Michael Bernth Nielsen, Chief Operating Officer, Capital Four.

Andrew Putwain: Would you recommend having more than one outsourcing partner?

Michael Bernth Nielsen: Yes, but it depends on several factors. You never want to put all your eggs in one basket if you have a lot of different aspects to a business. If your organisation is not very complex, then it may not be relevant to have more than one outsourcing provider.

Secondly, it depends on the investment strategy. To me, some outsourcing providers are well adept at liquid strategies. Some are more adept at illiquid strategies, so you must assess that issue when you choose your outsourcing provider. It’s often a good idea to have multiple providers if you manage very different strategies.

Andrew: Bringing admin tasks in-house to have more product control on quality – why and how would this work in terms of opportunities and drawbacks? What would be the areas you would focus on there - customer relations and service, data, or cost control?

Michael: The answer is all of the above and then some. I tell outsourcing providers that it's okay if I get angry with them. But if my clients get angry with them, then that's not okay. 

"When it comes to cost, often it can be expensive to be cheap. If you buy the cheapest provider, then you often get the lowest quality product and that's going to cost you more money."

That is because this situation goes to the end client and anything where the end client sees a result of poor quality is unacceptable. Often in fund administration, it has to do with Transfer Agency (TA), which is responsible for doing Know Your Customer (KYC) on clients and investors. That is a key area where we need to keep control.

It has to do with the point of contact. We need to consider cost as something that's always relevant. When it comes to cost, often it can be expensive in the long run to be cheap. If you buy the cheapest provider then you also often get the lowest quality product and, in the end, that's going to cost you more money.

Andrew: Are there tasks that are too important to outsource for operational reasons, regardless of cost?

Michael: Reputation is the main one, because when we choose a provider, our investors don't care if it's called A or B, if they want to invest with us, then it's our responsibility that the investors' experience is sufficiently high. In the eyes of the investors, we will be responsible for the experience or poor quality.

There's also the aspect of data quality as performed by the fund admin not experienced by an investor – a typical thing is errors; this is something that is of key importance to us and it’s something we need to know and be able to rectify quickly. To assess an outsourcing provider, you need to figure out what is important to you and someone that has a fit for that.

Andrew: Outsourcing will always have a hidden cost. What exactly are these hidden costs, why do they happen, and where have you tried to mitigate them?

Michael: The hidden cost is all the internal resources you have to add in voluntarily for a smooth operation. To manage the relationship with the outsourcing provider, there's an expectation to spend time with your outsourcing provider to agree to terms and specific details, which is one example.

The hidden cost is all the incremental increases in time consumption that will come that you didn't expect. When you see an error in one aspect, then there is a tendency to call up your internal control and ask them to check it, which can take time.

"It's easy to see the sticker price difference because often higher quality admins are more expensive and lower quality admins are cheaper."

In a Transfer Agency (TA), when frustrated clients call you and say your outsourcing provider has crazy requirements for deliveries in Know Your Customer (KYC), then you put a client service assistant in between the transfer agent and the client to help assist this. You didn't plan on that when you chose the outsourcing provider, so the time drains come incrementally and it's difficult for managers to figure out the cost of having a lower quality provider compared to a higher one.

It's easy to see the sticker price difference because often higher quality admins are more expensive and lower quality admins are cheaper. In some situations, this is fine because the price is more important than quality.

However, the actual price difference including the hidden cost is complicated to figure out because you can't identify the time consumption in your internal organisation. You also can't precisely identify the reputational risk that you run with your end investors.

Andrew: Is culture match between the outsourcing company and the fund operator important - especially in complex structures vs lesser complex structured funds?

Michael: Culture is the most important piece when you assess the provider, but it's complicated because the first person you meet is a well-dressed and quick-talking salesperson who is adept at demonstrating a solution in a controlled environment.

"Culture is something you have to feel and depending on the complexity of the structure and when you have institutional investors the tolerance to ways it could expose you to reputational risk might be lower."

If it's in your culture to help and you pick up the phone and assist when there’s a question, then that culture can have a flip side if you don't have time to do what you were supposed to do.

It's tricky to assess. Culture is something you have to feel and depending on the complexity of the structure and when you have sophisticated institutional investors the tolerance to ways it could expose you to reputational risk might be lower.

You need to be able to understand your potential reputational risk. If we have a €500m investor, then we spend more time on assessing culture and more money on finding the right provider to maintain that relationship because that investor has higher demands and lower tolerance for unprofessionalism.

Andrew: How would you recommend a balance of in-house/outsourcing? 

Michael: The key thing that I have underestimated historically, which we focus on now has to do with something that most managers consider an annoying compliance exercise, namely the outsourcing monitoring activities.

When you monitor your outsourcing provider, it has historically meant having a document with a lot of ticks that you can present to compliance.

If you make it more operational when you monitor your providers, then that becomes a valid input to your balance of insourcing versus outsourcing. We developed a framework where our material outsourcing providers are scored every month. We have a scoring system with different parameters in it, which is supported by a service call that we do with all of our key outsourcing providers, monthly.

"It's important to understand the price is not a sticker price and to understand the other aspects. The three parameters we score offers on are price, quality, and flexibility."

You need to add your operations specialist, controller, or finance team to those calls to ask the questions and have them do the scoring. It’s not as effective to have the operations officer doing the scoring of an outsourcing provider because I don't know what the day-to-day issues are. We combined that score with an action points list where we agree, on what is our objective to resolve over the next X days or weeks. You need to structure monitoring of outsourcing providers because that will feed discussions of what to insource versus what to outsource.

Price has historically been important. Especially for institutional investors, which were the main input to your assessment of an outsourcing provider. It's important to understand the price is not a sticker price and to understand the other aspects. The three parameters we score offers on are price, quality, and flexibility.

 

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