Build, buy or outsource: a practical test

When a credit manager’s portfolio outgrows its operations team and systems, the options can look mutually exclusive: hire staff and build the capability in-house, buy a system, or outsource the function. In practice the decision is made one process at a time, and the same firm can sensibly take all three approaches across its different processes.

We use three questions to decide which approach suits a given process.

Does doing it well set you apart?

Underwriting and portfolio management decisions do; processing a rate reset notice does not. Activities that distinguish the firm from its competitors deserve in-house staff and management attention. Processes that simply have to be performed correctly every time are candidates for software or a specialist provider. This question needs an honest answer, because many teams believe that their own process is unusual.

Does the process follow rules or require judgment?

A process that follows rules can be automated. A borrowing base calculation applies rules to a portfolio, and a reconciliation applies matching rules and leaves a small number of exceptions to investigate. Judgment requires people, but they do not have to be your own employees. An experienced operations specialist at an outside provider can investigate reconciliation breaks or follow up with an agent as well as an employee can, provided it is clear when an issue should be escalated and to whom.

Does the volume justify a team?

A function needs enough volume to keep at least two people proficient in it, because relying on one person creates key-person risk and leaves no cover during absences. Below that level, keeping the function in-house means that it is performed part-time by someone whose main responsibility lies elsewhere. That is often how a spreadsheet becomes a system of record.

Putting the answers together

• The process sets the firm apart and requires judgment: keep it in-house and invest in it.
• The process follows rules, at any volume: buy or build software for it, whoever operates that software.
• The process must be performed correctly, requires some judgment and has low volume: outsource it to a specialist under clear service levels.

Two cautions apply. First, software does not remove the need for an operator, because someone still has to investigate and resolve the exceptions. Second, outsourcing a process that you cannot describe only transfers the confusion to the provider. Document the process before deciding; doing so often answers the question of who should perform it.

Managers who make these decisions well tend to revisit them. A process that was too small to staff at one billion in assets may deserve its own team at five billion. Because the decision is not permanent, it is worth choosing providers and systems that allow you to change the arrangement later.