Some Common problems in outsourcing fund administration

Outsourcing fund administration has become a popular business strategy among today’s asset management companies. But it is not always easy to implement, and expectations may not always be met.

Here are some common problems that prevent firms from optimizing asset services in administrating funds, and how they can be addressed:

Tensions between in-house staff and third party. At the outset, it is understandable if some in-house staff will not be very keen with the idea of outsourcing, which is about enlisting a third party to do what they can theoretically accomplish. And when the outsourcing is in place, there might be tensions when they do not agree about decisions to be made, or the means by which the goals are to be pursued. These can be prevented by explaining to them why it is being done, as well as involving them in the process. They need to given sufficient information to make them understand that in the end, outsourcing will benefit them and the organization profoundly, through savings, and through improved focus on core functions. Moreover, the distribution of tasks need to be very clear, so that there is no confusion about who is in charge of what, and who is allowed to make approvals.

Unsatisfactory delivery of asset services. Sometimes, the partnership may not yield successful results in terms of fund performance, and the output may not up to par. This can be traced to unreasonable expectations. To avoid this, asset managers must clearly stipulate their values and standards, as well as the parameters that they will use in evaluating the asset servicing firms’ performance. All expectations must be put in writing, and neatly condensed into an agreement signed by both parties. The agreement should indicate the expectations for day-to-day operations, and also during crisis or disaster. Moreover, there should be terms for reporting and escalating concerns.

Confidentiality and security threat. When a company delegates tasks to an independent party, it means providing some crucial information about how the firm operates. The third party service provider will need these data as well as access to the company’s entire digital infrastructure to be able to help. To address potential threats to confidentiality and security, safeguards must be put in place in the form of access codes to limit what they can do. A proper confidentiality agreement must also be drawn up to ensure that the outsourcing partner does not divulge proprietary company knowledge.

By confronting these potential problems proactively, asset management companies can truly benefit from outsourcing fund administration.