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.

This paper investigates the extent to which firms have embraced outsourcing across the industry, key benefits they can reasonably expect on the back of outsourcing business processes and technologies to a specialist third party, potential drawbacks of outsourcing practices and what they are looking for when it comes to vetting outsourcing partners.