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Better business: Weighing up pros and cons of outsourcing

Outsourcing may save advice firms time and money but the final decision will depend on a range of factors

As competition increases, advice firms should seek ways of reducing costs to sustain profitability, such as through outsourcing. This is the practice of buying in services that could be done in-house but where you do not have the skills, expertise, time or resources to perform them.

Outsourcing is one of the ways by which small and medium-sized firms gain access to economies of scale, reduce costs and share in technological change.

The outsourcing decision often depends on the size and maturity of the business. For example, start-ups may only outsource compliance services and retain everything else due to cost pressures. 

But for established firms, there will be certain functions where outsourcing can save money and time. The best examples are networks, service providers, software, wrap providers and investment managers. The opportunities have greatly increased and include the following: 

Advice support:

  • Investment management
  • Product and fund research
  • Technical support
  • Specialist financial planning software
  • Compliance services.

Business operations support:

  • IT support and equipment, including wraps and platforms
  • Business planning
  • Training and professional development
  • Lead generation, newsletters and marketing materials
  • Website development and management
  • Company cars.

Each opportunity must be treated on its merits. The following table lists the main criteria to apply to each outsourcing opportunity.

 Outsourcing decision  
Is it core or peripheral? Will it cost less to outsource?
Is it a source of competitive advantage? Will it reduce busness risk?
Do we have the expertise in-house? Is there an opportunity to learn from the outsourcer and bring the activity in-house in the future?
Are we confident we can manage it if we outsource? Will the quality of the outputs be better than the in-house solution?
  Can we use the time released more productively by outsourcing?

As the chart shows, questions are split into two groups to help structure the decision process.

First, think about the function itself and how important it is. It does not always follow that core activities should not be outsourced. For example, investment management is a core activity for most advice businesses and sometimes considered a source of competitive advantage. However, there are circumstances where it is right to outsource it, in the knowledge that potentially this key activity will operate more effectively and with less risk. Second, ask questions that are specific to the outsourcing opportunity under consideration. The table below provides an example of this in relation to paraplanning services.

FUNCTION: Paraplanning services ANALYSIS
Is it core or peripheral? This is an important function – it should increase productivity of advisers but is not a core client output
Is it a source of competitive advantage? Not directly, although it will underpin excellent advice, and compliant and well-presented plans
Do we have the expertise in-house? Yes – but it resides with the advisers who are most productive when working with clients, as opposed to researching funds and writing reports
Are we confident we can manage it if we outsource? Yes – we know what is involved and realise we need to provide a very clear brief – that will be an additional positive discipline
Will it cost less to outsource? Probably because it is flexible – we carry no overhead and will use the service when we need it
Will it reduce business risk? Yes – provided we select the right provider and make clear the compliance and advice framework that they should work within
Is there an opportunity to learn from the outsourcer and bring the activity in-house in the future? Yes – we will review this and potentially bring it in-house if we have sufficient need for the service, and it delivers clear client and business benefits
Will the quality of the outputs be better than the in-house solution? Yes – because the supplier concentrates specifically on technical support and we will set clear quality requirements
Can we use the time released more productively by outsourcing? Yes – the advisers will have more client-facing time and better reports to present

This enables the key issues to be considered in a logical order. Often the decision is straightforward but the implementation is more complex. 

The following list summarises the process to use to ensure nothing is missed and to demonstrate the essential due diligence where that is required:

  • Prepare written specification of business requirements
  • Research to prepare a long list of possible suppliers
  • Review their proposition via desk research
  • Prepare shortlist
  • Contact and visit or speak to users of the shortlisted suppliers
  • Agree selection criteria with fellow decision-takers
  • Review presentations and supporting material from shortlist
  • Select – subject to contract
  • Agree contract and finalise implementation plan
  • Establish internal project team to work with supplier on implementation.

The activity to be outsourced will determine how many providers are considered and the extent to which you contact their existing clients. Make sure you check out the FCA criteria for outsourcing where relevant. It is always worth revisiting activities that were rejected for outsourcing in the past because services and costs change daily.

David Shelton is the author of “The Business of Advice” book and website


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