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Outsourcing:The loss of knowledge

The last Post-Trade Forum debate was all about the pros and cons of outsourcing v internalisation. A cross industry panel of outsourcing experts debated with an audience of equal experts and thrashed the topic to arrive at some really interesting conclusions and observations. Not least was operational memory loss. This knowledge can be expensive to replace, if at all and the Post-Trade Forum were unanimous that this concern must be addressed before any decision to outsource is made. The PTF noted that responsibility remains with the financial services firm not with the outsourcer and for this reason it was muted that firms should ensure that operational knowledge and expertise at both industry wide level and internal is retained and continuously updated.  

A surprising comment was the view that regulators rarely think that outsourcing is a good thing because they prefer firms to have everything internal and local, under their own control. However, this was rebuffed during the debate, as provided due diligence was conducted and documented at a very detailed level, showing that responsibility and control is retained in-house, regulators should be satisfied.

It has been a concern of mine for some time that firms have been allowing the draining away of too much industry knowledge, replacing it with automating systems and automatons to operate them. This appears to be a major weakness that creates situations of fraud for example, at places like UBS. Would outsourcing have prevented the UBS fraud?  Perhaps not, but it could have created heightened procedures or processes less likely to be circumvented by a knowledgeable trader. A synopsis of this debate is now available for attendees and to employees of regulated financial services firms by becoming a member of the Post-Trade Forum Group on LinkedIn or join in the PTF discussion on Finextra.

Join the panel: Daniel Thieke, VP, (DTCC), Edwin De Pauw, Director, Euroclear, Alan Wells, Deputy Head of Operations, Butterfield Private Bank & Alan Jones, SmartStream Technologies at the next debate on the 27th October on ‘Technology versus Data Standards to mitigate Risk in Corporate Actions’ hosted by the London Stock Exchange.

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Comments: (2)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 20 October, 2011, 14:37Be the first to give this comment the thumbs up 0 likes

Most disasters - including ones like UBS - happen not because of too few alarms. Many risk management systems throw out too many alarms, most of which are 'false positives', and it becomes impossible for traders and other line managers to do their jobs if they have to investigate each and every alarm. This is not an excuse, but certainly an explanation, for why so many alerts from risk management systems are ignored. Insourcing or outsourcing might not matter. 

Technology has made it possible to preserve and grow organizational knowledge even if the possessor of that knowledge has moved on or the function gets outsourced. It's time regulators recognize this fact and enact regulations on the basis of outcome from processes, rather than whether they are insourced or outsourced.  

Gary Wright
Gary Wright 20 October, 2011, 14:43Be the first to give this comment the thumbs up 0 likes

Can not agree

Gary Wright

Gary Wright

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BISS Research

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Post-Trade Forum

The Post Trade Forum's aim is to propagate debate and discussion between senior practitioners in Post Trade Operations in the global securities market; to bring about increased awareness and knowledge across both buy-side and sell-side financial institutions in financial products and be a focal point for firms and practitioners to air views.


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