Layoffs are coming. The outsourcing industry will benefit.
With layoffs expected on Wall Street as a potential recession looms, outsourcing providers should expect a flurry of new business.
Outsourcing is the practice of hiring companies outside the company to perform tasks instead of providing those services internally. Outsourced services can range from back office operations – compliance, accounting, IT – to services such as outsourced investment managers and outsourced financial managers.
On Monday, CNBC reported that widespread job cuts are expected at major banks for the first time since 2019 – due to slowing markets, inflation and expectations of weak performance at the end of the third quarter. And the job cuts likely won’t stop at banks, according to Amy Lynch, founder and president of FrontLine Compliance, an outsourced compliance firm for investment firms.
“We are going to see layoffs. It’s unfortunate, but it’s going to happen and not just for the investment space,” she said. “Investment firms are going to tighten their belts because the cost of doing business is getting more and more expensive, and one of the ways to still get the job done and not have to pay so much for it is to ‘outsource.’
The outsourcing industry was born out of the 1989 recession and gained momentum amid the global financial crisis in 2008. If the current downturn leads to another recession, the industry could boom, Lynch said.
The outsourcing industry “was basically born out of a crisis,” Lych explained. The industry, which she defined as comprising both back-office and investment services, has grown significantly since the GFC, as outsourcing is often used as a cost-cutting strategy.
“[Wall Street] understands how recessions work and knows what businesses should do when times get tough,” Lynch said. “One way will be to see where they can cut costs.”
According to Lynch, the most expensive element of any balance sheet is the payroll. “There’s a whole regulatory component around having an employee, not to mention health care, so it ends up being very expensive to keep someone on the payroll because of all those extra costs,” he said. she declared.
Lynch noted that most employees don’t realize how much capital it takes to keep them on staff. In fact, she said that retaining an employee costs the company an additional 35% of that employee’s salary.
“So [firms] can automatically save 35% by outsourcing and nothing is different,” she said.
For companies with in-house compliance and IT departments, outsourcing these functions can be less costly than retaining staff. In the case of investment staff, however, hiring OCIO may cost dispatchers more than staying with their original investment team, according to Brad Alford, founder of the consultancy research firm OCIO Alpha Capital Management.
“Doing the outsourced route, at least the OCIOs, is not necessarily the cheapest,” Alford said. II. “That’s just it [allocators] deal with employee turnover and this is the most effective way [solution].”
Amanda Tepper, founder and CEO of Chestnut Advisory Group, a management consulting boutique that advises asset managers and OCIOs, agreed with Alford. In an email to IITepper said cost savings are not driving OCIO’s growth.
“Not at all,” she added.
Instead, she argued that the most important driver of investment outsourcing is the recognition that certain business functions are “non-essential and/or require specialized expertise that would be costly prohibitively expensive for the company to keep in-house,” she wrote.
For Chestnut, Tepper said periods of market dislocation always bring new challenges for investment organizations, which sends business to the advisory firm.
“For an endowment, for example, their core competency is in making grants to advance their goals, not in building investment portfolios,” Tepper said. “All of this economic dislocation and related capital market volatility should lead to continued, if not accelerated, growth in OCIO business.”