It’s not uncommon these days for fund administration firms to outsource tasks to external vendors – both domestically and overseas. This decision can often reduce costs, increase efficiencies and provide greater flexibility. It can also result in operational complications, communication gaps and significant financial and reputational risk.
Regulators have been looking more closely at fund service providers’ outsourcing practices. The Central Bank of Ireland, for example, has taken actions related to the outsourcing of fund administration activities. The Bank also issued industry guidance asserting its expectations as to how these arrangements should be governed.
When considering potential firms, it’s important to do your due diligence. Enter relationships with eyes wide open and have an exit strategy in place in case your expectations aren’t being met. Here are five questions to ask to help you understand an administrator’s outsourcing policy, so you can better hold them accountable.
Question 1: What work do you outsource?
Outsourcing is an umbrella term for contracting work to an outside party. It’s done for a variety of reasons, often in pursuit of benefits such as the following:
- Expense reduction
- Greater specialization
- Increased capacity
- Gains in productivity
- Labor flexibility
- Skillset-specific efficiencies and more.
Outsourcing becomes problematic when communication gaps emerge. Delays, errors, dips in quality – the more work an administrator delegates, the greater the likelihood issues will arise. Understanding out of the gate what tasks are being assigned to whom will give you greater context to monitor and assess ongoing results.
Question 2: How much outsourced work is offshored?
Offshoring is a specific type of outsourcing where work is assigned to a vendor in another (usually less-expensive) country. While it can be done for many of the same reasons as above, usually cost cutting is the primary driver. When a service partner offshores key functions, additional risks emerge. Complications to consider include:
- Time zone delays
- Political turmoil
- Misaligned holidays and office closures
- Communications gaps
- Cultural and language differences
- Increased turnaround times
Question 3: How do you maintain regulatory compliance?
A great wealth of experience, expertise and technology often resides in a third-party administrator like U.S. Bank. Relying on the centralized resources of a knowledgeable partner can be a key step toward staying in sync with regulators and best practices.
Compliance becomes more difficult when an administrator adds additional links to the outsourcing chain. Keeping vendors in check requires diligent governance and oversight. A good maxim to keep in mind is this: an administrator can outsource certain tasks, but not the responsibility for them.
Your administrator should have a framework in place to ensure governance, manage risk and maintain business continuity. Before entering a partnership, it’s important to understand what processes and policies exist and how rigorous they are about enforcing them.
Question 4: How will your outsourcing/offshoring impact my day-to-day activities?
Depending on your needs, work that’s outsourced – and specifically offshored – can add disruptions to the course of daily operations. The best administrators prioritize proactiveness, responsiveness and flexibility to ensure you’re able to get what you need when you need it. Here are several questions to address as you assess the workability of an administrator’s vendor relationships:
- What are your turnaround times?
- What are your response times?
- How do you accommodate time zone difference?
- What’s your ability to accommodate urgent requests?
- What’s your client service approach?
- What’s your location strategy today and into the future?
Question 5: Do the potential cost savings outweigh the potential financial and reputational risks?
Every fund is unique, so it’s crucial to find the right fund administrator that’s best suited to your specific needs. Smart asset managers assess their short- and long-term goals to determine the best balance of potential cost savings to potential risk.
The client-provider relationship often suffers when an administrator starts offshoring too many essential functions, which can in turn reduce the control of the fund manager. It’s important to go into a relationship with an administrator with the understanding you can walk away if you need to. If your administrator is outsourcing tasks and you feel it’s impacting their level of service, that’s a clear sign it’s time to reassess. Staying with an unsatisfactory administrator hoping they’ll improve over time is rarely a successful approach.
Whether you’re working with an administrator currently or searching for new one, it’s important to do your due diligence and dig into their outsourcing and offshoring policies. Some outsourcing might benefit you by lowering costs, but it’s crucial to know what you’re getting into ahead of time. Asking the right questions early on will help you find a partner that best suited to the unique requirements of your specific fund.
Learn how we can help you with your fund servicing needs. Visit us at usbank.com/globalfundservices.
Equal Housing Lender