Despite the growing focus on outsourcing in recent years, the question of what functions to outsource and when continues to perplex investment firms.
As the industry evolves, the strategic implications of these decisions grow ever more significant.
In a landscape where speed, efficiency, and innovation are paramount, firms must carefully weigh the benefits and risks of outsourcing. Is it worth relinquishing certain functions to gain access to specialized expertise and cost savings? Or should they maintain a tight grip on operations to ensure control and quality?
In this blog post, we'll delve into three key considerations to help you make an informed decision.
By understanding these factors, you can develop a robust outsourcing strategy that aligns with your firm's unique goals and challenges.
1. Competitive Advantages
When it comes to deciding what functions to outsource, more and more firms are considering outsourcing everything that does not contribute to their competitive advantage.
For many buy-side firms, this means outsourcing functions they consider laborious or areas where there is not much room for differentiation. These functions include tasks like fund accounting and settlement.
By outsourcing these types of tasks, firms are better able to focus on alpha-generating activities within their firm, like trading, portfolio management, and investment research and analysis. Because these functions are key ways for firms to differentiate themselves, they are also the types of business processes firms look to keep in-house.
2. Lifecycle Stage
What stage of its lifecycle is the firm in? Is it early on – in the startup or emerging phase? Or is it more established – managing billions of dollars of capital?
Firms at different stages have different concerns: A newer, smaller firm’s primary consideration may be controlling costs. This motivation will shape its outsourcing decisions, as costs for hiring internal headcount add up fast. These firms, therefore, may choose to outsource more expensive positions, like traders or CFOs.
Additionally, early on, firms are hyper-focused on growing their core competencies. In this stage of growth, finding, hiring, and retaining top talent in specialized areas outside their key capabilities, like legal and HR, can be challenging.
More established firms will rely on a mix of outsourced and in-house support. For developed firms, outsourcing key positions like traders or executives may be seen as a red flag to investors. However, this does not mean these firms should neglect to leverage outsourcing for more routine operational tasks or responsibilities outside of their core areas of expertise, like IT infrastructure.
3. Cost-benefit Analysis
To guide their outsourcing decisions, firms should conduct a thorough cost-benefit analysis to evaluate the potential advantages of outsourcing vs. keeping operations in-house.
This analysis involves considering all potential costs and cost savings.
Consider what the firm has to gain or lose from a quality, risk, efficiency, and control perspective.
Consider what the firm has to gain by diverting internal resources to higher-impact tasks.
Remember that along with the many benefits of outsourcing, such as reduced costs, enhanced efficiency, and increased expertise, entrusting a third-party provider in this way also comes with the potential for added threats related to risk, security, and regulatory concerns.
To mitigate these risks, careful selection of the right outsourcing provider and effective vendor management are required. Consider the time and involvement these tasks will take and ensure they are outweighed by the efficiencies gained from the outsourcing relationship.
An Outsourcing Strategy for Your Firm’s Unique Scenario
The decision to outsource is a complex one, and, ultimately, your choice to outsource or maintain operations in-house will depend on the specific circumstances and strategic goals of your investment firm.
By understanding the firm's competitive differentiators, evaluating its lifecycle stage, and conducting a thorough cost-benefit analysis, you can make informed outsourcing decisions tailored to your unique scenario and position your firm for long-term success.
