How to Effectively Engage in Component Outsourcing

March 8, 2011

The Winter 2011 issue of the MIT Sloan Management Review contains an article that captured my attention. Although titled What Happens When You Outsource Too Much, it might make more sense to call it “How to Effectively Engage in Component Outsourcing”. You can find the article here.

The article focuses on the challenges faced by the automotive industry during the economic downturn, and asserts that the challenges are in part due to the trend to outsource large or entire chucks of the manufacturing process. Despite the deep snow in Boston this winter, Detroit might feel like it’s a million years away – Boston’s stalwart healthcare, education and tech industries have not suffered nearly the fate as many parts of the country. But the lessons in this article apply across all industries, including the outsourcing of middle-to-back office functions in asset managers.

To grossly simplify this excellent article, the authors suggest that companies can do three things to improve their ability to outsource, all of which rely on firms ensuring that they don’t lose knowledge as part of the outsourcing process:
• Develop component-specific knowledge
• Practice learning by doing
• Adopt mechanisms for technological renewal

The other day, I read a scary statistic published by McKinsey. According to their research (performance data from 2004), while Morningstar 5-star funds had the greatest cash flows relative to 4-star and below funds, three-quarters of the 5-star funds had negative cash flows. McKinsey goes on to draw many conclusions from the data, one of the most relevant being that performance is no longer sufficient to retain and attract clients.

Component outsourcing is an interesting and growing offering that allows firms to focus on their core capabilities of managing money and providing client service, leaving outsourcing providers to handle non-critical processes. Since service levels are contractually guaranteed, the risk to funds is limited but the potential upside is huge. This is just one of the many benefits of component outsourcing.

Thomson Reuters PORTIA has a robust Outsourcing Services team that provides a wide range of services from basic hosting to outsourcing all middle-to-back office functions. But, in our experience, most clients are looking component outsourcing solutions. And PORTIA meets these needs in spades.

PORTIA’s Outsourcing Services team can assist clients with outsourcing everything from trade matching, to reconciliation and everything in the middle. Our solutions are totally flexible, customizable and scalable. And, in the spirit of the article, we work very carefully with our clients to make sure they are outsourcing only those functions that are not critical to their mission. And when firms outsource to Thomson Reuters, we exceed service level expectations.

For more information about our component outsourcing solutions, visit our website or contact us using the information in the About tab. And even if your only connection to Detroit is a fond memory of convertible muscle cars, I’d nevertheless recommend learning some outsourcing lessons from the automotive industry courtesy of the MIT Sloan Management Review.

Do you agree with the pitfalls laid out in this article? Are you observing growth in component outsourcing, and if so, do you think clients prefer this over full outsourcing to mitigate the risks described above?

– Matt Bellias, Director of Strategy and Marketing

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