In recent years, many alternative fund managers have explored ways of enhancing operational productivity. Forward-looking firms have recognized that fund growth leads to increased operational volume, complexity, and operating expenses, and as with most things, one size does not fit all when it comes to outsourcing. A management company’s size, complexity, and in-house resources influence the optimal outsourcing model, from co-sourcing to partial outsourcing to full outsourcing.
Outsourcing essential non-core functions of the management company to an administrator has become a pivotal strategy for many managers aiming to scale efficiently. This practice not only streamlines operations but also allows businesses to focus their internal resources on areas where they hold a competitive advantage. By leveraging the experience and technological assets of third-party providers, companies can adapt more swiftly to market changes and demand fluctuations, ensuring they remain competitive in a rapidly evolving business landscape.
Outsourcing options
Fund managers are progressively turning to external service providers to outsource their management company responsibilities for full scope or ad hoc support. By outsourcing operations, either partially or fully, fund managers can significantly enhance their internal capacity and efficiency. The following outlines the various alternatives available for outsourcing operations of a management company.
Co-sourcing
The co-sourcing model enables service providers to integrate seamlessly into the management company’s existing infrastructure, leveraging its technology, processes, and procedures. This approach’s primary and most significant advantage is that it helps to relieve or delay the need for the management company to recruit and retain additional staff.
Partial outsourcing
The partial outsourcing model allows management companies to have the flexibility to select particular operations for outsourcing, thereby alleviating pressure on internal resources. For instance, outsourcing payroll adds a layer of confidentiality by limiting visibility of firm compensation.
Full outsourcing
Management companies can choose a turnkey solution to outsource the full range of operational responsibilities to an external provider, alleviating the need for in-house staff. The firms benefit from proven experience and technology supported by a rigorous controlled environment.
Retain the option to scale up or down
Fund managers who decide to outsource management company operations can quickly add or reduce services as AUM fluctuates, establishing a collaborative relationship to adapt to the firm’s evolving needs. Choosing the right strategic partner allows the administrator to serve as an extension of the firm and become a key contributor to the client’s overall business strategy.
Choose the right mix of resources at the right time
GPs balance the costs of technology, human capital, and outsourcing as they build their operational infrastructure. What might be considered the ‘right mix’ varies over time based on several variables, including the firm’s lifecycle stage, AUM, and preference for fixed versus variable costs, to name a few.
Replace rote work with value-added activities
Back-office tasks are often repetitive, and the function itself is often perceived as a cost center by fund managers. By outsourcing rote management company functions, which can be automated by a tech-enabled fund administrator, in-house staff can perform higher value and more impactful tasks. GPs become more efficient with business processes, mitigating common risks which enables in-house staff to focus on core competencies while providing their investors with a level of comfort that comes from third-party independence.
Outsource, but ensure internal accountability
Outsourcing should never fully replace internal staffing. GPs require leaders who will monitor and provide oversight for the outsourced work, specifically managing the deliverables and timing of those deliverables.
Outsourcing not only enhances productivity but also significantly boosts a company’s ability to adapt and innovate in its sector; the strategic decision to outsource management company operations can serve as a catalyst for growth and operational efficiency for fund managers. By choosing the right outsourcing model—be it co-sourcing, partial, or full outsourcing—managers can not only optimize their internal resources but also enhance their adaptability in a dynamic market environment.
At Ultimus LeverPoint, we assist our clients by working together to select and implement the most effective outsourcing strategy tailored to their unique needs. We discuss the various factors and benefits of outsourcing management company operations and how it can bolster a client’s specific growth initiatives. By fostering a partnership that scales with their operations, we ensure that fund managers can focus on their core competencies and strategic initiatives, secure in the knowledge that their operational needs are expertly managed. In the end, the goal of outsourcing is to enable fund managers to deliver superior value to their investors while managing costs and mitigating risks effectively.
ULP COD00000199 5/21/2024
