Fundamentally, the value or allocation should be derived from the following four-tiered assessment:
- What contribution does each service ultimately make to long-term performance?
- Conversely, how much value-add is gained by cost savings provided by the specific service?
- What does it cost for the service provider to deliver that competency?
- How much accountability is the service provider prepared to take in ensuring that the fund meets its long-term objectives?
The greater the magnitude of contribution along that four-point framework the greater the allocation should be. In the table we have created an idealised picture of how we believe the value chain of services could work. Note that the allocation is reflected as a percentage of the overall costs.
The value chain: a hypothetical model
Participants in the chain are seen as continuous (but not irreplaceable) partners in the process and governance procedures would reflect that partnership dynamic. As mentioned earlier, there are an increasing number of entrants to the market who can provide these services that reside outside the traditional Watson Wyatt model. The governance process would also ensure that effective value measurement was applied to every participant in the process.
Conclusion
Clearly, a shift to the value chain model would demand a new mode of participation from trustees. Trustees must now shift their focus to providing a more rigorous assessment of the service providers in the value chain – not just their fund managers. Just how well resourced are the different candidates for consideration? How can trustees balance the dual requirements of ensuring that the different service components are well integrated and efficiently managed while avoiding potential conflicts of interest in the value chain? The time has come for trustees to assess what really counts in the bigger scheme – and reward it.