Managing the increased risks associated with outsourcing

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Managing the increased risks associated with outsourcing

  1. 1. 15<br />PracticalSuggestions<br />Managing the increased risks associated with outsourcingFTF’s 5th Annual OpRisk Conference, 2 March 2011, New York City<br />Holly H. Miller, Founding Partner<br />Stone House Consulting, LLC<br />1<br />© 2011 Stone House Consulting, LLC<br />
  2. 2. You Probably Outsource Already<br />© 2011 Stone House Consulting, LLC<br />2<br />Office cleaning<br />Legal services<br />Cafeteria management<br />Fund accounting<br />
  3. 3. Suggestion #1:Don’t Outsource What You Don’t Understand<br />Lack of understanding actually increases risk<br />If you are outsourcing out of fear, think again<br />Outsourcing is not a fix for a lack of confidence in a department head<br />Chances are, their job does not go away<br />Ensure you can supervise what is outsourced and manage the vendor appropriately<br />3<br />© 2011 Stone House Consulting, LLC<br />
  4. 4. Suggestion #2:Inventory Your Current Services and Costs<br />What services do you provide today?<br />Internally<br />Externally<br />What MUST remain and what can be outsourced?<br />What really can go away completely once implemented?<br />Can you do an apples-to-apples comparison?<br />4<br />© 2011 Stone House Consulting, LLC<br />
  5. 5. Suggestion #3:Do Your Homework<br />Perform due diligence<br />Initial and ongoing<br />Document it!<br />Has the provider ever serviced the kind of business that you manage?<br />Asset classes<br />Investment vehicles<br />Check references<br />Consider on-site visits<br />Create a scoring matrix<br />Gain internal agreement on what is important—and what is not<br />Consider size<br />Independence<br />Service<br />5<br />© 2011 Stone House Consulting, LLC<br />
  6. 6. Suggestion #4:Manage Your Staff and the Rumors<br />© 2011 Stone House Consulting, LLC<br />6<br />Secure signed NDAs from potential providers<br />Keep potential providers off-site for as long as possible<br />Prepare—in advance—statements for when the rumors start<br />For staff<br />For clients<br />For investors<br />For others<br />Budget ‘stay’ bonuses<br />Prepare for temporary staff<br />Discuss contingency plans with potential providers and your consultant<br />
  7. 7. Suggestion #5:Consider Hiring a Consultant<br />Document your current state<br />Give document to all potential providers<br />Excellent for evaluating success later<br />Document—but maybe don’t share!—your anticipated future state<br />Obtain blind quotes from potential providers<br />Manage the process<br />Gain guidance and support throughout<br />Current business heads often viewed as biased<br />Let the consultant be the bad guy<br />Provide a ‘cloak’ for activity<br />7<br />© 2011 Stone House Consulting, LLC<br />
  8. 8. Suggestion #6:Document Workflows<br />Current state<br />Helps educate potential service providers<br />Aids with identifying what can be outsourced and what cannot<br />Helps ensure nothing is forgotten—or replicated<br />Future state<br />Ensures all parties know what to do<br />Educational tool for new staff<br />Assists with due diligence reviews<br />8<br />© 2011 Stone House Consulting, LLC<br />
  9. 9. Suggestion #7:Examine Hand-offs Carefully<br />Hand-offs are points of considerable operational risk<br />Lost information<br />Missed deadlines<br />Unclear accountability<br />9<br />© 2011 Stone House Consulting, LLC<br />
  10. 10. Suggestion #8:Establish Strong Service-Level Agreements<br />10<br />© 2011 Stone House Consulting, LLC<br />Clearly delineate:<br />Responsibilities<br />Deadlines<br />Turnaround<br />Quality measures<br />Escalation<br />Communication<br />Pay particular attention to hand-offs<br />Ensure metrics are assigned to each<br />Utilize during meetings with providers<br />
  11. 11. Suggestion #9:Establish and Monitor Metrics<br />© 2011 Stone House Consulting, LLC<br />11<br />Current state<br />Future state<br />Particular attention to:<br />Hand-offs<br />Service levels<br />Business volumes<br />
  12. 12. Suggestion #10:Consider Timing<br />© 2011 Stone House Consulting, LLC<br />12<br />Timing of:<br />Evaluation / selection<br />Conversion<br />Parallel<br />Go live<br />Year-end can be a good time for tracking books and records<br />Year 1 on existing systems<br />Year 2 with outsourcing provider<br />But year-end is a busy time<br />When are bonuses paid?<br />Evaluate phased approach<br />
  13. 13. Suggestion #11:Think About Duplicate Effort<br />Some firms duplicate effort to:<br />Obtain independence<br />Improve timeliness of information<br />Create checks and balances<br />If you don’t trust the outsourcer, then don’t outsource<br />13<br />© 2011 Stone House Consulting, LLC<br />
  14. 14. Suggestion #12:Confirm Record Retention Timeframes<br />14<br />© 2011 Stone House Consulting, LLC<br />Investment managers must maintain records<br />Legal and regulatory reasons<br />To substantiate performance track record<br />Retention timeframe for performance is for entire length of track record<br />To substantiate performance, typically retain:<br />Investment accounting records<br />Partnership accounting records<br />Fund administrator records<br />Bank / prime broker statements<br />Pricing documentation<br />Investment management agreements<br />Investment guidelines and restrictions<br />Client correspondence<br />Outsourcing providers often have record retention policies that are shorter than yours<br />
  15. 15. Suggestion #13:Evaluate Privacy and Location<br />Where will your provider:<br />Store data<br />Perform services<br />Regulatory environment<br />Privacy laws<br />Client concerns<br />Data protection<br />Jobs<br />15<br />© 2011 Stone House Consulting, LLC<br />
  16. 16. Suggestion #14:Prepare an Exit Strategy<br />Outsourcing is the ultimate roach motel<br />What happens if you are not happy?<br />Contract language<br />Consider a data warehouse<br />Build interfaces to/from the warehouse<br />16<br />© 2011 Stone House Consulting, LLC<br />
  17. 17. Suggestion #15:Control the Press Release<br />Ensure the ability to review and approve it<br />Only allow an announcement AFTER conversion is completed<br />Consider agreeing to a case study<br />17<br />© 2011 Stone House Consulting, LLC<br />
  18. 18. Contact Details<br />Holly H. Miller<br />Partner<br />+1 610 358 1791 phone<br />+1 917 587 2411 cell<br />+1 509 479 1831 fax<br />hmiller@stonehouseconsulting.com<br />Stone House Consulting, LLC<br />Strategic, operational and IT consulting for investment managers and hedge funds<br />www.stonehouseconsulting.com<br />New York | Philadelphia | Wilmington<br />© 2011 Stone House Consulting, LLC<br />18<br />

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