Hugo Larguinho Brás, PwC Luxembourg, Financial Services Consulting
Offshore vs. Outsourcing
Over the last 15 years, many Luxembourg Transfer Agents have offshored or outsourced part of their activity. If “offshoring” and “outsourcing” both mean getting activities performed by another institution, in the first case the offshored institution is always located abroad and is usually part of the same group as the “original” TA, while in the second case the outsourced institution is external to the group but can be located in Luxembourg or abroad.
In the case of Luxembourg TAs, offshoring abroad is very common, as most TAs belong to a big financial group (banks or asset managers) who wants to leverage on a branch or subsidiary based in country with appealing labour costs. Luxembourg TAs often also outsource some of their activity within the Luxembourg territory, like printing for instance.
Offshoring is a delicate strategic move for a Transfer Agent.
Like for most other businesses, TA offshoring is nearly always decided by the Group in an attempt to reduce operational costs. When Luxembourg TAs started to offshore, at the end of the 1990’s, they were typically afraid of reducing their service quality and, consequently, damaging their reputation.
If these apprehensions are still valid today, 15 years of offshoring experience have helped Luxembourg Transfer Agents and their clients to get used to the concept and live with the risks induced by offshoring.
Progressively, Luxembourg TAs started to see in the offshoring a way to spend less (or at least cheaper) resources on processes with a lower added-value and to focus, from Luxembourg, on processes which make a difference in terms of service delivery.
After a busy period of heavy regulatory programme, Luxembourg TA are now seeing in the offshoring a way to adapt their whole operational organisation to the reality of today’s world, keeping a decision and expertise hub in Luxembourg and delegating most of their production to a shared service centre abroad.
Offshoring what and where?
In line with offshoring strategies seen in other business areas, Luxembourg Transfer Agents have always offshored the processes that they considered as easier to perform with less TA expertise: manual input of transactions, cash management, reporting processing and the input (not the validation) of account opening and maintenance. Conversely, processes requiring a strong TA expertise – fees calculation, dividends processing, AML/KYC, project management – and strong communication and language skills – management of investors’ requests, relationship with distributors and clients - have usually been maintained in Luxembourg.
Luxembourg TAs who have decided to offshore have often chosen Asia to do so. The region is particularly attractive: India and Malaysia have a low labour cost base, while Singapore and Hong-Kong already have a strong experience in financial services. Last but not least, having an operational hub in Asia makes perfect sense to facilitate fund distribution in a region with a fast developing economy and a strong appetite for UCITS-type funds.
Among the other offshoring locations, Poland has been emerging as a privileged country, offering, in comparison to India or Malaysia, less attractive labour costs but a business culture which is more in line with Luxembourg standards.
Key steps and lessons learned
Offshoring TA activities requires a careful planning. Defining a clear target operational model is the very first step. It will help the whole organisation understand the other key milestones of the offshoring project.
Change management will help prepare the staff to embrace their future roles, given that Luxembourg teams will get higher responsibilities (validation, supervision, project management) once the offshoring will go live. Defining and taking enough time to apply a good training plan is essential. Implementing a competencies assessment programme will make the transition between previous and future roles happen smoothly. Recruiting additional resources to sustain workload peaks is also key to maintain service quality levels.
One of the CSSF’s pre-requisites to TA offshoring is to get an official green light from each client of the TA (i.e. the Funds, the Management Companies). Failing to get several agreements will imply a reduction of the offshoring scope, and the obligation to work with a double model (funds offshored vs funds not-offshored) is an operational complication that Transfer Agents should avoid as much as possible. A strong involvement from Sales and Relationship Managers is required to explain to TA clients that the offshoring will also bring benefits to them.
Offshoring TA activities outside of the Grand Duchy requires the authorisations of the CSSF and the CNPD. Transfer Agents must build and submit a file to these 2 commissions to describe their future operational set-up and demonstrate a perfect control of activities supervision, IT security and data protection. The time needed to prepare the files and get the feedback from both bodies should not be neglected.
Among the main lessons learned from existing TA offshoring models, we can highlight the importance of having a stable operational set-up before even kicking off the project. Offshoring TA activities should not happen if too many resources are missing or if the processes in scope are not under perfect control. If the Transfer Agent organisation is split among several sites, it is recommended to first repatriate the whole activity to Luxembourg and take time to stabilize it before implementing the offshoring.
Another lesson learned is the need to create a spirit of unique team between Luxembourg-based and offshored teams. Given the physical distance and the time difference, building and keeping such spirit requires a smart and dynamic management, and a strong capacity to cope with different business cultures. Organising an efficient communication is crucial and not easy. We all recall the “Yes, maybe” type of replies to a “Can you do it?” question, when the reply should have been “No, sorry I won’t be able to do it”.
Finally, TAs who plan to offshore must be ready to make a strong investment and wait a few years before achieving the expected return. The costs to build a strong project management team, to retain more qualified resources in Luxembourg, to recruit an increasingly expensive staff in the offshored site where turnovers are high and to maintain a strong governance between 2 distant sites, can have a considerable weight on the project budget.
Looking at the future, scenarios of Transfer Agents cancelling their offshoring and returning to a full TA activity performed exclusively from Luxembourg seem unlikely.
As most financial groups are pressuring to reduce their back office costs, offshoring will certainly continue to be part of the TA models.
But in a context where Transfer Agents are reflecting on their future business model and can struggle to recruit adequate resources in Luxembourg, offshoring will become more an assumed part of the TA organisational strategy with a clear aim at bringing operational value and not just reducing costs.
Future will tell…
Hugo Larguinho Brás, PwC Luxembourg, Financial Services Consulting