Following RFA’s headline sponsorship of the With Intelligence HFM EU Emerging Manager Summit we discuss: Build vs Buy: Balancing outsourcing options.
In the world of private equity and hedge funds, outsourcing continues to be a hot topic amongst managers and regulators. RFA’s panel investigated key questions surrounding the ‘Build vs Buy’ debate including how cost-effective outsourcing can be and the rationale for when it is right to build in house and when it is right to work with outsourced partners. There were debates surrounding whether the landscape for technology is bipolar and what this environment looks like for smaller firms in comparison to more established market players. In light of this, the event debated how smaller managers can gain a competitive edge.
These questions have gained widespread circulation in the industry and are topics that RFA explores regularly with clients. Buying outsourced IT services in comparison to building an in house solution can come with many benefits and can lead to significant efficiencies, freeing up time and manpower for other tasks that are central to fund operations.
However there are many considerations that need to be taken into account when choosing to work with an outsourced provider. Following the panel, George Ralph explains what emerging managers should be looking for when selecting an outsourced partner.
The culture and mindset of a third party vendor.
This sounds obvious however it can often be overlooked when businesses are looking to grow and quickly. Having a third party vendor who shares the same culture is critical because ultimately this business will become an extension of yours. Being able to work together effectively will be easier if you share the same culture.
Fund manager willingness & openness to DDQ
It is integral that you are able to share with your investors that your outsourced partners are aligned with your business’ vision and your goals towards success. You need to be able to give 100% visibility and your outsourced partners will need to be prepared to be a part of any DDQ.
Whether your outsourced provider uses third party providers.
When it comes to managing third-party risk and compliance for your own business, it is important to know whether the provider you have hired is outsourcing without your knowledge or consent. When seeking a partner, a key consideration should be asking firms whether they subcontract any of their obligations to you and whether your own contract terms align with those of the subcontractor. Firms within finance have to be extra careful from a regulatory perspective as an additional third party vendor may need access to systems and data which presents an even greater cybersecurity risk.
Don’t commit to long term contracts.
The technology landscape is constantly evolving at lightning speed. Changes to technology, legislation and operational structures happen all the time and it is vital to be able to keep up. This is why it is important to maintain a long term view for the business whilst keeping contracts with outsourced providers relatively short. There is nothing worse than releasing the needs of the fund changes yet they are tied into a lengthy contract.
Is the team staffed appropriately?
This question is particularly important for small funds who are seeking to embrace growth. Funds should seek to outsource with a partner who can reflect this growth and not be outgrown.
Fundamentally, outsourcing can be a cost effective decision if a fund selects the right partner who can scale with them and support their needs. Like any decision, selecting the right partner takes time and consideration before making a commitment.