If you’ve ever outsourced an aspect of your operations—and who hasn’t—then you’re no stranger to the question of oversight. Most asset managers turn to external service providers as a way to free up resources and refocus on core activities. But outsourcing can create a new kind of demand on your time: oversight.

Crunching the numbers

Knowing how much or how little to monitor service providers can be difficult to determine. On one hand, you want to minimize errors and confirm service quality is maintained. On the other hand, every dollar spent on oversight eats into any cost savings gained from outsourcing. Are you too trusting or too skeptical? Underinvested in oversight or not invested enough?

I recommend starting with a simple algebraic expression like this one:

(A + B) * C = D

Where:

A = Value of avoiding errors: What risks are inherent in this outsourcing arrangement? What kinds of errors would give rise to those risks? How valuable is it to you to avoid each type of error?

B = Benefits of achieving and maintaining service level quality: To what extent does maintaining a certain level of service reduce your risk, increase efficiency, improve your speed to market, or support timely and accurate reporting? How much are those benefits worth to you?

C = Probability of accomplishing A and B with your oversight program: What level of tools and resources are you willing or able to commit? How confident are you that your oversight program will detect critical errors and maintain your desired level of service?

D = Justified investment in oversight: Based on your qualitative estimates for the three variables above (A, B and C), you can begin to develop your business case for outsourcing oversight.

Starting a dialogue

Whether you’re designing a new oversight program or reevaluating your existing approach, the formula I’ve outlined above could help. At a basic level, it can provide a rough sense of how much you can justify investing in outsourcing oversight. More important, it can trigger meaningful conversations regarding risk tolerance, service quality and program design.

If you’re risk-averse, you may value error avoidance more highly than another asset manager. If you’re focused on profit maximization, you may be willing to accept a higher risk of error in exchange for lower costs. There’s no right or wrong approach to outsourcing oversight. At the end of the day, it’s about striking a balance that you can live with.

For more details, read: The Algebra of Oversight

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