Outsourcing Investment Data Management: Experiences with the tendering process

This article by Bruce Russell, Director of Shoreline, was published in Vol. 14, No. 1, pp. 72–77, Journal of Securities Operations & Custody, Henry Stewart Publications.

This paper explains why Custodians have demonstrated a significant interest in offering Data as a Service (DAAS) to their Clients on the basis that they should be in a prime position to provide a compelling offer. Notwithstanding this, Custodians have not yet fully delivered to their potential, and we explore why this is the case and what some of the specific barriers are. Understanding these limitations, we then present the reader with a ‘checklist’ that they can use when considering
appointing Custodians for DAAS. The reader should expect to understand what current limitations exist with respect to Custodian DAAS and how they can assess these via a tendering process.

Over the past few years Custodians have placed significant focus on the development of a Data as a Service (DAAS) proposition to their buy-side clients. On the face of it, the rationale for this is clear. Investment Managers and Asset Owners are interested in uplifting their data management capability to deliver improved investment management outcomes or improved client experiences. By virtue of being the legal owner of investments, Custodians already have visibility over much of this data and being large global operations should have the requisite operational and technology capabilities to offer a compelling DAAS proposition. Unfortunately, we are yet to see this ambition fully transition into reality and in most cases investment organisations are continuing to pursue an ‘insource’ strategy for investment data management. Based on Shoreline’s experience in assisting clients design and implement uplifted investment data management capabilities, this paper explores some of the pitfalls we have observed and how these can be addressed through your tendering process for investment data management services.

Problem 1 — transitioning an internal capability into a service

Whilst Custodians have been managing investment data for many years, this has been in the context of fulfilling their custody and investment administration functions, and essentially represents a ‘by-product’ of these activities. Client data management strategies have matured with greater data security, data quality, data diversity, deeper data governance and investment of resources to overcome factors contributing to data disparity. The Custodians have recognised the growing challenges faced by Investment Managers and Asset Owners to manage the increasing complexities of investment data management and the need to keep pace with the changes. The shift for Custodians to meet these demands by extracting investment data management into a service for external clients is not straight forward and simply re-purposing an internal function as an external client facing service is often not possible nor adequate in the meeting the needs of Investment Managers and Asset Owners.

The common constraints of Custodians transitioning an internal capability into a service include:

  • Inability to change internal capabilities that are ‘hard wired’ and inflexible.
  • Lack of service delivery culture.
  • Inability to access required scale and expertise.

The result is that Custodians are often presenting internal capabilities as a service offering and do not fully understand the consequences of offering it as a 3rd party

Problem 2 — lack of agility and responsiveness

The investment data needs of investment organisations are dynamic and often requires new data to be sourced quickly or for changes to existing data to be made
on a near real-time basis. Custodians are intrinsically hard wired to provide scalable, repeatable processes and responding to rapid change is not a core component
of their capabilities and internal processes. Furthermore, insular bureaucracy and lack of change culture within the Custodian is often a material issue prohibiting their agility. Moreover, having a contract in place also gets in the way of accommodating changing priorities and the complex collaboration between multiple stakeholders necessary to achieve critical outcomes. Custodians are wary of making rapid changes that are perceived as disruptive as they are highly sensitive to the exposure to legal risk, etc.

In the context of offering DAAS, Custodians need to respond to the new expectations
and demands of clients for a dynamic, fast changing and agile DAAS, that is characteristically in contrast to traditional Custodian service models and capabilities.

Problem 3 — supporting non-operational data

The ever-evolving operating environment of Investment Managers and Asset Owners requires investment data to be used enterprise wide in more compelling ways.
Whilst custodians are natural owners of operational data, organisations also require other investment data sets to support their needs. This requires Custodian capability to source, master and distribute these data sets, with an increasing demand for unstructured data to be transformed. The main drawback is the existing capabilities from Custodians are not well suited to expanding demands from a client that is re-defining the scope of Custodian data management and requires different expertise, technology and processes to adapt to the changing needs of Investment Managers and Asset Owners.

Problem 4 — risk aversion and culture

Custodians are renowned for being a ‘safe pair of hands’ and attributes such as scale, risk aversion and a strong control culture are the attributes required for a successful Custodian. Whilst some of these attributes are also important to the delivery of DAAS, there are other key components required that are often not core Custodian competencies. These include:

  • A deep understanding of the investment management processes of the Client and how this translates into Investment Data needs. This will ensure the services delivered are ‘fit for purpose’ and support the overall investment management process of the Client.
  • The ability to adapt processes and controls to reflect that investment data is used for different purposes and thus will have different content, timeliness, frequency and quality needs. The Custodian should have a ‘multi pipeline’ delivery approach to enable customised delivery of data to meet specific needs. Risk management policies and practices should be adapted to reflect the nature of data delivered and the investment activities it supports.
  • A recognition that investment data will be used to inform investment decisions and accordingly is a ‘mission critical’ service. This requires an agile and responsive service model from the Custodian that is integrated into the overall investment management support model.
  • An appropriate and mutually agreed model between the Client and the Custodian to assign proportional liability that is commensurate to the risks and commercials of providing data services that contribute to investment decisions.

These requirements are often confronting to a Custodian and represent a significant departure to how services are traditionally delivered.

Problem 5 — offering a blend of managed and self-service
Custodians are used to delivering outsourced services whereby they provide a discrete set of services to the client that are well defined and the boundary between
insource and outsource is clear. They typically refrain from providing clients with access to technology as this blurs the lines of responsibility and the technology platforms used by custodians are not well suited for external client access, especially beyond read only. The appetite among clients for self-service functionalities is
increasing with the growing adoption of agile ways of working and greater need for transparency over data quality. Clients expect secure self-service portal functionality with a user interface enabling real-time data interaction as well as authorised privileged access to directly edit standard set of data.
A successful DAAS needs to provide a blend of service and technology as the client will need to use tools to interact directly with the data and the insource/outsource line is less binary. This requires new technology and a shift in mindset from Custodians on enabling client access to platforms.

To address the key problems defined above, in running a tendering process for DAAS, investment organisations should consider the checklist shown in Figure 1

Figure 1 Key checklist items to incorporate in Custodian assessment

Custodians are natural providers of DAAS given they already manage most data and have global scale and expertise. However, simply re-presenting existing internal
capability as a DAAS offer is not likely to be feasible and needs to be developed as a stand-alone operating and service model. In some cases, the organisational attributes of a Custodian conflict with what is needed to be successful for DAAS. Understanding how the Custodian can address these challenges is important and should be a key focus of any tender engagement to ensure service expectations are met.

Share This

Copy Link to Clipboard