Easily scalable, outsourcing can be managed successfully as business expands and contracts, allowing work to be done so that it doesn’t disrupt the business flow. Related to this, outsourcing allows access to niche technology and expertise that may not be viable to retain with a fixed pool of employees. In today’s climate of accelerating regulation in fields such as data2 and fintech3, there is an increased incentive to have access to this knowledge.
Like the issue of scalability, outsourcing also allows for flexibility within the work itself. In a volatile business environment, outsourcing allows different tasks to be prioritised and pared back to meet the challenges of the market. Furthermore, outsourcing allows firms to build global partnerships that can tap into areas of local expertise with regard to areas such as regulation that may be more difficult to navigate from abroad.
With technology, it can be easier to outsource to platforms that have already implemented new technology than it is to update legacy systems in-house. The time and energy needed to constantly monitor whether the system needs updating to keep pace with competition can be high. Therefore, outsourcing can both provide ease and an efficiency gain.
In the financial sector, firms are usually divided into back, middle, and front office. The front office deals directly with the client, the back office completes all administrative and support work, and the middle office operates between these two, often managing less routine functions than the back office such as risk management. Since the introduction of IT in the 90s, outsourcing back-office functions has become more and more common. A more recent emerging trend is middle-office outsourcing, which is growing at a current annual growth rate of 9% per year in some regions1.
A middle office outsourcing partnership also guarantees a certain level of oversight, which may reduce both the actual risk of wrongdoing and, as middle-office outsourcing becomes more common, the perceived risk in the eyes of clients and prospective investors. A key driver of middle-office outsourcing is that it allows firms to focus on their core business. The flexibility of an outsourced team can increase knowledge and specialism, therefore often work done is better tailored to the needs of the business. As outsourcing means one point of contact to the middle-office, the connection to the front office can become more streamlined than in-house relationships. This can result in a clearer direction for the business and a greater level of productivity.
Since Adam Smith’s writings on the division of labour, it has been observed that people are more productive when they do not need to switch between tasks and their work is bounded in a narrower range. Though this can be done in-house, it often practically leads to staff dividing their attention between many smaller tasks. Outsourcing can therefore lead to productivity gains, particularly in a small firm and for firms operating on smaller margins.