Outsourcing vs. plug and play - how to choose the right strategy for your firm

Christina Schack, Head Data Governance, Operations & Projects at Vontobel explores the trick to getting outsourcing decisions right

Sara Benwell POSTED ON 11/2/2020 3:13:49 PM

Christina will be speaking at the virtual Fund Management Operations Summit this week. To register for the event click here.

Sara Benwell: What are the benefits of plug and play and what are some of the risks?

Christina Schack: In general, if you take existing modules from the market and use them, of course the benefit is that you are quicker in setting things up. You can immediately take on business and then you can speed up if you want to add new services.

The risk is that you also cannot build up own technical knowledge and then of course you also rely on their further development in terms of new services and products so you might be at some point limited if you want to enhance certain things.

Sara: Looking at the other end of the scale what are some of the benefits and drawbacks of full outsourcing?

Christina: Fully outsourcing makes sense for areas which are not your core competences, so that might be a good starting area. For example, some firms might outsource the middle office or custody service, where you say: ‘okay we as an investment firm are focusing on investments and not so much on the back-office services’.

"Fully outsourcing makes sense for areas which are not your core competences"

There it makes sense to outsource is because it’s not your core competence and if you have a huge outsourcing provider you have also the leveraging and the scale because they have a huge set up and you don't have to pay them for interfaces because it's all there.

However, on the other hand, if you have some very special or bespoke setups that you want to implement you might be restricted because the outsourcing partner has their services and they have to accommodate multiple clients so they will not be that individual and flexible to accommodate your special needs.

Sara: Can you have a middle ground between those two those two extremes and if you are going for a middle ground approach is there a risk that your different elements will clash with each other?

Christina: How I see it is really that you look really at all the business areas and all the business functions that you must do as a bank or asset manager individually. Some areas you might decide to fully outsource because they aren’t your core competence.

But with other areas where you think this is your business advantage, your business knowledge, your strength, your individual set up, or where you want to be very close to your clients – this is where you more look for individual modules that you can use and put into place.

I think you could run those in parallel depending on the business functions that you in total have in your business

Sara: How can organisations decide on the right path for them and are there other factors that firms might want to consider when they deciding between these different strategies whether it's outsourcing, plug and play, or building your own?

Christina: Yes, definitely. So, of course the first questions to ask are: ‘Is it your core competency?’ and ‘Do you feel that you have a good partner that you can collaborate with?’ so that that's one part.

But then it's important to consider the overall company strategies so if you decide to become a more client oriented company or a data analytics company or more digital than I believe that you would then look for this plug and play and individual pieces of fintech and you wouldn’t fully outsource certain of the elements.

The other consideration is called the ‘time to market aspect’. Once you're outsourced and you have found the right playing that you want to collaborate with then you might be faster, but in the long run of course you might be limited.

"The other consideration is called the ‘time to market aspect’"

So you need to question what your long term strategy is and what are the short term goals are and then decide where you think that that knowledge and the setup should be more in your hands and where do you say: ‘I have a good partner, I know that this partner is going into the same direction and these are the items that  I want to outsource.’

I also think that currently in the market there's a lot of consolidation going on so especially in the digitization area and you can see there's some mergers, some new players coming up and so on. It’s important to consider the market develops and changes and then also take this in consideration.

We know that some large service providers have merged into bigger companies or have sold out pieces of their business because they don't believe it's their strength or they want to focus on new things - especially if you look in areas like digitisation artificial intelligence and so on.

If these are services you want to use for your business, there's quite a lot of things going on in the market and I think it takes some time to get the overview and find the right partner. So, it's worth really scanning the market to get the overview of what's there and let this feed into your consideration of which model you want to use.

Christina will be speaking at the virtual Fund Management Operations Summit this week. To register for the event click here.


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