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Co-Sourcing Has Firms Re-Thinking Outsourcing Models

The co-sourcing model is gaining traction in firms looking to scale front and middle office.

Co-sourcing is the practice of collaborating with dedicated staff from a service provider to subsidize the firm's front and middle office responsibilities. The model blurs the line between partnering and outsourcing, and it's gaining traction in the financial service space.

People are embracing co-sourcing a lot more than they ever have, says Jayesh Punater, CEO of Gravitas, a provider of cloud, collaborative outsourcing, risk analytics and research support to hedge funds and private equity firms. Their employees work onsite or remotely, and all parties are responsible for the success of the projects.

Punater says large firms are looking at co-sourcing as a quick way to leverage technology and professional resources without up-front costs of in-house solutions. "It makes them more efficient as they scale the business."

The biggest challenge to the adoption has been the idea of ceding control of traditional in-house and value-added functions to an external party, but Punater says early adopters are coming in a big way.

Following 2008 bottom line P&L and downturn risk is a concern, and firms want to be agile and able to scale. "We have been innovating in that space. We're taking proprietary technology and packaging it into a customizable service called co-sourcing, where clients have control when they need, but get the benefits of outsourcing."

For larger firms, co-sourcing of market intelligence is particularly popular, especially if they are a hedge fund equity firm. For example, if a private equity firm is looking to explore multiple sectors such as credit, global equities, M&A and capital markets, they may rely on a co-sourcing provider to provide research analysts with knowledge that span across multiple sectors simultaneously when and how the firm needs it.

"I think research support is growing now more and more as clients realize that they need eyes on data 7 by 24. No matter how many people they hire it is hard to keep analyst talent on staff. So, for example, having a team in Mumbai, using their eyeballs, it's very valuable. I can get the competent resources and I can use a co-sourced team to support analysts in New York." Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio

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Becca L
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Becca L,
User Rank: Author
1/27/2014 | 4:30:40 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
Steve, exactly! That survey by E&Y isn't a surprise, and even though co-sourcing is still a novel concept, they seem to go hand in hand. How else can a firm hit both goals without the heavy down payment?

The questions raised above by Greg and Ivy have their merits, and it gives insight to the tug of war executives are having over resource-saving strategies and their reservations about security.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Apprentice
1/27/2014 | 12:12:10 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
Internal data threats, as you point out, are also dangerous to banks. However, banks have been reluctant to 'expand' the data-security perimeter by placing sensitive data outside of its own firewalls. Yes, internal safeguards need to be strong, but by working with a 3rd party, now a firm needs to also develop external safeguards as well. How can banks do both (improve internal checks, as well as develop new external safeguards)?
jpunater
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jpunater,
User Rank: Apprentice
1/26/2014 | 8:40:43 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
Data protection and security is a top issue for most firms - even with their own employees. In addition recent hacking incidents have made companies very cautious about data security and possible attacks. However, this is a generic issue and not related to co-sourcing. We live in a fluid society and weather a company co-sources or uses in-house resources, it needs to put in the appropriate safeguards on data protection.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Apprentice
1/15/2014 | 11:58:32 AM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
Sharing the technology is one thing, but sharing data is another thing entirely. I also imagine the hedge fund or financial firm will be leary of the 'experts' at the co-sourcer will work with other financial firms -- sharing information or one fund's 'secret sauce.'

I'm sure there are ways to protect the IP, but protecting IP is one of the hardest things to do even when you aren't cosourcing.
Steve Richard
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Steve Richard,
User Rank: Apprentice
1/14/2014 | 5:48:36 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
In following-up on BeccaG«÷s previous point with respect to
hedge funds trying out new markets, a recent survey of hedge funds published by
E&Y, identified growth initiatives as there number one priority followed by
operating efficiency. Co-Sourcing provides
great flexibility for firms to be nimble and to dynamically size the team to their
needs as they ramp up certain investment strategies or expand into new products
and for some accelerate growth through acquisition.
IvySchmerken
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IvySchmerken,
User Rank: Author
1/14/2014 | 2:30:04 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
I don't think financial firms will ever get used to the idea of sharing proprietary data, unless what they think is proprietary or unique is already a commodity.
IvySchmerken
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IvySchmerken,
User Rank: Author
1/14/2014 | 2:28:51 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
Even if firms are uncomfortable with having their data analyzed and modeled offshore, it can bring them efficiencies since the analysis is done in another time zone when they are asleep. And if this is used for the "grunt work" of analyzing and modeling of say credit portfolios, the firm could do further analysis with their own in-house staff. The decision of whether or not to trade with the data is still their own.
Byurcan
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Byurcan,
User Rank: Author
1/13/2014 | 4:42:45 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
that is very good point, financial services firms especially are very leery of sharing proprietary data, a mentality that may have to be overcome somewhat.
jpunater
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jpunater,
User Rank: Apprentice
1/10/2014 | 4:20:44 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
The client will have dedicated staff. The technology has some components that are shared (like a risk engine), however all the client data is stored in a separate environment that is dedciated only to that client. This is made possible by deploying those components in a cloud and using virtualization technology.
jpunater
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jpunater,
User Rank: Apprentice
1/10/2014 | 4:13:32 PM
re: Co-Sourcing Has Firms Re-Thinking Outsourcing Models
With regards to research being proprietary - absolutely, almost all firms will think that is their "secret sauce" and would not like an outside provider to make decisions on investment or handle the most important aspect of producing "alpha". However, the research support services provided in a co-sourcing engagement deals with doing a lot of analytics and modelling of various investment ideas and opportunities, whether they may be eventually traded or not. Especially when one thinks of credit portfolios like CLO's and levered loans, or high yield or distressed funds, there is a lot of "manual" grunt work like monitoring of credits, or creating a an investment memo - which especially if done off-shore with time zone advantage, provides support to a research analyst in a timely fashion. This model has been succesfully been implemented by some very large funds like DE Shaw and others, and by using a co-sourced research provider, the model is available to a firm that does not need to open their own office offshore.
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