Yesterday, I moderated a lively panel discussion at Hedgeweek’s Emerging Manager Summit where we debated outsourcing, how it has evolved and what new managers should look out for when selecting partners.
With high-profile panellists possessing expertise spanning regulatory requirements, IT operations and fund management, and outsourced CIO services, this was a well-placed group to comment on the impact of outsourcing.
We talked about the pandemic of course, as it has undoubtedly changed the way we all do business. The panel agreed that the pandemic has merely accelerated the inevitable move to virtual, both in terms of enabling staff to work remotely, but also in conducting business. Investor relations, fundraising, due diligence and meetings with partners and service providers have all successfully pivoted to digital interactions. Whilst it remains a given that face to face is the preferred interaction, in some ways the move to virtual meetings has been very positive. New business meetings can happen quickly and easily, without the expense and time involved in extensive travel. Investor meetings can be conducted efficiently and effectively, where previously investors would have been mistrustful of video calls.
The reliance on outsource partners does seem to have increased, but a quick poll revealed that most listeners did not attribute this to Covid-19 and were already outsourcing those services they needed to when the pandemic struck. There has been a growing acceptance of outsourcing by investors (both institutional and otherwise), not only for emerging managers, but those established players too. Being a service provider myself, in a heavily regulated space, time and again we observe that the emergence of new rules – whether it’s financial reporting standards, nuanced tax law, FCA regulation, etc. – gives even established managers a need to seek external assistance, both generally and in specialist projects. It is simply too much to take on internally. The new prudential regime set to come into force in mid-2021 is a good example. Several clients have approached us for support with due diligence questions that demonstrate their preparedness to investors.
The panel agreed that the most successful outsource relationships are those where the service provider and manager are real partners, not adversaries on opposing sides. There is no doubt that outsourcing brings huge benefits, but only when done right. The point of outsourcing is to reduce workload for the manager, allowing them to focus on core business activities, so if it doesn’t achieve that, or the service provider needs too much close management, then it isn’t viable. Having said that, it is key that whilst you are outsourcing tasks, responsibility should not be fully delegated. A level of critical oversight is still required.
We agreed that the stakes can be high if managers make the wrong choice. The process of selecting outsource partners is time consuming and can be costly. Justifying a mistake to investors is hard, given the current levels of scrutiny and operations can suffer if the wrong partners are in place.
Managers can mitigate the risks associated with outsourcing by conducting appropriate due diligence on their service providers before selection and appointment, but that this should not be a one-off exercise and should be done on an ongoing basis. Annual reviews would be a bare minimum, but continuous evaluation and assessment of service providers is a good idea, as managers need to keep abreast of what is out there and at what price. As one panel member said, the worst outcome would be for an investor ODD team to question your choice of an outsource partner on price or service levels. Professional networks can help, with peer recommendations and referrals.
In fact, at Wheelhouse we believe in maintaining an ecosystem of outsource service providers that offer high quality services at competitive rates across a range of areas which commonly present outsourcing opportunities for managers. This not only helps our clients select trusted partners, but also helps us to work more effectively as a component in a client’s network of providers.
We discussed the concept of outsourcing alpha. Is it feasible? A quick poll revealed the majority of the audience did not believe that alpha could or should be outsourced. That is firmly the responsibility of the manager and would be incredibly hard to justify.
We concluded by agreeing that the decentralisation of offices and workforces and the ongoing digitisation of fund management would lead to greater levels of outsourcing in the future and that specialist outsource partners would become even more important. However in parallel, investor scrutiny and regulatory burdens are increasing, meaning only the best outsource providers would meet the grade.