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Family Office – The Value of Function

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:

The Value of Function

There can be the temptation within family offices to give low value tasks to highly paid staff. Family offices tend to be dynamic, but relationships often get in the way of the professional process, particularly when there is a very strong family principal – or a group of very strong principals. Because there is a relationship of great trust and social closeness between family principals and senior staff, family principals may call on those senior staff to take care of personal favors. This may not be the best use, and certainly not the most economically efficient use, of that person’s time. Applying cost-benefit analysis to a family office does not always work.
In this case, the benefit to the principal might be the assurance that the task will be completed as wished because it is entrusted to a senior staff member. The senior member of staff might see this as another way to prove reliability and thereby further cementing his or her relationship with the family principal. There can be great value to both parties in not outsourcing these requests, but there can also be a great danger if the senior member of staff becomes effectively an overpaid personal valet.

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