To Outsource or not to Outsource, that is the Question – Time-Cost-Quality
There are several approaches to answering the question of whether to outsource or not. Unfortunately and unhelpfully, the answer is often: “it depends.”
There is the important consideration of comparing existing in-house capacity to available outsourced resources, and measuring cost, quality and timeliness of service. There are also other factors to evaluate, such as confidentiality, where data will reside, availability of consultation (24/7 or during regular business hours), time zones, geographical differences, and cultural sensitivities. This case study focuses on the specific issue of whether to build new internal capacity to meet an unmet need, or look to outsourced resources to fulfill that role.
Any consideration of this issue must begin with the initial objectives. There are many questions that need to be asked, including: should in-house staff perform the asset allocation and stock selection for a family’s investment portfolio? If the objective of the family office is to build an investment business, particularly if that objective extends to offering services for a fee to third-party clients – either as an MFO or as an investment boutique – then the decision on whether to build in-house capacity or to outsource should be determined by the overall business plan of the investment business. If, instead, the family office is looking to construct a simple, lean, strategic investment portfolio that will not become a core operating business, then the decision will be very different.
There are several key points to consider in making these decisions, including – but not limited to:
There is little to add to the obvious consideration of time-cost-quality, except to emphasize that family offices are intended to manage significant wealth over multi-generational time horizons. Too many times, short-term cost considerations are far too influential in determining long-term goals. The cheapest up-front costs do not necessarily translate into a longer-term loss, but this certainly should be considered. Cost is a function not only of the up-front fee, but also of the total cost that will be seen in future years and in the future possible outcomes of immediate decisions. An up-front investment to either build inhouse capacity or obtain higher quality (and more expensive) outsourced resources may well translate into a lower long-term total cost.
The next weeks we will also have a closer look at: Value of the function; Repetition of the function; Likelihood of change and some other external factors.
If you have further questions don´t hesitate to ask.