Mar 08, 2022

Fear can be a huge motivator ─ or it can freeze you in your place. When talking with leaders about their operating models and the topic of outsourcing comes up, I often hear about their fears.

"Don't fear failure. Fear being in the EXACT SAME PLACE next year as you are today." — unknown

Of course, they don’t call them “fears,” but instead refer to them as “misgivings” or “concerns.” It’s one and the same, however. We’re human and need to “feel safe” in order to be effective.

Chief Operating Officers face significant pressures to deliver a smooth working environment that is functional and consistent, and the idea of outsourcing marks a significant change. Change causes uncertainty and uncertainty leads to fear.

Cutter has helped numerous asset managers with their strategic operating models. While developing their future target operating model, outsourcing always comes up. These discussions can be tense, and I’ve become something of an expert at identifying outsourcing fears (okay, okay … misgivings/concerns). Cutter helps firms mitigate their outsourcing concerns along the entire journey and ensures that firms make the best possible decisions. In this article, I provide an overview of the top outsourcing fears. In future articles, I’ll dig deeper and share tips on how to mitigate these fears.

1. Loss of Control

All operations have challenges, but at least they’re your challenges. You understand the issues, the players, the workarounds, and the history of “how things are done” ─ it may not always be pretty, but at least the challenges are yours. You understand them and you have mitigated them as much as possible. Further, you control the budget, the staff, and the technical decisions. You have relationships that you can rely on when you need support for your future initiatives or when things don’t go as planned and you need a helping hand.

The idea of turning all that responsibility over to a provider is frightening. Dozens of areas and responsibilities that you now control will be turned over to the provider. Whereas your priorities are number one in your mind, you’d be right to wonder how your priorities rank against the provider’s own priorities. Will your firm’s needs be met when things go awry? How will the provider make things right?

Clients always identify loss of control as their top outsourcing fear.

2. No Cost Savings

Outsourcing is sometimes viewed primarily as a cost play, although many investment firms that have decided to outsource would argue that reducing cost was not the primary driver. I would also argue that there are many other objectives, some of which are even more important drivers that should be top of mind. But I digress.

The problem is that when expectations are focused solely on transferable costs or the costs related to the staff and business functions that will be outsourced, you might be setting yourself up for disappointment. Determining the true cost of outsourcing is a difficult exercise, especially when you consider the residual staff that will be required for oversight roles. So, if those cost savings appear at first glance to be minimal, then what is the point of outsourcing those functions in the first place?

Another concern I hear has to do with automation. With technology advancing so quickly, wouldn’t it be more cost-effective to leverage technology like artificial intelligence (AI), machine learning (ML), or distributed ledger technology (DLT) rather than outsource those functions to a service provider?

3. Inflexible Solution

Providers offer their services to dozens or, in some cases, hundreds of clients. The managers I speak with have operations that continue to adapt to the needs of the organization. They fear that moving functions to a provider will put their firm in a situation where they cannot adapt as they must. Further, the changes the provider implements as part of the provider’s roadmap may not align with the needs of their clients. You can imagine how frustrating such a situation can be. And let’s face it, if you’re the COO handcuffed by an inflexible provider, you’re going to feel like you’ve put the firm in a bad situation. Not only is that scary, but it also may disrupt your career goals.

4. Lacks Functionality

One criticism I hear about some service providers involves asset coverage. When I talk to these investment firms, equity and fixed income are not the problem; it’s their derivatives and private assets that create the biggest headaches given their inherent complexity and the manual work needed to support them. As allocations to these assets continue to increase, these areas have become even more challenging for investment firms to manage. Clients with products distributed globally find it difficult to achieve a single service model, with providers operating differently in regions and lacking a comprehensive data solution.

Unfortunately, these coverage areas also are where the most skepticism about the service provider’s capabilities exist. Why outsource these assets if we are not confident that the provider can truly handle them? And if they can’t alleviate our biggest headaches, what’s the point?

5. Boilerplate Processes

Similar to how a provider can have inflexible tools, its processes also can be inflexible. Some of the concerns that I hear from clients have to do with customization. Many outsource providers stick to a standard operating model. This allows them to minimize operational risk and operate at scale, which means that they can also be more cost-competitive in the market. The problem, however, is that there are still many valid reasons for customization and bespoke workflows. Internally, your front office might have specific expectations that must be met, and further up the value chain of a firm is where functions are less standard due to client-specific needs.

Firms worry that a one-size-fits-all approach may not work depending on the type of firm, especially if there are client-specific requirements that can make outsourcing problematic.

6. Knowledge Loss

Operations staff members have some of the longest tenures at a firm. When outsourcing is on the table, managers look around the floor at individuals who may have been with the firm for 20-plus years and collectively have hundreds of years of experience. It’s hard to imagine being the person that separates so many good people from the firm in an outsourcing arrangement. What will outsourcing mean to them and their families? Further, they know how to get the work done and understand nuances across the client base. Will a provider know enough to manage the functions once outsourced? Will the provider staff have high turnover rates that reduce their overall effectiveness? There are numerous fear factors related to people that cannot be overlooked.

7. Failed Implementation

Remember in the movie “Apollo 13,” when Ed Harris, playing NASA’s Gene Kranz, emphatically states, “Failure is not an option”? Unfortunately, it’s more than an option ─ it's commonplace. BCG reports that 70% of digital transformation projects fail. The Standish Group reports that 66% of software projects fail. Because so much can go wrong, the fear of a failed implementation is real and warranted.

This type of transformation will not be quick and easy, and even with well-thought-out plans, defined goals, and objectives, you’ll undoubtedly run into hiccups along the way, and your project may even at some point get derailed. Time, budget, and resourcing are common concerns that I hear from clients. And how do you encourage staff to be “all in” when uncertainty lies ahead?

If you are deciding to outsource, the question is: What can you do to ensure success?

8. Vendor Lock-In

Inevitably, when helping the client with its operating model strategy, the comparison between outsourcing and marital relations is eventually made. It’s good for a laugh, but in both situations the stakes are high. You’re making a commitment. Okay, not for a lifetime, but outsourcing arrangements are still multi-year contracts, and implementations can take years. If something goes wrong with your provider relationship, you’re locked into a bad relationship, and “divorcing” yourself from the vendor by terminating the contract early will be cost-prohibitive. The fear of making a bad vendor decision and finding yourself stuck in a bad partner relationship is so analogous to our real lives that the fear is extra powerful.

Want Some Help?

Cutter consulting can help you evaluate outsourcers by using our comprehensive evaluation criteria and frameworks to support effective decision-making across stakeholder groups. We identify and document model and services gaps and provide the data, both qualitative and quantitative, needed to make the right decision for your firm. Want to chat? Reach out at connect@cutterassociates.com.

Interested in learning more about outsourcing? Check out our research report, Outsourcing Solutions or learn more about how we can help with making the right Outsourcing decisions for your organization.