Research shows ‘capability sourcing’ is disrupting super ecosystem

From

Raewyn Williams

New research by Parametric, a global investment manager, shows that the superannuation ecosystem is being redefined by a series of foundational, strategic business decisions called “capability sourcing” – what Parametric calls the “make or buy” decision.

Raewyn Williams, Parametric’s Managing Director, Research, explains: “superannuation funds are making the most of a “push to pull” paradigm shift where, instead of having structures and processes “pushed” to them, funds have become the centre of gravity in the ecosystem and can “pull in” what they want, how they want it and who they want it from.”

“Make or buy” decisions have been transforming the superannuation value chain over the last few years. Just some examples: AustralianSuper, Equip Super, Cbus, First State Super, QSuper, MTAA, REST, UniSuper and Telstra Super decided to build out internal investment teams. QSuper’s insourced their insurance capabilities. RBF outsourced its administration. Vision Super decided to insource operations. Telstra Super and WA Super both decided to switch custody to JP Morgan.

Parametric’s research points out that with the power funds now have, they must make good “make or buy” decisions. The firm says that good “make or buy” decisions are critical not only to the success of the fund, but the industry as a whole. The research suggests how superannuation funds can measure the effectiveness of different “make or buy” configurations by reference to an SMSF investor who bypasses the institutional super value chain.

Parametric’s analysis highlights a key trap that superannuation funds can fall into.

“Too narrow a focus on real, measured interaction costs will artificially skew “make or buy” decisions towards funds building the capability themselves” Williams said.
“This can leave no room for niche entrants and thoughtful external partners in the superannuation value chain.”

The research offers a capability sourcing decision-making tool that funds can use to navigate the possibilities, one which avoids a narrow focus on economic interaction costs which could skew funds’ decisions towards a “make” rather than “buy” decision. The tool identifies three considerations which are key to a good “make or buy” decision by a superannuation fund: third party interaction costs, internal notional costs and a crisp, fund-specific view of the standard the capability must meet to be fit-for-mission.

The research paper goes on to explore unbundling as a healthy development in the superannuation value chain, bringing buying power to funds, risk benefits, transparency and cultural alignment. “Unbundling opens up “make or buy” options for all superannuation funds, not just large funds, and makes “make or buy” strategy a precision instrument.”
She added: “this type of innovation can enhance the member dollar experience and is relatively easy for funds to embrace.”

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