Entitled Co-Source Solutions: Combining technology and service to optimize the back-office, the panel consisted of Hugh Bagatelle, founding partner at Windward Advisory Group; Kenji Mochizuki, chief investment officer at Akemi Capital; Jeff Sesar, vice president and owner at Zenith; and Bob Shepro, senior vice president and head of the private capital group at SS&C. It was chaired by Stephen Draper, senior consultant at Family Office Exchange.

Draper began the session by asking the panelists to describe what co-sourcing is and why some family offices would do well to consider this approach to technology.

Shepro of SS&C, the global provider of investment and financial software-enabled services, explained that co-sourcing is a combination of technology and service. “Co-source is a blend of a client’s team and the vendor's team, putting together a business process that takes you to the desired end result,” he said. “It can vary client to client in terms of how hands-on they are in the process, and in which areas.”

Shepro continued: “We heard earlier today that one of the problems in data aggregation is that it gets you maybe to the five-yard line, but then you still need qualified people in that process to get you to the end zone. We can bring in those qualified people. Co-source is a blend of the service aspect and the software technology aspect.”

Draper then asked Mochizuki of Akemi Capital, a family office, why he thinks some family offices are resisting the co-sourcing model, which Draper remarked is fairly common practice in the hedge fund world. Mochizuki commented that “many vendors are simply too late” and that the space is not an untapped new market. “Many family offices are investors in hedge funds and private equity funds, and have therefore already been introduced to other vendors,” he said.

Mochizuki added that “co-sourcing is often driven by cost savings, which is not really a concern for family offices.” He shared how some SFOs “even prefer to recreate the wheel” and build from scratch their own in-house versions of processes such as virtual data rooms, deal sharing platforms and asset management software.

He concluded that SFOs have a “good history” of co-sourcing the front-office to supplement an internal staff member in a particular function and to gain the ability to quickly and temporarily scale up in an area, but that they often prefer to outsource commoditized processes concerning the middle- and back-office.

To co-source or not?

According to Bagatelle of Windward Advisory, there are at least five characteristics that family offices should consider when trying to determine whether a specific task should be co-sourced or not.

The first is whether the process is localized among just one group responsible from start to finish. A localized process tends to be a much more suitable candidate for co-sourcing as it requires less coordination among various groups within the organization. Additionally, “generic” processes that are similar within most family offices – such as bank reconciliation – are also better candidates for co-sourcing, as there are likely significant economies of scale to be had, he said.

A third element to consider is whether the process is “high-touch.” Does it involve dealing with family office principals, for example, and would they feel comfortable speaking to someone outside of the organization about it? Similarly, a fourth characteristic relates to security and confidentiality, and what kind of information the family office wants to keep strictly within its confines. The last factor is about identifying where and how to realize cost savings in certain areas

“The last point I would make is the importance of maintaining an accurate inventory and documentation for all of the processes within an organization – this is a way for the company to realize exactly what is going on,” Bagatelle said. “By auditing on a periodic basis you are always going to find things that don’t work like you thought they did. I think it’s key to do that even if you’re not considering co-sourcing, but, if you are considering co-sourcing, I think it gives you a lot of valuable information.”

Draper then turned to Sesar of Zenith, the provider of specialized family office software, to go into more detail about the customer support aspect of co-sourcing. “We realized that what we were doing previously – what we thought was customer service – was actually co-sourcing,” Sesar said. “So if someone was ill, we would fill in their role. It used to be called customer service, but today it is co-sourcing. That’s the mindset of how you work with a family. Today we’ll do anything from complete bill pay for our client, to banking reconciliation to taking over someone’s role.”

Shepro added that while each vendor has its own model of what they offer in co-sourcing, it all boils down to the idea of “business processes shared across client and service provider in a single, transparent environment.” One of the things SS&C offers, for example, is a task management and business process definition tool. “It's part of our portal that makes the transparency of the business process, and where you are in that process, evident to anyone that has access to the portal,” he said.

He added that with the outsourced model, you're essentially giving something to somebody and waiting for it to come back, whereas with co-sourcing all sides are involved and there is complete transparency at each stage of the process.

“The co-source vendor is an expert in their own technology,” said Shepro. “They can make things happen behind the scenes – that is totally different than the software license model...Rather than selling you a set of tools and training you to use them, we’re providing you access to a set of tools and expert craftsman to ensure you get the results you want.”