating a Middle Office that can provide accurate and timely investment data to the front office, improved support, optimized costs and creation of a scalable operating model.
In this article, we will build upon on the first article and discuss the opportunity presented by the evolving landscape of Asset Servicers in the region and the potential for Asset Owners to benefit from outsourcing activities to these firms.
The Middle East region has emerged as a pivotal area for growth in the Investment Management industry as well as boasting almost half of the top 20 Sovereign Wealth Funds by size. The ambitious regional plans combined with significant Sovereign Wealth Assets present new opportunities and challenges to current operating models. To match the ambition, operating models are adapting to deliver at scale using new technology providers, cloud data platforms and increased outsourcing and strategic partnerships.
A decade of significant change and growth in the Investment Management Industry
Over the last decade, the global Investment Management industry has seen a number of drivers create the need for significant transformation. Increasing AUMs, diversification of assets, focus on technology and advanced data solutions, has left many organizations with a gap between their current operating model and the capabilities required to deliver on the organization’s strategy. These drivers have led to Investment Management firms increasingly turning to Asset Servicers for outsourcing needs predominantly across the Back Office (Fund Accounting, Custody, Passive Currency Overlay & FX) and Middle Office (including Trade Support, Asset Servicing, Client Reporting, Data Warehousing, Cash Management). Middle East Asset Owners ambitions and future roadmaps, could see them follow a similar path (many already have) and lead to cross-functional, multi-product, global partnerships with Asset Servicers. The key themes that have been identified as part of these outsourcing arrangements are outlined below:
Driving Scalability through Bundling of Services: Globally, Asset Managers are looking to leverage the existing technology and data solutions, streamlined processes and integrated solutions that are available from Asset Servicers. They are extending their operating models further beyond the traditional Custody functions and into the Middle and Front Office, with the aim of a fully integrated outsourcing model that enhances value across the entire investment lifecycle. This ultimately allows Investment teams to focus on Alpha generation rather than sourcing data or creating reports.
Traditional Strategic Partnerships & Beyond: A significant percentage of Asset Managers globally have three or more functions within their operating model outsourced to a single Asset Servicer, simplifying operations, enhancing efficiency and better oversight. In addition, the evolving landscape has witnessed Asset Servicers forging new strategic partnerships with FinTechs, Data specialists, and software developers/vendors. These alliances are instrumental in driving innovation, differentiating services, and accelerating the development of new solutions, ensuring that the industry remains dynamic and responsive. Asset Managers are increasingly using their relationships with Asset Servicers to leverage these innovative solutions and achieve their Target Outsourcing Model.
The Middle East remains a growth target
As the Middle East continues to grow, the region benefits from not having undergone the decades of iterative change that other regions have experienced. This means that any future transformation will not have to unpick complex legacy technology architecture and fragmented operating models (i.e. multiple outsourcing partners). This leaves a window of opportunity for the MENA region to design a future-proofed Target Operating Model that looks at the entire investments value chain to meet its growth ambitions, whilst recognizing the local nuances.
A key aspect of this transformation will be to consider an “outsourced” Target Operating Model that looks beyond Custody, which is the current focus in the region. The foundation of outsourcing in the Middle and Back Office enables a stable, and scalable platform upon which the organization can scale. Most importantly, it allows for access to newer services in the Data and Reporting space to be used. With IBOR (Investment Book of Record) and ABOR (Accounting Book of Record) fully outsourced and centralized, the entry to these newer services becomes a natural progression. Performance, Attribution and Client Reporting which are all “data hungry” and “tech-heavy” are based on such data sets. These latter points are addressed by developments into the Data Services as Asset Servicers move away from BPO-only offerings and start to offer technology and a managed services today.
However, delivering this will require addressing and navigating local nuances such as: concerns regarding potential loss of control through partnerships, stringent data privacy requirements that could limit the use of global technology solutions, and a desire to maintain service delivery locally and grow local talent.
We expect Asset Servicers in the region to play a strategic role in this transformation by leveraging their global expertise and their commitment to Middle East on the ground. However, in order to be successful, Asset Owners will have to ensure that certain success factors are in place:
- Establish clear, long-term strategic objectives for the next 5-10 years, including product ambitions
- Define a strategic Front to Back Target Operating Model to identify clearly the boundaries of any service provision by third parties
- Consider the Data Strategy required to deliver the long-term strategic objectives and enable the firm’s vision
- Define a clear Third-Party oversight model including the Governance Framework and KPI/SLAs expected by the business
- Establish desired commercial terms up front, based on the strategic long-term requirements
These success factors will allow Asset Owners in the region to initiate their transformation with a clear strategy. On the other hand, Asset Servicers will have to demonstrate they can deliver a bundle of services that address the local challenges and concerns. Overall, we expect that moving to an “outsourced” Target Operating Model with strong partners who are present in the region will be an enabler to achieve long-term scalable growth by: reducing operational risk, reducing architectural complexity, building strategic relationships to deliver non-core services, and enable an enterprise model that delivers for the long-term.
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About the Authors
Jamilla Ekedi-Tanenang
Senior Manager
Jamilla is a Senior Manager at Alpha with experience across several Asset Management projects, with a focus on Operations & Outsourcing. She specialises in operating model design, provider selection and implementation cross Middle and Back Office, with a particular focus on Transfer Agency.
Fernando Sanchez Molina
Senior Manager
Fernando Sanchez-Molina is a Senior Manager at Alpha with 10 years of experience in the Asset Management sector. Fernando has significant experience in designing operating models, selecting technologies and implementing end-state solutions for clients. Prior to joining Alpha, Fernando held change management and strategy positions at abrdn, including Chief of Staff to the asset management business CEO.
Ben Cordingley
Consultant
Ben is a Consultant at Alpha and has a strong background in enterprise platform transformations, TOM reviews and vendor assessments working across both Alpha’s Investments and Operations practices. He has worked with a variety of clients in the investment management industry including large US asset managers and various Middle East Asset Owners.