Effective oversight essential as back office outsourcing matures, says Milestone Group

Sydney, London and Boston, MA - 8 November 2011

With outsourcing arrangements now prevalent across the fund management value chain, regulators worldwide are reviewing the risks associated with outsourced relationships, in many cases mandating the use of independent controls and clearly stipulating terms of accountability.

In response to these regulatory pressures and related market focus on oversight functions, Milestone Group, the specialist provider of optimised fund processing solutions to the global funds industry, has published a white paper examining the challenges of ensuring effective oversight of outsourced relationships. It draws on a lesson learned from the automotive industry and discusses how effective oversight nurtures a positive and mutually beneficial dynamic between financial institutions and service providers.

Entitled ‘Keeping your foot on the outsourcing control pedal’, the white paper addresses the operational, regulatory and reputational risks faced by financial institutions when outsourcing key operational functions, such as fund accounting or middle office activities. It also explains how recent developments in technology can provide holistic solutions that increase transparency, efficiency and control across a financial institution’s entire internal and external operations.

“Regulators globally have expressed concerns over how financial institutions that outsource business-critical functions operate their relationships with third-party service providers,” states Nathan Travell, Product Manager at Milestone Group and author of the new white paper. “Asset managers, asset owners and administrators that are party to these arrangements are struggling to maintain effective oversight as the value chain expands and becomes more complex. Very often, this function was not anticipated in the original outsourced operating model design, and has continued to be resourced as necessity demands.”

In the white paper, Travell draws parallels with developments and lessons learned in efficient and rigorous supplier quality management in the automotive industry. In the world of manufacturing, supplier quality management protects against the risk of quality issues arising from outsourced functions. For investment management firms, it’s no different. Rigour and transparency in the oversight process is the key ingredient to guarantee that the ‘accelerator pedal does not get stuck’, as one major car manufacturer found out to its cost.

Travell continues: “Effective oversight ensures the timely detection and remediation of service ‘blips’ prior to investor impacts occurring, meaning issues can be resolved quickly with the relevant third parties before anything rolls off the production line. Crucially, it creates a positive and mutually protective dynamic between financial institutions and service providers, strengthening the relationship and supporting a more objective understanding of the service interface.”

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