The big question: Which is better - outsourcing or building your own?
Ron Miao, Chief Operating Officer, Hadrian’s Wall Capital Limited explores the pros and cons of outsourcing platforms and functions rather than keeping them in house
Insurance Investor Editorposted on Wednesday, November 06, 2019
Insurance Investor: What are the pros and cons of outsourcing services and platforms versus keeping them in house?
Ron Miao: For a small fund like ourselves, the pros are the ability to effectively manage our internal infrastructure and not have to build a large infrastructure to support the various services that are required for our firm or fund.
It can also be simpler and more convenient to fulfil certain regulatory or legal requirements obligations through outsourcing.
It is simply a matter of managing staffing needs and the efficiencies or being able to use an outsourcer’s expertise in providing services.
The service provider may be able to aggregate several firms of similar sizes and requirements using their own resources which is then more efficient for them through economies of scale than having to duplicate these resources ourselves in house.
II: What can be kept in house and what should be outsourced?
Ron: As we are a small firm, having the ability to leverage off the expertise of a service provider who is closer to the regulatory environment or the legal requirements than ourselves and knows the exact requirements in these areas is a huge advantage to ourselves to outsource these services or products in order to take advantage of their skillset and expertise.
"Having the ability to leverage off the expertise of a service provider who is closer to the regulatory environment and knows the exact requirements in these areas is a huge advantage"
Eventually, it makes sense when you get larger and have a larger asset base and team to bring certain resources in house because you then are able to support your business directly, but because of the nature and size of our firm, keeping certain services in house is not efficient because we wouldn’t be able to keep a full-time finance department busy given the nature of our size, therefore, it makes sense to outsource it.
Generally the cost benefit is and when your costs for the outsourcer becomes uneconomic or inefficient then running such service internally. As long as we are benefitting from the economies of scale from the external service providers we will continue to use them.
II: Would it be fair to say that smaller boutique fund management firms like yourselves tend to outsource more services than larger firms?
Ron: Yes, I would expect that the firms of the size of BlackRock for example will have all of their own internal, compliance, legal, regulatory, finance, accounting, and all other firm support systems in house because it is just more efficient for them to run it in house than to pay a third party provider because they are just so large it would be inefficient for them.
Whereas for ourselves, due to our small size, we can’t hire specialists internally to run these services because we just wouldn’t be keeping them busy full-time and, for this reason, we need to hire a third-party service provider because they will be the ones that can more efficiently deploy the resources and allocate them appropriately.
II: Are costs worth it? How can cost saving be applied and how would this impact on the quality of services being provided?
Ron: Everything is scale driven. Our scale isn’t large enough to hire these resources internally and so for us the cost savings is the fact that we are using a third-party provider that has the expertise and skillset and they have their teams and are not solely devoted to ourselves because they don’t need to be and so can deploy their services across several institutions.
"I can shop around for the best price that may not be the most prudent thing to do because clearly what one seeks is a service provider relationship that you feel comfortable with."
Whereas, if I had that same resource in house, then I wouldn’t be fully utilising them, thus making it inefficient. As and when you grow and become larger as a firm, then this scale flips around and you definitely want to have these resources internally.
While I can shop around for the best price that may not be the most prudent thing to do because clearly what one seeks is a service provider relationship that you feel comfortable with, trust them, and to feel that they are giving you the required attention you need, when you need it.
II: Do you feel that you are getting good quality when you do outsource because they are so specialised?
Ron: I do feel that quality matters as you want to choose those providers that value the business relationship and the service that they are providing for you. If the relationship is not important to them, then you aren’t getting value, no matter what the cost you are paying.
"If the relationship is not important to them, then you aren’t getting value, no matter what the cost you are paying."
It isn’t necessarily that the lowest price wins, it is really about whether the provider gives you the attention you need when you need them.
II: What about co-sourcing or smart sourcing? How can these strategies improve business profitability?
Ron: To some degree we do this already where we have some of the expertise in house but not all of it so we use the ‘bolt on’ of a third-party provider to give us the additional skills or expertise required to bolster our own skillset.
It is legitimate and valid as clearly you may not have someone who has 20+ years of skills and knowledge in whatever service you are requiring so instead you can bolt them in and use them when you need the expertise.
II: Do you see an increasing uptake in fund managers outsourcing certain services/platforms in the next 12-18 months? If so, why and what would be the impact to financial markets overall?
Ron: It is not clear to me that the industry is headed towards increased outsourcing. I think it ultimately comes down to a cost benefit analysis and what is most efficient, convenient and appropriate for each individual business.
"It is not clear to me that the industry is headed towards increased outsourcing."
If the business model is vanilla or cookie cutter, it may lend itself to outsourcing, whereas a complex business or strategy may be more difficult to outsource. I do think that smaller businesses such as ourselves lend themselves to outsourcing, whereas a large established business such a Blackrock would be less likely to outsource.