Outsourcing does have one downside: provider risk,
particularly where there isn’t a well-established sup-ply-chain. The early adopters are usually ‘lift-outs’
(where their staff effectively leave the firm and go to
work for the outsourcer) and these tend to be highly
Lift-outs don’t necessarily create a utility model;
they generally create a back-office out of the first operation that is outsourced. In this way the operation may
not follow an industry-standard model and therefore be
unsuitable as a commodity for other firms to use. This
can be a significant problem and commonly arises in
industries where they want commodity pricing along
with specialized service.
Where an outsourcing arrangement has gone sour,
this is usually because the firm either has an unrealistic expectation of what the outsourcer can provide,
or when they outsourced, they moved all of the staff
to the third party who understood that element of the
business. This severely compromises the firm’s ability
to provide effective oversight of the outsourcer. The
asset management industry is facing that very challenge now, as it seeks to comply with a growing interest from the regulators that have become increasingly
aware of the industry’s dependency on outsourcers.
THE NEED FOR MOBILITY
One of the dangers of an outsourced service is that it is
much harder to move to another provider once the relationship is solidified. When outsourcers provide unique
operating models, firms will have less mobility with
their outsourcing agreement. Therefore, firms experience much lower risk when utilizing as standard an
operating model as possible, as it will provide the most
significant cost advantage but also facilitate the highest
level of mobility between providers.
The least optimal situation is where there is ‘zero
mobility’—the client is so tightly aligned with an outsourcer that if the client lacks the agility to react to their
requirements, in isolation to the suppliers capabilities.
Increasingly seen as ‘resilience risk’ this is a growing
cause for concern in some markets and sectors.
OUTSOURCING AND RESPONSIBILITY
Most people forget the golden rule of outsourcing,
which is that you can’t outsource responsibility. You
can outsource the process, but ultimately you are still
responsible for that business function.
This is a major threat, as most firms underestimate
the amount of expertise that they need to retain in order
to conduct effective oversight of their outsourcer.
If a firm has never outsourced before, it is a massive
statement of change that can have an immense impact
on the culture of the firm. Many firms see this as a
negative, but in a fast-moving market, having a culture of change can be a tremendous asset. It can shake
up and transform the conservative nature of a firm
and can be a substantial contributor to the rapid evolution of the business.
Of course, many people often don’t like or are wary
of a change culture, but if a firm can embrace it then it
can be a truly positive experience. Losing good people
that have been loyal to the company will always be seen
as a negative, but in the end senior management needs
to do what is best for the business. If change is required,
then outsourcing should be seen as a positive step.
If you are considering an outsourced function,
proper due diligence is key. You have to bring in
experts or consultants who know the market, the suppliers and, most importantly, have been through the
same outsourcing process before. In this way you will
ensure that you make the best selection and that you
enter into the agreement with your eyes open. Firms
that conduct effective due diligence upfront will reap a
harvest of benefits downstream.
COMPROMISE IS KEY
Fundamental to that due diligence is your willingness
to compromise. Understanding that a service provider
may undertake a particular task differently from your
firm is not necessarily a negative; there is usually a
very good reason why the outsourcer works that way.
You need to consider whether your current approach
actually delivers any tangible competitive advantage:
if it does not then you need to follow the outsourcer’s
lead. If you want to derive the maximum benefit from
the arrangement, willingness to compromise among
your operational team is a must.
Steve Young is CEO of Citisoft, a consulting firm dedicated to
servicing the investment management industry.