Until three years ago, Stewart Crawford wasn’t a happy man. He and his senior colleagues at the WM Company, the Edinburgh-based investment business, had reached the top of their corporate tree. But they were being hampered by WM’s then owners, US-based Bankers Trust, whose vision for the business was at odds with their own.
“We weren’t in tune with the direction in which Bankers Trust was wanting to take the business,” remembers Crawford. “There was not a meeting of minds.”
At that time WM was running the “back office” for UK-based fund management groups — a low-profile sector of the financial services industry, but one that is growing rapidly. It includes things like investment administration, global custody, unit registry and performance measurement: basically almost everything that happens within an asset-management business, except for the “client-facing” activities of choosing where to invest and selling and marketing fund management services.
Since the mid-1990s there has been been a growing trend for asset managers of all stripes to outsource such activities to specialist players — business that, due to economies of scale, are more likely to be able to afford the complex systems and specialist staff required. The back-office sector already employs an estimated 4000 people in Scotland and is expected to grow at 10% per year.
Disillusioned with Bankers Trust, chief executive Crawford and WM directors Mike Martin, Jim Phillips and Colin Kay faced a simple choice. They could grin and bear it in the hope that the US company would change its ways — or that a new owner would turn up, as it eventually did in 1999, when Bankers Trust was bought by Deutsche Bank. Or they could make a leap in the dark and launch a new business for themselves.
It didn’t take them long to make up their minds. After all, they had helped build WM into a significant operation employing 600 people and boasting revenues of £25 million. If they couldn’t go it alone, who could?
So, in 1998 Crawford, Martin and Phillips resigned from their WM jobs and started weighing up their options for getting a new investment business off the ground in Edinburgh. “The market for both investment administration and performance consultancy was at a point of change, and it was an excellent opportunity to start from scratch,” remembers Crawford.
“There was a tremendous opportunity to set up a new analytics business. We anticipated the global investments performance standards (GIPS) would come to be much more widely utilised. And on the investment administration front we saw the move to outsourcing was gathering pace — and we would have the opportunity to do it with brand new systems. Timing-wise, everything fell into place.”
While still contemplating getting funding from venture-capital backers, the colleagues were introduced to HSBC by a London-based consultant, who was aware that the former Hongkong and Shanghai Banking Corporation was eager to get into this financial sector. The first meeting was held at HSBC’s offices in London in April 1998, and it was serendipitous.
Crawford and his team had identified 10 key imperatives for their new business. At their first meeting two executives at the global bank — John Gubert, its head of securities services, and Terry McCaughey, director of Midland securities services — outlined their own requirements. “They knocked off eight of the 10 imperatives without us even opening our mouths,” says Crawford. “It was absolutely incredible. Within 24 hours of that first meeting, they had approval from Sir William Purves, chairman of HSBC, to proceed.”
Soon afterwards the London headquartered bank, which tomorrow is expected to declare 2001 profits of £6.7bn, approved a five-year business plan and earmarked £20m to get Crawford’s business started. “It was a relatively high-profile requirement,” says Crawford now. “They had already tried other routes with which they were uncomfortable.”
There followed a very busy summer. Crawford, Martin and Phillips eventually launched their new business, called HSBC Global Fund Services, from a training room in Midland Bank’s call centre at Edinburgh Park in August 1998. They were soon joined by their old WM colleague Colin Kay and quickly began assembling a team of 20. The majority of their staff came from WM, and all but one of the original team members still work for the business. “Almost to a person, everyone we contacted was eager to come,” says Crawford.
One of the new business’s priorities was to ensure that it had robust systems and controls in place before it took on its first client. So Crawford and his team focused on selecting networkable IT systems and sorting out processes, procedures, controls and risk-management. “One of the most refreshing aspects of HSBC’s approach was that the priority was to do this thing correctly,” says Crawford. “They did not mind if it took an extra three months. They wanted us to be sure we launched in a situation where we were confident we could deliver.”
HSBC Global Fund Services’ doors finally opened to new business in November 1999. But fears over the so-called Millennium Bug caused a slight hiatus. The bug was preoccupying many clients at the time, and few were prepared to embark on IT-related outsourcing deals until after the millennium.
In the end, the first client to come on board was Swiss Life Asset Management, in early 2000. Since then the largest client won by HSBC Global Fund Services has been Gartmore unit trusts, which came on board in early 2001 after a competitive pitch also involving HSBC GFS’s global rivals State Street and Bank of New York.
Crawford believes that several things impressed Gartmore. “We weren’t using legacy systems,” he explains, “and they liked the procedures, processes and controls we had put in place. Also, when you get the backing of an organisation like HSBC, it makes a tremendous difference.” Other clients secured in the past two years include Britannic Asset Management, New Star, Jupiter and Polar Capital Partners. This takes the total assets supervised by the company to £60bn.
Among other things, HSBC Global Fund Services is verifying most of these clients’ compliance with global and UK investment performance standards (GIPS and UKIPS). Last week London-based JP Morgan Fleming Asset Management confirmed it had appointed the new business to do GIPS verification, and HSBC GFS is also in the process of taking on the Lattice group’s pension fund, which has assets of around £12bn.
But does outsourcing suit all asset management businesses? Two of Scotland’s leading players — Standard Life Investments and Baillie Gifford & Co — prefer to do such things in-house and are showing no signs of changing their tune.
“It’s not a solution for everybody,” admits Crawford. “If you are not happy with the concept of outsourcing, then you should not outsource because you’d be entering into it with the wrong state of mind. We’re now seeing examples such as Schroders and Scottish Widows in the £100bn range. Nothing is too big. But we would argue in some instances that overall contracts are too big. Doing a big asset manager in one chunk is a tremendous challenge.”
“Baillie Gifford believe they can do it better themselves. But I would argue it’s more expensive for them to do it in-house. We have economies of scale in terms of systems in terms of market coverage, size and numbers of people. It takes away a lot of less-than- productive management concerns if you outsource.”
Having rapidly built a healthy share of the UK market, HSBC Global Fund Services is looking overseas. It has taken control of operations in Dublin, Jersey and Guernsey, which were part of HSBC prior to 1999, in addition to having a Paris-based sister business which was previously part of Credit Commercial de France (CCF). “We are certainly looking to continental Europe via France and Luxembourg,” says Crawford.
The company is expected to adopt a hub-and-spoke approach to international expansion, keeping most of its systems in Edinburgh but using local expertise for regulatory reasons, as well as to ensure good sales and client relationships. Crawford says: “The HSBC way of doing things is that wherever its businesses are around the world, their requirement is that we should be talking to each other and making sure we’re getting the best value out of each other. HSBC is an extremely collegiate operation and unlike any other operation I’ve worked for in terms of being a big partnership.”
So how does Crawford see the business he has created — which already employs 166 people in Edinburgh — shaping up?
He expects it to have increased to 220 people by the end of the year and is enthusiastic about future growth potential. Nevertheless, he does not want growth to get out of control. “There’s an old saying that you can be a busy mug and take on a huge book of business and fail to deliver. One of our key things is that we must deliver every single time, as you can’t have a single dissatisfied client. Otherwise you end up with a stressed-out team and a no-win situation. We want a win-win situation — client happy, team happy.”
He says he is much less worried about a skills shortage in the investment administration sector than he was a year ago. “Maybe there were a lot of organisations such as ourselves, State Street and JP Morgan building up staff at the same time.” But he still believes that Scottish Financial Enterprise’s investment administration sectoral training initiative must go ahead: “We mustn’t turn ourselves into Dublin or Luxembourg, where there is significant turnover but escalation in all costs. We could ruin the business and price ourselves out of the market.”
This article was published in the Sunday Herald on 2 March 2002