11 Key Questions to Ask When Considering Outsourcing

May 28, 2024

Outsource vs. Insource: How Do You Decide, and What Are the Questions You Ask?

When mid-market financial firms evaluate whether to outsource or insource functions, the decision extends beyond cost savings and workload management. Executives must navigate a complex landscape of internal and external risks to determine the most strategic choice for their company.

We spoke with Sunil Rao at LPGP Miami, COO and SVP of Finance at Plum Alley Ventures Company, who shared his approach to these pivotal decisions. Drawing from his extensive experience, Rao outlined 11 critical questions that guide him in assessing whether to outsource or insource key business functions. These questions help to ensure that any partnership aligns with the firm's strategic goals and operational needs.

1. How far from my core functions is this specific function?

Outsourcing is often beneficial when a function lies outside your company's expertise. This approach allows your firm to leverage external proficiency, particularly in areas where maintaining in-house expertise is impractical due to the depth and cost of the required work.

2. Will outsourcing this function compromise our strategic autonomy?

Outsourcing critical functions can risk your firm's ability to set and pursue strategic goals independently. Ensure that relying on an external vendor will not restrict your decision-making capabilities or place your company in a dependent position.

3. Does the team required to perform the function need continuous upskilling?

Consider the long-term training needs when deciding between insourcing and outsourcing. Outsourcing may be preferable if the function demands rapid and ongoing skill upgrades. This approach can prevent overloading a single employee or a small in-house team as the company grows and the scope of responsibilities expands.

4. Is the pace of technological change in that function high?

Consider whether frequent technological updates are necessary for the function. If constant technology upgrades are required, this can slow down operations and create bottlenecks. Outsourcing to a vendor who can keep pace with these technological needs might be more effective than relying on an internal team, which could struggle with rapid changes.

5. What is the cost of switching vendors?

Consider the comprehensive cost of leveraging outsourcing providers beyond just fees and savings. This includes potential losses during the transition period, such as the time and resources spent transferring data. If a vendor proposes restructuring a key function, assess whether the potential restructuring costs and the time required outweigh the benefits of reducing administrative and back-office burdens.

6. What is the cost of failure in that function?

Evaluate the potential consequences if either an internal team or an outsourced vendor fails to meet the company’s needs. Consider the risks and potential losses associated with each option. Determine whether a failure could lead to catastrophic outcomes and assess which option—insourcing or outsourcing—presents a higher risk.

7. Will outsourcing this function enhance or reduce security?

Assess the security implications of adding an external provider, scrutinizing their cybersecurity measures, and data backup protocols. While outsourcing introduces security risks, it can also offer superior security expertise, as vendors often have more robust processes due to their specialization. Weighing these considerations is crucial in determining the most secure option.

8. Will this allow for scalability?

Consider whether outsourcing a function will provide the flexibility to scale operations up or down efficiently without significant investment or restructuring. Determine if an external vendor can accommodate fluctuating demands and growth more effectively than managing the function in-house, ensuring that the chosen approach supports your company's long-term expansion goals.

9. Is direct control over that function crucial?

Evaluate the importance of maintaining direct control over specific functions within your team. Assess whether certain tasks require hands-on management or if an external expert can effectively handle them. Understanding which functions are strategically critical to your company will guide decisions on what needs direct oversight.

10. Can risk be effectively managed externally?

Consider if outsourcing can more effectively manage risks associated with specific functions. For example, a Market Data procurement service with deep expertise in vendor compliance,  and reporting, could mitigate the risk of an audit more efficiently than an internal team. Evaluate whether an external vendor's specialized knowledge and processes can offer better risk management than maintaining those responsibilities in-house.

11. Does the task require specialized technology?

Assess the necessity and cost of specialized technology required to handle functions internally versus outsourcing them. Consider whether outsourcing can provide access to the needed technology at a more affordable price, eliminating the need for your team to manage and invest in specialized equipment or software. This comparison can help determine if outsourcing offers a cost-effective solution while meeting technological requirements.

Bonus Questions:

Once a decision to outsource has been made, selecting the right partner to handle internal functions is crucial. Sunil Rao also shared five essential questions to ask potential vendors. These questions are designed to help ensure that the chosen company is well-suited to meet your outsourcing needs effectively.

1. How well-funded is the company?

Assess whether the company has sufficient funding to support its team and sustain growth. This evaluation helps ensure that the company is financially stable and capable of meeting your outsourcing needs long-term.

2. What is the cost of their failure?

Consider the potential impact on your company if the outsourcing provider fails or goes out of business. Evaluate the stability and longevity of the company and how their potential failure could affect your operations in the next 2 or 3 years. Assessing this risk is crucial for ensuring continuity and planning for contingencies.

3. What is their policy on internal training?

Investigate the outsourcing provider's commitment to ongoing employee training. Determine if their experts are equipped to keep pace with industry developments and whether they continuously upgrade their skills. This is crucial for ensuring that the team managing your business functions remains competent and effective as industry standards evolve.

4. What is their history of maintaining and promoting talent internally?

Examine the outsourcing provider's track record for employee retention and internal promotion. High turnover can affect the consistency and quality of services provided. Determine if the company is known for nurturing and advancing talent contributing to a stable and expert team capable of effectively growing and managing their responsibilities.

5. What is their company culture and approach to partnerships?

Explore the outsourcing provider's company culture and how they treat their employees and partners. Since a procurement service acts as an extension of your own company, their values must align with yours. Assess whether their concept of partnership and treatment of people are compatible with your company’s culture, ensuring a harmonious and effective collaboration.

In the intricate decision-making landscape of insourcing versus outsourcing for mid-market financial firms, Sunil Rao’s questions provide a comprehensive roadmap. Through a series of strategically crafted questions, the questions help leaders not only evaluate the immediate operational and financial implications but also consider long-term impacts on company culture, security, and scalability. The additional questions for selecting the right outsourcing partner underscore the necessity of alignment in financial stability, growth potential, and values. Ultimately, these insights guide executives in making informed, strategic choices that align with their firm’s core functions and future aspirations, ensuring that every decision enhances their ability to adapt and thrive in an ever-evolving market.

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