It’s a question every growing business eventually faces: Do we buy it or do we build it? To meet client demands and create economies of scale, companies like Apple, Amazon, Netflix and Microsoft all buy some of their services. Conventional wisdom mandates that a modern company only build tools that enhance ROI and build up their competitive advantage; all others should be outsourced. The financial industry should be looked at no differently than high tech firms that employ similar thoughts. Clients are insisting on more services from advisory firms, and firms must adapt to meet those changing demands. At the intersection of those dynamics is time and scale.
So why is it that otherwise level-headed companies ignore this principle? Very often, they carve out valuable resources and assume unnecessary market risks. Even when a perfectly good and highly economical solution – in terms of quality, features and cost – is ready and available for purchase.
At the crux of these decisions is cost versus time. How much do the outsourced services cost and how much time can they free up? Unfortunately, this time question isn’t quite as tangible as the cost for those that choose to build their service model. You need to ask the following questions:
- Do we want to manage people or clients?
- How many people are we comfortable hiring?
- What is the process for finding talent?
- What is the process for retaining talent?
- When do we hire more people?
- What types of roles do we hire for?
- Do we have a career path for individuals who want to grow or climb in the business?
- Are we willing to give up equity in our business to retain or enhance employees?
- Do we want to train people? If so, how much time are we willing to dedicate to the training process?
For those that want to buy or outsource these services, you need to analyze the following:
- Does our outsourcing partner give us flexibility in the process?
- Can our solutions be customized?
- How many roles can our outsourced partner replicate from our insourced option?
- Do they create additional resources such as tech offerings, discounts at vendors/partners and human capital outside of their basic offering?
- Do they philosophically align with our investment philosophy?
- What is the cost and how do they structure those costs?
- Can they scale with us, and can they serve us through multiple business cycles?
While this can seem vague, let’s look at how this might play out over time using the following parameters for a firm the builds their staff in house:
In a recent podcast from Michael Kitces and Eliza De Pardo, they examine the effects of maximizing human capital to better scale your business, as well as review benchmarking data from Fidelity and Schwab.
Here is how the buy versus build decision stacks up for firms that average $1.5 million to $2 million of revenue:
- The average firm that builds their service model employs six to eight staffers (not including the owner(s) of the firm).
- The typical payroll is $345,000.
- Overhead management (benefit analysis, career path creation, employee management, etc.) of the team takes up roughly 20% or more of an estimated revenue of $300,000 to $400,000.
- Non-tangible costs:
- Additional staff will need to be added to match the scaling needs of the firm. Owners need to always be on the lookout for additional talent, as well as talent that enhances the firm’s value (i.e., more expensive talent).
- Replacement talent, in the event a key employee leaves.
For those that outsource trading, portfolio management, practice management support, marketing support, client communication and client experience support, some challenges might not be as pertinent as those listed above. One of the main factors in the buy analysis that isn’t as tangible is the delayed hiring effect. Outsourcing partners buying resources may allow firms to delay hiring more expensive pieces of the staffing puzzle and create scale or solve for complex client needs, thus enhancing the profitability of the firm. Many firms that outsource employ fewer individuals yet maintain similar – if not better – profitability metrics simply due to time.
While outsourcing isn’t the cure-all for every business, it does provide firms with more time to spend with clients and less time focusing on staff management. The decision to do so shouldn’t be taken lightly and should be vetted by all stakeholders. The temptation to marginalize the costs of the in-house alternative can be compellingly attractive when the very group that stands to be affected by a “buy” decision is given the responsibility to make the case between building in-house or buying externally. This often leads to the wrong decision, and ultimately disadvantages the competitive position of the company.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information may be based upon third party information and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this document. R-22-3222
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As a Divisional Manager for Buckingham, Ben partners with financial advisors to help them provide better advice and investment experiences to clients. Areas of focus include Nobel Prize winning economic theory, investment management, and best practices in growing and maintaining a successful wealth management firm.
Prior to joining Buckingham, Ben was with NPH Holdings, working as a Regional Vice President helping advisors transfer their practices to a fee-based model. Ben’s background also includes many years as Regional Business Consultant for a TAMP investment firm. Prior to entering the Financial Services Industry Ben worked as a Manufacturing Engineer at Ball Aerospace where he helped oversee the production of night vision cameras.
Ben holds Series 6, 65 and 63 licenses and is a graduate of Colorado State University with a bachelor’s degree in Industrial Technology Management and a minor in Economics. He also holds the Certified Fund Specialist™ (CFS®) and Behavioral Finance Accreditation (BFA™).
Ben, his wife, April, and their two daughters live in Denver, Colorado. In his spare time, Ben enjoys watching his daughters play soccer, skiing, golfing, finding humor among his friends and family, good food and traveling.