Co-Souring without Sacrifice

Updated on: January 29, 2025

For many years now, private investment fund managers have turned to outsourcing for fund administration. Enlisting a team of outside experts has been proven as a cost-effective solution to stay on top of investor evolving reporting demands and growing regulatory obligations that seem to become more complex as they proliferate. In addition, outsourcing can eliminate some of the burden on the IT team to evaluate, implement and maintain a variety of software solutions.

While outsourcing is not going away any time soon for all of the benefits it provides, a number of fund managers are adopting a “co-sourcing” hybrid model, intended to provide the best of both worlds. The thought is that some firms want to ensure total control of and instant access to fund data but do not want to give up all the additional labor and specialized expertise that outsourcing brings.

Unfortunately, some managers find that their attempt to get the benefits of both models leaves them with half a solution that satisfies no one. When building your outsourcing solution, there are a number of objectives to carefully examine and factor into your decision in order to get the desired outcome.

Retained Control
The primary rationale for co-sourcing is that you want more control over certain functions and better oversight of key strategic decisions, while remaining efficient. But you also want to make sure that you are not giving up the capabilities you need for world-class administration and reporting.

What level of analytics do I need to respond quickly to internal and external inquiries? Does bringing some functions in house impact the quality or process of automated reporting? Most importantly, will the full suite of my co-sourced solution guarantee 24/7 availability via cloud-based solutions? Making assumptions on these issues without a full investigation can lead to disaster.

Flexibility
In co-sourcing, firms will choose which specific functions or tasks to outsource while keeping others in-house, often requiring a tailored solution rather than an “off the shelf” package. Not all third-party administrators are built to manage such mandates. Far-flung and dispersed technicians who have little connection to each other or their clients are less than ideal for the personal attention a tailored solution requires.

Your partner should have a dedicated team that knows you inside and out—from the details of your solution to the people at your firm who will use it. Most important, there should be an experienced leader at the helm who you can rely on to step in and manage any obstacles. The last thing you want when troubles arise is no recourse but a customer service number.

Risk Mitigation
By retaining some functions in-house, you want to mitigate perceived risks associated with complete outsourcing. You prefer to more closely manage sensitive information, maintain a direct relationship with stakeholders, and have primary control over the security of critical data. But do you really have the systems to achieve that in hybrid environment?

If co-sourcing will really mitigate risk, you need to ensure that you are not giving up the quality control and security that comes with a quality outsourcing partner. First, that means Embedded Quality Control. Having quality control that operates independently from client service and does not have direct client responsibilities is critical, especially with regard to investor-facing deliverables. Second, it means up-to-date and comprehensive cybersecurity. Your firm’s systems must be SOC 2 Type 2 audited and qualified, ensuring not only defense against outside threats, but also that they meet standards for transferring personal data between jurisdictions.

Integration with Existing Processes
You want seamless integration with your existing workflows and processes, and you want your fund administration partner to adapt to your firm's specific practice. The first requirement here is to ensure that the outside team you work with has the systems expertise you need. Chances are that while they are experts, they have trained on their systems, not yours. A lack of familiarity can impact the speed of workflow as well as the quality of the final product.

A comparable situation exists with regard to your procedures. One reason that outsourced fund administrators are so good at what they do is that they have optimized their own internal processes and apply them with rigor and precision. Adapting to a client’s approach—especially one that is less disciplined—can be a problem. To address both of these issues, a streamlined, tech enabled onboarding process is critical.

Ability to Evolve
When a firm first elects to co-source, it is usually to address a specific concern or set of concerns. But these issues rarely remain stagnant. It is important that your co-sourcing solution is built not just for today, but for the future. That means a partner who is willing and able to evolve and scale to address new needs as they arise and who will collaborate with you to find the right solution at every stage of maturity.

While there are many more questions that can and should be ask of your third-party administrator when developing a co-sourcing solution, thinking about these critical issues up front will help ensure that whatever solution you arrive at will not require you to sacrifice on quality or capabilities.

Published on: January 29, 2025