Speakers:

• Lounarda David, Chief Operating Officer, IFM Investors
• Andrew Chan, Chief Operating Officer, Columbia Threadneedle Investments
• Troy Rieck, Executive Officer, Investment Strategy, Equip

Fund Operator: What are the governing principles around designing in-sourced operations versus outsourced operations?

Andrew Chan: I can’t say that there are universal principles but in general, there are three critical factors that need to be considered.

One is around understanding the cost because more than anything else, if we take on something that we can’t ultimately afford - or there are unintended consequences that we aren’t prepared for - then it creates huge issues.

The second factor is the readiness of the organization for change because in any kind of design around insourcing or outsourcing, it requires a change in mindsets as well as roles. Very often, the most capable people are the first to feel it’s not what they want to do because it wasn’t what they signed up for, and they will be the first to bail.

"Any kind of design around insourcing or outsourcing, it requires a change in mindsets as well as roles"

Finally, one needs to understand what the ultimate objective is and this is where it can get very challenging as the people making the ultimate decisions may be doing so for the wrong reason.

The most dysfunctional being where the senior management decide that by outsourcing, they reduce their costs immediately - and for the next five years they enjoy higher profitability and much higher bonuses for themselves - but the organisation ultimately pays the price.

Troy Rieck: Andrew raises an interesting point of internal versus external operations. This is a secondary consideration to the more important question of having mission clarity: what are you trying to do and why, how are you doing it and why, what does success and failure look like and what are you willing to do to get there?

"Short term thinking tends to win out over long term thinking, and that can be a huge mistake"

A second key point is to understand the sustainability of the solution.

You can see organizations conceptualize an internal or external solution that meets its needs right now, but that solution may not be flexible enough to meet changing needs, increasing demands and greater complexity over time.

Short term thinking tends to win out over long term thinking, and that can be a huge mistake.

Lounarda David: There is the assumption that insourcing is better than outsourcing or that outsourcing is better than insourcing, but this is all relative. There is a step that needs to happen before such decision is made and that is reviewing the operating model, the model that translates strategy into a set of design principles that relates to how the organization wants to execute their strategy.

From a strategic perspective, the strategy of the organization and how they want to deliver it, the business requirements, the clients, the functional and critical capabilities and the costs of running all of these elements are all important factors.

"No one would outsource an activity, even if it was cheap if the capability wasn’t there"

You also have to consider other factors such as the organizational and cultural strengths and weakness, heritage issues, the effectiveness of these factors as well as gaps in capabilities that need to be improved.

Additional factors that could influence your decisions revolve around the impact of growth, geography and regulations.

The functional model is really important because this is the piece that is about the capability of processes and information. No one would outsource an activity, even if it was cheap if the capability wasn’t there.

There are a host of practical and functional elements that come together to create a better idea of what should and should not be outsourced.

This excerpt is taken from a roundtable: ‘What are the fundamental governance decisions that need to underpin the decision to insource investment and outsource middle office operations?’ You can read the full article here.

 

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