JP Morgan's outsourcing business Thursday, September 18, 2008
Image by Getty Images via Daylife I was chatting with a good friend and COO of a large institutional fund manager this week over lunch about the outsourcing market for fund managers. In looking over the landscape of providers which includes BNY Mellon, Northern Trust, State Street, Citibank, BNP Securities Services and JP Morgan, it is notable that most still have relatively few clients. As such the economies of scale which many of these firms anticipated will have not materialised.
The one firm which does have a large stable, JP Morgan, achieved this through a series of back office lift-outs e.g. Morley and Barclays Global Investors. Yet these operations have broadly remained silo operations and have yet to be migrated to a common multi-tenanted platform. As a result, genuine economies have yet to be achieved. At some stage soon, one assumes that this arrangement will need to be tackled and existing clients migrated into such a setting. Yet no one will race to be first, given that most benefits accrue to the supplier and not the customer unless fee reductions are being proposed. Moreover, the operational and service risk arising will encourage most COOs to let someone else be the guinea pig.
In the meantime, any prospective customer will be aware that comments offered by existing "reference" customers won't reflect the setting they are being offered. Likewise, they also know they won't have the benefit of migrating to a proven strategic platform that has been tested in anger by others if they choose JP Morgan. Finally, when existing customers do migrate onto the same platform, new customers may be affected by the "wake from the other boats".
Consequently, JP Morgan faces a genuine dilema - continue pitching for more business with the elephant in the room, or temporarily step away from the market whilst they internally migrate existing customers. Irrespective of whether JP Morgan feel they can take on additional customers whilst migrating existing ones [they will obviously claim they could], they are likely to meet a sceptical client base for whom the risks will be perceived as too great. Of course, they could leave things as they are, but that looks like a difficult sell internally.
I have great respect and admiration for JP Morgan's EMEA regional boss, Francis Jackson, and am sure he will be giving this matter considerable thought, given the potential ramifications for his business. His competitors and clients are eagerly awaiting his decision and next steps