Threadneedle Investments, the UK's fourth-largest retail investment fund manager and ninth-largest pension fund manager with £73bn under management, had reached a crossroads. Its operations had been developed to support traditional investments such as equities, bonds and exchange-traded derivatives. The use of over-the-counter (OTC) derivatives, however, was expec-ted to quadruple, and processing them is mostly manual and costly (£200-£300 per trade compared with £5 for an exchange-traded derivative).
Rather than spending huge sums on technology, the investment house decided to outsource its investment operations, mutual funds, and trustee, depositary and custody arrangements to a single supplier. The 'lift-out' deal would include the complete transfer of staff, operations and premises.
The potential value of the contract for investment operations alone was well over £100m over 10 years, not to mention the valuable knowledge and skills of employees to be transferred. And Threadneedle also wanted a commitment from the supplier that it, not Threadneedle, would develop and support future derivatives requirements.
A tough demand, so Threadneedle asked Troika (UK) to help test the appetite of suppliers and assist with selection and contract negotiations. The project had to be completed within a year and a partner found by 16 June, 2006. Troika worked with Threadneedle to draft a Request for Proposal document, sent out to eight suppliers. All responded and, despite the time constraints, their interest was maintained right up to the final agreement.
On the June 16 deadline, JP Morgan was named as the outsourcing partner, firing the starting gun on final contractual negotiations.
In September 2006, just 12 months after the start of the project, Threadneedle transferred its Swindon premises, together with existing systems, processes and 165 staff, to JP Morgan Worldwide Security Services. The lift-out was so seamless, says Threadneedle MD Crispin Henderson, that 'our dealers didn't even know it had happened'. And, thanks to Troika, Threadneedle avoided an estimated £50m spend on developing derivatives services, and made substantial cost-savings on its existing investment operations.
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Troika advised Threadneedle on a 'lift-out' of its derivatives interests, involving the transfer of 165 staff, operations and premises to JP Morgan, thus avoiding an internal spend of £50m.
- Set out clearly the timings and processes to be followed.
- Get suppliers to sign up to key contract principles, covering its nature, timing and scope.
- Draft a 'handshake document' telling suppliers the nature of the deal in business terms.
- Maintain competitive tension among suppliers.
- Manage the process sensitively - inject expertise and innovation where needed.