Service Credits

Thinking

Getting the most out of Service Credit Regimes

How can asset managers and suppliers get the most out of service credit regimes?

With the significant majority of asset managers now using an outsourced model for administration services, ensuring the right level of service is received from suppliers is high on the agenda for most asset management firms. Service credits provide an input to achieving this, by putting at risk an agreed percentage (usually 5-15%) of the supplier’s fees, linked to the supplier’s performance against a predetermined set of KPIs.

There are many ways in which service credit regimes can be structured, and increasingly complex methods are prevalent. We think that regimes should be kept simple to avoid unnecessary administrative burden for the supplier and the asset manager, and to achieve the purpose of the regime in the first place – to reward the supplier for achieving or exceeding agreed levels of service.

The following are some key points to consider when implementing a service credit regime:

  • Ensure the right KPIs are included in the regime (and provide flexibility for changes as the business and relationship evolves)
  • Use the regime to reward the supplier for quick and sustained correction of breaches
  • Do not unfairly penalise the supplier for one-off breaches; use a trend-based mechanism
  • Keep it simple
  • Payment method is commonly by fee rebate. However, suppliers may make extra efforts to stay within the boundaries of regimes if payment must be made by cheque, requiring a physical signature from someone appropriately senior at the supplier!

In summary, service credit regimes are a useful tool to reward suppliers for good performance and there is little reason not to agree an appropriate regime. The focus for both the asset manager and the supplier, however, should be on making all other elements of the outsourcing relationship work for both parties so that the service credit regime is never required!

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By Dan Sharp

Dan is a management consultant for Knadel, and has worked on many projects in the IM industry, particularly focusing on Outsourcing and Operating Models for institutional asset managers.

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