Outsourcing across the buy side: Look before you leap

Outsourcing commoditized—and in some cases mission-critical—business processes and technologies to specialist third parties is an integral part of the global investment management industry. The premise is simple: it is difficult for a buy-side firm to justify managing a business process or technology in-house if a suitable alternative is available from a specialist third party. This rationale holds true for all buy-side firms, regardless of their technology expertise, budget or sophistication.

However, there is one key proviso: the outsourced business process or technology must be at least as good as—if not better—in efficiency, accuracy and overall quality than the incumbent business process or technology being managed in-house. If the outsourcing partner cannot guarantee an improvement in key performance indicators or through detailed and specific service-level agreements (backed up by references), the outsourcing proposition cannot be seriously entertained. While cost reduction is always a key consideration in this context, it would be operationally and reputationally damaging for any buy-side firm to outsource a business process or technology if the primary driver were cost reduction but the resulting collateral damage is reduced efficiency and quality.

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