Buyers Guide to
Co-Sourcing
“The biggest challenge facing a GP today is data.”
– Mike Trinkaus, 4Pines Fund Services CEO and Co-Founder
- INTRODUCTION The fund administration market is moving to co-sourcing
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What does co-sourcing mean for you?
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How do you find a suitable co-sourcing fund administrator?
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Questions to ask potential co-sourcing fund administrators
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Finding a partner who can develop a migration plan
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What does a typical implementation look like?
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In co-sourcing, people leverage the value
- CONCLUSION Navigating the co-sourcing transition in fund administration
INTRODUCTION
The fund administration market is moving to co-sourcing
Private capital firms overseeing more than $1 billion AUM are increasingly considering co-sourcing their fund administration, the cloud-driven, software-centered approach to back-office operations that gives GPs ownership of their data while maintaining access to the services they need to scale.
Choosing the best co-sourcing fund administrator has therefore become a business challenge.
Changing fund administrators, tech platforms, back-office operations, and other workflows represents a major decision. Service providers might claim they can co-source, but GPs need to make sure they can easily and effectively conduct due diligence, adopt technology, manage data migrations and implementations and other changes.
After working for many years with GPs, fund managers, CFOs, and others at successful private capital firms that have taken the co-sourcing route, we’ve amassed sufficient wisdom to have distilled a handful of important lessons for everyone seeking a co-sourcing fund administration.
From assessing whether co-sourcing is right for your firm – it isn’t always – to understanding the timeline for implementing, configuring, and integrating the new platforms that are sometimes necessary to make this shift, the 4Pines Fund Services Buyer’s Guide to Co-Sourcing is a resource for private capital firms seeking to innovative and grow.
GPs seeking more information about the ins and outs of co-sourcing should consult the 4Pines Fund Services Definitive Guide to Co-Sourcing for more information.
SECTION 1
What does co-sourcing mean for you?
GPs and fund managers pursuing best practices in private capital are enjoying major advantages with co-sourcing. This on-the-rise iteration of outsourcing is cloud-driven, software-centered, and inherently flexible, making it a great fit for self-administering firms that want to scale up or firms that want to change service providers without much disruption or loss of control over their data.
While co-sourcing arrangements vary depending on the needs of different firms, they generally allow GPs to expand capabilities without relinquishing ownership of valuable data, as happens in traditional outsourcing. Instead, GPs and fund managers retain their data but gain a strategic partner in fund administration – a team of professionals with deep domain expertise and powerful cloud-based, scalable tools.
Assessing how co-sourcing is right for your firm
A firm’s particular situation determines whether to opt for co-sourcing. Based on many years of working with successful companies who’ve gone the co-sourcing route, here are questions to help make the call:
Have you grown to manage more than $1 billion AUM?
If you’re a GP or fund manager working with more than $1 billion AUM, co-sourcing can pay off.
Private equity firms that grow beyond $1 billion AUM frequently find themselves stretched beyond their resources due to fund administration tasks. Investor requests, new regulations, and other developments push them beyond their core competencies. But there’s another inflection point when firms hit this threshold as well – having sufficient capital to make better risk-adjusted decisions. .Co-sourcing gives these firms the modern, data-driven firepower they need, with 24/7 support for the administrative and day-to-day responsibilities, and built-in flexibility to match changing needs.
Do you want to possess your data?
If you’re like most GPs, the answer is likely yes – if you can. In this era of increased regulation, and when stakeholders often want access to data nearly instantly, forgoing direct access to your data at hand can be crippling. “The biggest challenge facing a GP today is data,” noted Mike Trinkaus, CEO and co-founder at 4Pines Fund Services.
But typical outsourcing arrangements put firms’ data in the hands of a third party. Given rising compliance burdens and fierce competition for LPs, it’s a risky, cumbersome arrangement in terms of reporting and decision-making as well as trust and transparency. In contrast, the outsourced fund administrator executes the GP’s accounting and reporting on the GP’s software or platform. The GP holds the software license and owns their data, but gains access to the technology, practices, and staff of the third-party fund administrator.
Practically speaking, the larger the AUM the greater the challenges – and the greater the trove of data at stake. When CFOs at firms managing more than $1 billion discuss their inefficiencies, high on their list is their inability to leverage and learn from their own data. Through co-sourcing, they keep full control of their data and its value while gaining administrative and operational support – a partnership – that helps them improve efficiency, too.
Have you been preparing to embrace technology in fund administration?
The increasing digitization of everything hasn’t skipped GPs. Today’s LPs and stakeholders expect advanced tools that afford efficiency, better decision-making, and transparency in fund administration. These improvements require better systems and processes for communication and reporting. Savvy GPs turn to co-sourcing when they recognize that their systems can’t check those boxes.
By co-sourcing, GPs and fund managers leverage not only advanced technology but the domain expertise to maximize its power. They find expertise from a range of innovators that previously had been out of reach, including fund accountants and investor-facing relationship managers, as a result.
These innovations include high-speed analytics, AI, automation, automated subdocs, virtual data rooms, AML and KYC due diligence, configurable workflows, granular to birds-eye views, and machine learning that not only pinpoints inaccuracies, biases, and discrepancies but advances in performance over time.
When firms grow large enough, think hard about their data, realize that compliance is always changing, and become ready to embrace technology, co-sourcing in fund administration enables them to tap into more and better capabilities and punch above their weight class.
Conducting due diligence: Identifying internal hurdles
A firm’s readiness to shift to co-sourcing depends on a broad range of factors. Looking at your firm’s internal readiness, however, will help ensure the arrangement’s success. Here’s what to assess:
Do you have staff to oversee the transition and co-sourcing relationship?
Co-sourcing is a relationship. You’ll need dedicated staff to execute a smooth transition to the co-sourcing arrangement and then continue it. Typically, a transition starts with a consultant, software vendor, and fund administrator, along with the GP’s transition team.
Whoever participates in the co-sourcing arrangement should be involved.
Do you have tools to communicate and collaborate?
Co-sourcing depends on communication and collaboration, using collaborative virtual tools and communication channels across a cloud-based platform. In this strategic, dynamic partnership, parties share information and data in real time, examining and solving intrinsic problems and considering processes and culture. Legacy forms of communication won’t cut it. As your firm readies for co-sourcing, assess the state of your communication and collaboration tools
Are you facing an accountant shortage/staff churn?
In-house fund administration gives private capital firms control over their middle and back offices but demands heavy investment in accountants and staff at a time of protracted shortages. The A analysis of data by the Bureau of Labor Statistics found that the U.S. has some 340,000 less qualified accountants than five years ago. Further, in trying to reduce the risks incurred by giving up data control, firms increase their exposure to a volatile labor market. Band-aid outsourcing arrangements solve neither issue well; upping recruiting, onboarding, and payroll when hiring and retention are also iffy. Co-sourcing supplements the gaps with both professionals and technology (including automation and machine learning).
What are the siloes in your decision-making process?
Siloes often plague legacy administration approaches – organizational, informational, and cultural. Traditional outsourcing is siloed by definition. The co-sourcing relationship tends to undo siloes, assembling a multifaceted team to share expertise and perspectives – such as investor-facing relationship teams and fund accountants. Having data centrally located and shared in real time promotes transparency around decision-making. Fund managers also have ready access to outside operations experts who act as extensions of the organizational team. The resulting peace of mind has a way of dismantling siloed mindsets.
Does your firm’s “champion” have the power to make co-sourcing happen or not?
Making the case for co-sourcing requires more than good intentions. It takes a strong grasp of the process and sturdy rationales that overcome objections. Fundamentally, co-sourcing modernizes the middle and back offices and taps into the best new digital finance tools, keeping fund managers close to the data driving their decisions. It alleviates the need for an expensive in-house accounting team in an era marked by personnel shortages and enables managers to mitigate risk.
It’s also a competitive (and practical) strategy. As a for instance, a Northern Trust report found that of the asset managers considering outsourcing, 83 percent see it as a means to augment their data management capabilities. The key to best leveraging this approach is using the innovations that co-sourcing provides to transcending the limitations of traditional outsourcing with the innovations that co-sourcing offers. In terms of reducing human errors and improving process efficiencies, maintaining control over data, and improving compliance and security, there’s no comparison with legacy fund administration approaches.
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How do you find a suitable co-sourcing fund administrator?
To find the right co-sourcing fund administrator for your firm, list the blind spots, challenges, and process gaps that the firm faces. Elevate your expectations beyond the parameters of traditional outsourcing, identifying the roles involved in an ideal solution. Then consider another component – lift-outs – to make the process smooth
What are the differences between a fund administrator and a software vendor?
The transition to co-sourcing often entails a consultant, software vendor, fund administrator, and the GP. The consultant maps out the basics and the software vendor handles data migration, as well as building and maintaining the platform. The fund administrator guides the process and uses the system once it is up and running.
You’ll want a fund administrator with experience, deep knowledge of the technology, and the ability to analyze your back-office requirements and operations before and after implementation. They should be prepared to allocate sufficient people power to complete the job – and maintain it, as there will be plenty to do before the next deadline.
Lift-outs make co-sourcing easy
Innovation
The lift-out is an innovative approach to fund administration that makes co-sourcing even easier. In a lift-out, co-sourcing fund administrators hire, or “lift” a team out of the GP. The GP’s position shifts to client, the fund administrator becomes the employer, and the team continues to provide the same services to the GP as if they were still in-house. This nuanced solution also gives employees in less high-growth career tracts new opportunities to scale their skills. The key is finding a fund administration partner committed to preserving the fund manager’s values.
Continuity
The same personnel, systems, and data move from the fund manager to the administrator, providing services back to the fund manager. There’s no change in culture or, often, personnel — the team is intact, just working under a new aegis. There tend to be opportunities for improving efficiency in the process, as the team involved likely has ideas on how to upgrade the firm’s operations. Additionally, the fund administrator may have their own ideas on changes and improvements, and can act on them in ways a traditional fund administrator would not.
Cost Savings
Lift-outs bring cost savings, too, giving established fund managers the means to transition to an expense structure more consistent with current market practices while minimizing the disruption and risks related to outsourcing. Outsourcing is usually treated as a partnership expense – albeit a tiny percentage – rather than an operating expense borne by the management company. Fund managers often redeploy the savings toward other initiatives to strengthen their platforms. Regulators and LPs value the independence of a qualified outsourced provider, while the latter are usually willing to bear the cost.
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Questions to ask potential co-sourcing fund administrators
Asking the right question is half the answer. Selecting a reliable partner who fits a firm’s management and communications style is a prerequisite for a positive co-sourcing relationship. It can mean the difference between leveraging new talent for strategic tasks and optimizing back-office costs, and mounting losses and frustrations.
Equally important, asking the right questions helps co-sourcing partners improve their processes, better understand their needs, and ultimately receive better services. In most cases, for example, which technology, solutions, or platform to deploy should be negotiated in advance, since many GPs expect fund administrators and external consultants to help them with the initial setup of their platforms. Quickly identifying the best digital tools for a firm’s needs will save a lot of time and resources in this process – not all technology suites are created equal and even great platforms are not perfect for every client.
Many questions will be specific to individual firms’ data, structure, and needs. But here are a few questions that are important to consider:
How can you get the most out of software and systems?
GPs and fund managers new to co-sourcing will probably need to select and set up new digital systems from scratch. The best fund administrators understand this challenge very well and can help configure new software environments. In many cases, they will also bring in external consultants to expedite the process. Prospective co-sourcing fund administrators should be prepared to discuss the advantages of the right tech setup and what edge they might afford, too, of course, to help clients plan.
The immediate benefits of this shift include optimizing human labor significantly, reducing errors through automation and other solutions, and cutting costs as these changes take root in firms’ operations. Later, firms can tap their co-sourcing partners to extract additional value –lessons, business insights, etc. – from all their data safely and ethically.
What off-the-shelf solutions can be deployed to address specific inefficiencies?
Asking this question helps GPs and fund managers gauge both a prospective fund administrator’s grasp of cutting-edge digital technology and their willingness to understand a firm’s operations well before recommending upgrades. It is hard to overemphasize the importance of both points.
Developers used to try to perform every task through a single piece of software, but in recent years the thinking has shifted toward leaner solutions that can be deployed quickly to resolve inefficiencies without the need for extensive configuration and/or customization.
These off-the-shelf solutions are ideally much more than a band-aid. Different tech solutions should interface with each other and the overall operating system to create a seamless user experience that can easily be upgraded or expanded for new collaborators. For this expansion to happen, however, these digital tools need to offer certain features, including good plug-and-play capability or support for diverse data formats.
What are some specific examples of how to successfully deploy these solutions?
It’s easy to create a presentation – or even a shiny demo – that will impress clients. It’s harder to deploy technology in real-life situations and perform consistently over a longer period.
Just about every developer, for example, claims their software has plug-and-play capabilities that can be deployed with minimal manual input. Often, in practice, it’s not nearly as minimal as one might imagine. Look for how much human labor went into setting everything up in the past. Consider what problems arose and how they were handled.
Co-sourcing successes often occur when the customers ask questions to elucidate this information. Can potential co-sourcing partners offer a trial or sandbox experience using the prospective client’s own data? Is there a cost to implementing a trial? Lastly, seek out references. Are there testimonials from satisfied clients? Who has benefited from the service provider’s pilot programs in the past?
Who is on board?
When co-sourcing relationships sour, it’s frequently due to fund administrator’s staffing issues. Not only is the growing shortage of skilled accountants taking a toll, so is the limited pool of well-qualified candidates for other positions and external partnerships, such as tech and communications. Firms want to test whether a prospective partner will be the right fit.
They need to ask who in the fund administrator’s team will help them transition to co-sourcing, what are their qualifications, and how much time will they commit to the partnership. Usually, a good co-sourcing fund administrator will have a point person and team assigned to each client’s account. Firms should ask their service providers how many accounts they are currently managing.
Clients also need a roadmap for the internal workflows related to the co-sourcing fund administrator. Does the client need help in determining the internal team that works with the co-sourcing fund administrator? Do these team members have questions related to co-sourcing? What’s the process for structuring teams on the client’s side?
Regulators are also demanding ever more due diligence from GPs concerning their fund administrators and other external partners. Co-sourcing makes that compliance easy because the firm is always in control of its data. Note, furthermore, that it is possible to negotiate some staffing arrangements in advance, too, as is the case with lift-outs.
How will co-sourcing drive future expansion?
Ultimately, it’s human interaction rather than automation that drives value in private equity. One of the main advantages of co-sourcing is that it frees up important staff for strategic tasks that enable expansion.
Internal discussions that keep co-sourcing in mind often yield the best ideas. What core operations are GPs looking to outsource? What risks does co-sourcing solve vis-à-vis that potential outsourcing? This analysis reveals the flexibility of the GP’s frameworks for future expansion.
Co-sourcing creates a culture of collaboration that, at its best, will lead to new partnerships and networking opportunities. A good fund administrator typically comes with a valuable network of their own – something to keep in mind and potentially explore as GPs and fund managers consider new partnerships.
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Finding a partner who can develop a migration plan
A proper migration plan helps ensure a structured and efficient transition to the new systems and processes that enable co-sourcing. Choosing a consultant to map out and oversee the transition is usually one of the first big steps GPs and fund administrators take together.
Often, the fund administrator will have prior experience working with several consultants so will be able to recommend one or more. In other cases, the fund administrator may create the migration plan, though it is usually better to hire a dedicated third party that specializes in aligning the firm’s new infrastructure with the GP’s operational objectives, compliance requirements, and potential pitfalls.
Sometimes, a GP invites a co-sourcing fund administrator to review operations for streamlining and other potential efficiencies. The admin brings aboard a co-sourcing consultant. Ideally, this consultant is a former CFO with the skills to turn a good setup into a great setup. Often, CFOs have a keen understanding of specific pain points like hand-filled subscription documents, wet signatures, compliance, data management, and other tasks.
The GP, fund administrator, consultant, and software vendor then work together to create a master plan for the transition and to mitigate risks such as data loss, system downtime, and operational disruptions. When the plan is ready, the fund administrator and the software vendor typically execute.
How do GPs and software vendors handle data migration?
Data migration is often the most labor-intensive part of transitioning to a co-sourcing model. Software vendors in particular play a major role in facilitating the process. Their main job is to configure and adapt the software infrastructure to the unique requirements of the GP.
Typically, a third party, often a system integrator, is hired to prepare and move the data. This third party could be a co-sourcing fund administrator, a consultant who specializes in data migrations, like a former CFO, or a team of former members of the GP’s finance unit hired by the fund administrator in a lift-out. GPs should know the third party’s background and feel confident based on past performance and client recommendations.
Before the data migration, GPs want clear answers to these questions: What capabilities are they and their LPs expecting? Which efficiencies or other items do they require at a minimum? What capabilities will they acquire that they need to consider before they take advantage of them? Are GPs spending too little or too much on too few or too many capabilities?
During the process, they want to keep close connections with every member of the team to ensure no snags or unanswered questions arise. The final responsibility for reconciling and verifying the accuracy of the migrated data remains with the GP, which retains ownership of the information.
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What does a typical implementation look like?
Success in implementing co-sourcing springs from a few common scenarios. In each one, co-sourcing fund administrators can help firms leverage their platform’s capabilities to make custom-designed systems that are efficient on the back end and friendly on the front end.
The front end means the whole team, incidentally. These transitions must always leverage data to empower – not burden – CFOs, analysts, auditors, lawyers, and other internal and external stakeholders.
What's the typical timeline?
It usually takes one to two business quarters to implement a streamlining co-sourcing system. Proper preparation makes that relatively short turnaround possible, however.
First, funds conduct their own analysis of their co-sourcing needs, from technology capabilities to the back and middle office.
During this examination, fund managers usually aren’t in that much of a hurry for answers. CFOs still have daily operations,, fundraising, compliance, and other tasks to oversee. Running in the background are also real-time, real-life global conditions that inform the depth, breadth, and capability of any co-sourcing system. A pandemic, a natural disaster, geopolitical unrest – these challenges and more highlight the strengths of decentralized, cloud-based computing.
Once a fund decides to opt for co-sourcing, the implementation leaders – CFOs, fund administrators, software vendors, consultants, etc. – take about a month to custom-design a plan specific to that GP. Then implementation occurs. But legacy systems can stay in place as the co-sourcing solution unrolls.
Which factors influence the timeline?
The pace of implementation depends on how swiftly the fund manager wants to adopt the co-sourcing model, and how much staffing is committed by both the GP and stakeholder partners to the transition.
A GP in a “we-need-it-yesterday” mindset can bypass the decision phase. With sufficient resources, going live can occur in less than four months in most circumstances. Various factors work for and against that timeline, of course. Other technology integrations, for instance, can either add more layers of complexity or streamline the build. Sometimes the answer is to optimize existing tech. If that’s the case, implementation can be speedier.
Whatever the case, the crucial first step is choosing the right co-sourcing partner. Many will point to a deep internal bench, but that’s just one strength. A mission-critical timeline often demands insight and action from niche expertise. Co-sourcing’s leading firms maintain those relationships. Finely tuned coordination is the key to a finely tuned build-out.
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In co-sourcing, people leverage the value
Technology often is at the center of a co-sourcing relationship. But it’s the human connection that maximizes value on both sides. That connection starts when GPs identify a co-sourcing partner that’s not only tackled familiar challenges but also navigated them successfully, from fund administration to other tasks that sap internal time and resources, including human resources, payroll, partner allocations, and navigating lift-outs.
Every co-sourcing fund administrator will talk about efficiencies and streamlining. They all have tech services that offer edges and advantages. But very few can offer a set of solutions purpose-built by private-capital CFOs for private-capital CFOs. There’s no better co-sourcing partner than one who has been in the trenches of fund management and administration.
Conclusion
Navigating the co-sourcing transition in fund administration
In conclusion, as private capital firms managing over $1 billion in AUM increasingly adopt co-sourcing for fund administration, the shift towards a cloud-driven, software-centered model is reshaping back-office functions. This approach provides GPs with enhanced control over their data and the scalability needed for growth.
Selecting the right co-sourcing fund administrator is a pivotal decision. Understanding what your firm needs, identifying and surmounting internal hurdles, asking questions, and assembling a team to manage the transition and data migration while putting people, not technology, first are crucial lessons for success.
Service providers must possess the requisite expertise to handle these complexities. Those who do can support firms poised for innovation and growth.
