Follow the Sun and Covid-19

Fund administrators, banks and other service providers supporting the asset management industry now rely heavily on "follow the sun" service models. Global "centres of excellence" have been established in numerous countries, with India especially critical to the business capability of many service providers. Yesterday, Prime Minister Modi gave the 1.3 billion citizens of India just four hours' notice before placing the country on Covid-19 lockdown, closing all offices. What does this mean for the asset management industry?

How do service providers organize their offshore operations?

Broadly speaking, offshore locations can be managed in three ways:

• Business Process Outsourcing: In the traditional "BPO" model, a company needing offshore support hires a vendor to complete a service, in accordance with a service level agreement. The BPO provider is responsible for hiring staff and producing the product - which could be a volume of reconciliations, or a volume of processing for custody transactions, corporate actions etc.
• Managed Operations: In this variant of the BPO model, the BPO provider hires staff (and is legally the employer) and will also typically provide office space, tech equipment and HR services. Under this model, however, the client is entirely responsible for managing the team and their workload. In essence, a managed operations model allows a client to build their own team in an offshore country, but not have to incorporate their own local company and deal with HR, employment, tax and similar issues in each jurisdiction.
• Direct subsidiary. Under this model, the fund administrator, bank, research provider, data vendor etc. creates their own company, and hires their own staff as the employer of record.

Which locations and countries are involved?

For asset managers (and their investors), the first step is to establish which cities / countries are used by which service provider. This may not be as easy as it sounds: it may not be transparent, for example, as to which fund administration offices are involved in servicing a particular fund. Admin offices in the US, Canada or Ireland, may "face" the client (the manager), yet reconciliations and other key work may be performed in India, the Philippines or other locations. Castle Hall has frequently identified cases where the fund manager is actually unaware that reconciliations are, for example, first completed in Manila before being handed off to a European office.

What work has been offshored?

Linked with our point above, asset managers and their investors should understand what work is conducted offshore by service providers. Position reconciliations, cash reconciliations, expense accruals, corporate action work, AML procedures, share registration input (thinking about fund administrators) can all be offshored. 

For the asset manager, are there procedures or tasks which are time sensitive and critical which depend on an external vendor who, in turn, depends on offshored locations? In other words, are there any operations or procedures conducted in, say, India which, if unavailable, could flow upwards such that an asset manager could no longer continue operations? This is clearly the worst case scenario, and should be identified as rapidly as possible.

What can the asset manager do?

Clearly - as Castle Hall has noted in our previous blogs - these are unprecedented times. As an initial comment, it is reasonable to assume that no bank or administrator, and no offshore BPO, has thoroughly developed and then previously tested a comprehensive BCP to cover potentially thousands of workers not being able to access any of their offices for a sustained period of time. Once more, this is not a time for "gotcha" due diligence - rather a time to gather objective information and collaborate with all parties to seek to reduce risk and enable ongoing operations.

Some points to consider:

• Did the asset manager have a pre-existing component of their own BCP to consider how they would respond to a BCP event at their fund administrator or other key service provider? In fairness, - even when this issue was previously considered by managers - any pre-planning is likely insufficient to address what we are now experiencing in the Covid-19 crisis.
• Has the asset manager contacted their service providers to ask for information about their own business continuity plans (in this case especially with respect to offshoring locations)? At a minimum, we would suggest that asset managers contact their prime brokers, custodians, fund administrators, auditors, IT consultants, compliance consultants and fund directors.
• Has the asset manager experienced any interruption in servicing from any external service provider to date (minor or significant?) And, are any service issues potentially the result of problems in offshoring locations?

What are the BCP implications of offshored locations?

In disclosure, Castle Hall has an office in Manila, so has just triggered our own BCP in a key offshoring location. Our comments, therefore, draw on some of our own experience.

• IT hardware. To work from home, employees must have access to computers. In most BPO environments, staff work using desktop computers in cubicles. To work from home, those staff must, therefore, go to the office and be able to retrieve their workstation equipment (computer, screen, keyboard, mouse etc.) Investors should remember that under both the traditional BPO and Managed Operations model, IT hardware actually belongs to the BPO. The BPO, therefore, must be comfortable to sign out their own fixed assets to employees - in India's case apparently with 4 hours notice. We expect that there may be considerable "stranded" hardware as a result.
• Home environments. It is frequently the case that employees in India, the Philippines and other key offshoring locations live in larger, multi generational households. It is therefore less likely that there will be a quiet space available for a member of a team to set up a workstation and effective work from home environment. Castle Hall's team has been able to find ways of working from their homes, and we greatly appreciate the accommodation our team members' families have made to help them continue their work. However, the challenges here - especially for offshored offices with hundreds or thousands of employees - should not be under-estimated.
• Internet access. Bandwidth may be limited, unlimited data transfer may not be available for home connections, and / or staff may need to use cell phone hotspots to reliably connect to the web. Neither may be ideal, and employers may need to subsidize their team members' purchase of internet connectivity. Separately, in Castle Hall's case, the computers provided by our Managed Operations provider connect using hardwired LAN cables. As a result, our team have had to set up their computers within cable length of their home router - which can further impact the compromise of finding a good home working environment.
• Cyber security. Security is clearly a key risk (as we discussed in our last blog.) Using personal computers to input potentially confidential transaction data is not appropriate. Can the fund administrator or other client ensure that all offshored staff do have access to BPO supplied (and cyber protected) equipment? Cyber controls must also be installed at the local computer level, as any protections in place at the network level will disappear once employees are working from home. Again, this may require the BPO's tech team to make software and security changes.
• Web applications. An obvious point - are all the apps and software used by offshored employees fully web enabled? A situation where a fund admin relies on a network installation of a portfolio accounting platform, for example, would not enable remote working unless a fully comprehensive VPN is available. 

Our sense is that the challenges of ongoing Covid-19 lockdowns in key offshoring centers will have material effects across the asset management industry. In this case, the enduring success of offshoring - much bigger scale and lower costs - introduces another element in the Covid risk landscape that will evolve over the coming weeks.