Jason Rich

Firms are often torn between outsourcing processes or retaining them in-house. As the demands for data and risk management increase and margins tighten, the dilemma grows ever more difficult to navigate. The time has come for firms to move beyond the in/out debate and focus on a hybrid model, such as smart-sourcing.

The debate over insourcing versus outsourcing in investment management has been ongoing for decades. The trend fluctuates as market cycles, asset allocations and skills requirements change.

Within firms, a similar ebb and flow often occurs as they navigate various phases of growth, acquisitions and new product launches and ventures. Given the nature of much of this change – is it time to challenge the more ‘binary’ approach to outsourcing and adopt a new approach altogether?

There is no one-size-fits-all solution to the insourcing versus outsourcing debate, not even for a single firm or a particular component in the investment lifecycle. A ‘smart-sourced’ approach, however, is one that scales and adapts to both evolving circumstances and the life-stage of your business.

How is smart-sourcing different?

The traditional approach to outsourcing typically involves delegating an entire department or division to a third party, surrendering control of processes and technology. In addition to fragmenting the business and removing control, this approach is inflexible, requiring significant reorganization if the business model changes and processes need to be brought back in-house.

Smart-sourcing involves building a core common platform and technology stack that can be customized to your operating model, and is flexible enough to adapt to changing priorities.

As the investment sector undergoes a rapid transformation, the need for a robust yet flexible approach becomes even more pressing. For example, the growth in private assets and the continuing evolution of regulatory requirements have pressured internal resources. Globalization brings further challenges of adapting to changing availability of skills that differ across markets and jurisdictions, and are subject to regulatory requirements.

Finally, the extraordinary amount of data and analysis involved in today's investment strategies requires increasingly sophisticated systems and processes for risk management, real-time valuation and response to regulatory requirements.

Each of these factors complicates the insourcing versus outsourcing debate, demanding a smarter solution that can adapt to changing needs. From an asset servicing perspective, it encompasses four key elements of an operating model.

Four Ps

There are four elements, which we call the four Ps, to the investment lifecycle:

• Process – what is being done?
• People – who is doing it?
• Platform – what infrastructure are they using?
• Place – where is this happening?

The essence of smart-sourcing is to establish a core platform with consistent processes, while allowing flexibility in people and place.

This approach provides complete flexibility, allowing an organization to source smartly and adjust to changing skills needs, including demographic change and variation in global markets. Having a single platform provides transparency, as all processes and stages in the investment cycle are visible in one place, supported a single technology stack, regardless of whether functions are insourced or outsourced.

For a business, this provides two vital capabilities – scalability and the ability to evolve.

A smart-sourced model can expand to match a firm’s growth and adjust to changes in the style of sourcing required at each phase. Importantly, it allows your business to explore new markets and asset classes in the same system, allowing for flexibility in deciding which aspects of these expansions are handled internally or externally.

When evaluating an outsourcing decision, it’s important to begin with an evaluation of the operating model, both as it currently exists and with a view toward how firms expect to grow and evolve over time. Each firm will have unique requirements and a distinct growth trajectory that may require rebalancing between insourcing and outsourcing at different stages.

Traditional outsourcing can lead to fragmented processes, creating data silos and inflexible operational models that are not sustainable, and could hamper future expansion opportunities. Smart-sourcing, on the other hand, allows a firm to leverage outsourcing when it offers the best solution for a particular process, while still retaining full control and transparent oversight.

Jason Rich is the head of sales for Asia-Pacific and the country head of Singapore and Southeast Asia for State Street.