Keeping You

Business: Do what you do best and outsource the rest

27 Sep 2018

When a business outsources some of its operations it can be to save money, or it can be to obtain expertise.

The underlying idea of outsourcing has been a long time coming. It was discussed by the economist David Ricardo in 1817 as part of his theory of comparative advantage.

Peter Drucker, more recently, made the case for outsourcing which he summarised with his saying, “Do what you do best and outsource the rest.”

Some years ago I outsourced something that we did in-house and that I loved doing. I considered it the core of what we did, investment research. Thinking back about the pressures on us at the time, I’ve asked myself why we did this. Could we have kept going, building the research function up, invested in new people and tools? Investment research can seem like the sexy part of wealth management so why would we give it up?

It dawned on me that we should only do what we were best at and that we can’t be best at everything.

There is a great saying in business, “You can’t be all things to all people.”

As the founder of our firm, I’d had some previous experience in running an investment research organisation. I had been the director of research at FPG Research, bought by Morningstar, now the preeminent research house for investment funds in the world. But I was never the boffin. To be a great researcher one must be strong in statistics. It wasn’t my strong suit. I love algebra and calculus, not stats. And I hated staring at computer screens all day. I decided there had to be people better at this than us and luckily, we found them based close by in Christchurch.

Consilium NZ was started by colleagues of ours. We call them ‘colleagues’ even though they are competitors of ours as well, because we share the same investment philosophy. We believed in the same things as they did when it came to investment.

They made sure that the new research house, Consilium, was a separate entity with an independent board chair and a managing director with no association to our old colleagues. The clincher was when they attracted a key investment economist from America to come and live in Christchurch and with him came the latest investment understanding and thinking in the world at that time. His connections have enabled the organisation to grow and grow and now they have over $2 billion of advisers funds on which they provide research. They are the largest independent research house in New Zealand and growing fast.

Could we have done something similar within our organisation? Not in my opinion. Once Consilium gathered momentum they included a professor of finance from AIT in Auckland to join their investment research committee and he too was world class. They have gone from strength to strength.

We call Consilium our ‘back office’ and we are closely integrated. Did we save money? No, it costs us hundreds of thousands of dollars a year to use them. We did it to obtain world-class expertise. Excellence in their field, the best that money can buy. Outsourcing at its best. We could never have afforded the expertise we now have available.

As Drucker said, “The cost-cutting crowd are delusional.”

A number of observers wonder what we do if we have outsourced our research. Hang on. Every investment adviser outsources their investment research, whether it be to an in-house team or an out-house team. It is the same. There are over 20,000 different investments in the world to consider and one cannot do justice to that body of work and have time to talk with clients.

If you want to get world-class research expertise you must be on a world stage working with a dedicated team. The old idea of a ‘clever guy’ pouring over a dozen or so annual reports is long gone. Our investment philosophy is a quantitative approach and it requires massive computing power and professors of statistics to work it properly.

In Drucker’s view, outsourcing should be about creating eco-systems in which best-of-breed organisations cooperate to deliver value.  He noted that outsourcing “…may actually increase costs, but you also get better effectiveness.” Business people would do well to take a wider view and see outsourcing this way.

Keep asking great questions …

Read more articles in this fortnight's edition of 'News Farmers Can Use':