Case study: How Origin Asset Management manages outsourcing risks amid cost pressures
Nishil Patel, Chief Operating Officer at Origin Asset Management discusses how to decide which risks to outsource, the trick to keeping costs under control and why independent access to data is critical for governance.
Sara Benwell POSTED ON 3/8/2021 1:36:15 PM
Sara Benwell: What are the key risks to consider when depending on providers to deliver crucial business activities and how do you manage these risks?
Nishil Patel: Origin is a boutique, long-only asset manager with just under US$5 billion of assets under management and only twelve people.
Of the twelve, six sit within the investment team and the rest are in operations, so we outsource everything.
In terms of some of the key risks, general outage is one that affects trading and operations.
“We manage these risks with standard service level agreements (SLAs), which we put in place with all our service providers”
Many of our outsource providers have different teams over different cyclical periods, and we sometimes find failings in the quality of the teams and information that they provide, so we do consider this a key risk.
We manage these risks with standard service level agreements (SLAs), which we put in place with all our service providers and use as benchmarks during service review meetings.
We also have and rely on the International Organization for Standardization (ISO) certifications, etc., that they themselves carry out on an annual basis. We also use those for due diligence purposes.
Sara: How does fee compression affect your organisation and your selection of outsource providers?
Nishil: Every vendor can and will provide a cheaper price. The challenge is, for me as a Chief Operating Officer, not to compromise on the quality of service despite the pressure from the top in terms of the revenue line.
Many of our big-ticket outsourcing vendor items are on variable contracts. So, when volume is up and things are looking good, everyone benefits, but when things turn negative, we all take the hit.
“The challenge is not to compromise on the quality of service despite the pressure from the top in terms of the revenue line”
It is important that we are not stuck at a fixed-cost level when things turn sour, because that could completely wind down the business.
If you want to engage in long-term fixed contracts, do so, but at a significant discount.
Sara: How are you overseeing your outsourced functions and third-party compliance? To what extent do you have contingency plans in place in the event a vendor fails?
Nishil: The most material vendor that we have in our contingency plan is our IT partner who provides us with a private Cloud service. We use Citrix to dial into a couple of the data centres.
In our agreement with the IT vendor, we have a specific clause which states that if the IT partner were to wind down or go bust, we would have access to the data centre for a certain period of time at a certain cost.
Normally, we put a clause in our contract that we can access our data. This this way we can bypasses the IT partner directly to the data centre.
“We have certain procedures that are built into our own policies for quarterly and monthly compliance monitoring”
For example, a lot of asset managers, especially boutique managers like us, outsource proxy voting as they don’t have the facilities and capabilities to carry this in house.
With the new Securities and Exchange Commission (SEC) regulations that came up last year, how do you monitor the outsourcing of your proxy voting vendor from a compliance perspective? The answer is that a lot of it is self-managed.
We have certain procedures that are built into our own policies for quarterly and monthly compliance monitoring, to ensure that whatever oversight we have of our providers we maintain, and we actually keep on updating based on new regulatory guidance.
Sara: Is there is a practical conflict to outsourcing something and duplicating costs by keep a backup process in-house?
Nishil: We do have a balance and have carved out the data that is already being held elsewhere. So we don’t need that per second replication at either of our data centres, which reduces the costs with our IT partner.
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