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Selective Insourcing – The best of both worlds for super funds

Selective Insourcing – The best of both worlds for super funds

20 July 2017

Advances in technology and more flexible business models have opened up a new approach to superannuation administration. Now with the ability to ‘selectively insource’ various aspects of administration according to their needs, super funds can achieve greater control and support their innovation efforts.

Until recently, super funds have had limited options in how they ran their business. Funds either took on all aspects of administration themselves in-house, or they outsourced the entirety of their business processes to a third party administrator (TPA).

But with increased technological capabilities and the advent of new consumption-based business models, funds can now enjoy far greater flexibility in regard to how they administer their business. Modern technology solutions that support high levels of automation, straight-through processing and configurable workflows are making it both feasible and cost effective for funds to retain in-house certain aspects of their operations that were previously manual and cumbersome.

The rise of new modular, consumption-based business models has opened the door for funds to ‘pick and mix’ the expertise they need. These services can be sourced from a range of global providers who are making the various elements of administration available on a subscription basis, often via the cloud.

In this changed landscape, many of the arguments in favour of fully outsourced administration no longer hold up for many funds. Take the issue of scale. It has long been asserted that the only way for funds to achieve economies of scale is to outsource their administration to a large TPA. But in today’s world, funds can effectively achieve scale either in-house using modern technology solutions or through selectively insourcing services from multiple providers. According to the Rice Warner Superannuation Fees Report 2016, a TPA’s administration fees can range between 10 and 35bps out of total fund fees of around 103bps.This suggests that the promised economies of full administration are not always being realised and it makes sense for funds to consider other options.

Not so long ago super funds turned to TPAs to access the unrivalled operational experience and expertise they could bring to fund administration. This too is yesterday’s argument. In recent years, market consolidation has led many funds to acquire a healthy pool of highly experienced superannuation professionals in-house. In addition, funds today can readily fill gaps in skills and experience by tapping into the services of niche providers.

It can also no longer be argued that full outsourcing to TPAs is the only way for funds to effectively manage business and compliance risks. In recent years, modern technology solutions have transformed the ability of funds to professionally manage their business and compliance risks in-house. These solutions are data driven and deliver high levels of automation, efficiency and transparency. They enable business and compliance systems, processes and procedures to be configured, monitored and managed with precision – reducing the administration burden, ensuring compliance and significantly lowering risks.

At the other end of the administration spectrum, the key argument in favour of funds choosing the full self-administration option is similarly losing traction. While in theory this approach promises absolute control over the business, in practice it can come at the expense of excellence and innovation and impede a fund’s ability to achieve desired outcomes. Savvy funds are recognising that it is unnecessary – and in some cases unwise – for them to build expertise in every area of their business.

Today, ‘selective insourcing’ is allowing funds to enjoy the best of both worlds by combining insourcing and outsourcing on a needs basis. In this way, funds can choose to retain in-house the tasks and functions they can add genuine value to, as well as the high-volume and low-value tasks they can automate, and they can outsource those tasks that would be better handled by an external provider with specialist expertise.

There are many benefits to this hybrid approach, starting with the ability of funds to think differently about in-house administration. The selective insourcing business model is about orchestrating commercial relationships to deliver optimal outcomes for members, rather than constantly building and maintaining internal expertise. This approach is gaining momentum in the technology domain, where it is increasingly common for trustees to develop a deep understanding of the technology their fund requires, but to source the delivery of it from global experts.

Selective insourcing allows funds to seek the very best in third party systems, solutions and services to achieve excellence across all aspects of the business. It enables them to innovate with confidence, as new improved digital services can be created and delivered quickly and cost efficiently by sourcing the necessary tools and expertise via the cloud on a subscription basis.

Selective insourcing also delivers funds unprecedented control over their business. The days of funds having to tolerate a vanilla approach foisted upon them by an administrator with many clients to service are behind us. A hybrid approach ensures a fund’s strategies, products and services are best suited to their members. It enables funds to truly own their own data, allowing them to identify, in real-time, where value is created or lost across their operations, and to leverage big data and analytics to develop a better understanding of their members and proactively respond to their needs.

And above all else, selective insourcing – more than either of the traditional approaches to fund administration – better supports super funds to meet their essential purpose – which is to materially improve the quality of life of their members in retirement.

About the author

John Burke

John Burke

Head of Strategic Accounts

John Burke is the Head of Strategic Accounts for Bravura Solutions and is based in our Melbourne office. With more than 12 years of experience in financial services, he has built a deep understanding of the market and the operational environments of businesses competing in this industry. John’s responsibilities include identifying and pursuing opportunities to address business issues for organisations in the wealth management industry.