With layoffs anticipated across Wall Street as a potential recession looms, outsourcing providers should expect a wave of new business.
Outsourcing is the practice of hiring firms outside of the company to perform tasks in lieu of completing these services in-house. Outsourced services can range from back-office operations — compliance, accounting, IT — to services like outsourced chief investment officers and outsourced chief financial officers.
On Monday, CNBC reported that broad-based job cuts are expected at major banks for the first time since 2019 — a result of downturned markets, inflation, and expectations of weak performance numbers at the end of the third quarter. And the job cuts aren’t likely to stop with the 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 will tighten their belts because the cost of doing business is becoming more expensive, and one way to then still get the work done and not have to pay quite as much for it is by outsourcing.”
The outsourcing industry was born out of the 1989 recession and picked up steam amid the global financial crisis in 2008. If the current downturn results in another recession, the industry could boom, Lynch said.
The outsourcing industry “was basically born out of crisis,” Lynch explained. The industry, which she defined as including both back-office and investment services, has grown tremendously since the GFC, because outsourcing is often used as a strategy for cost-cutting.
“[Wall Street] understands how recessions work, and they know what needs to be done by companies when times get tough,” Lynch said. “One way will be to see where they can cut costs.”
According to Lynch, the most expensive item on any balance sheet is payroll. “There’s a whole regulatory component around having an employee, let alone healthcare, so it ends up being very expensive to keep a person on payroll because of all of these additional costs,” she said.
Lynch noted that most employees don’t realize how much capital it takes to keep them on staff. In fact, she said retaining an employee costs the company an additional 35 percent of that employee’s paycheck.
“So [firms] can automatically save 35 percent by outsourcing and nothing is different,” she said.
For firms with in-house compliance and IT departments, outsourcing those functions can be cheaper than retaining staff. In the case of investment staff, however, hiring OCIOs may cost allocators more money than if they stick with their original investment team, according to Brad Alford, founder of OCIO consulting search firm Alpha Capital Management.
“Doing the outsourced route, at least OCIOs, may not necessarily be the cheapest,” Alford told II. “It’s just that [allocators] are dealing with turnover among their employees and this is the most efficient [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 II, Tepper said cost savings are not the driver of OCIO growth.
“Not at all,” she added.
Instead, she argued that the most important driver of investment outsourcing is the recognition that some business functions are “non-core and/or require specialized expertise that would be prohibitively expensive for the business to keep-in house,” she wrote.
For Chestnut, Tepper said periods of market dislocation always raise new challenges for investment organizations, which sends business toward the advisory firm.
“For an endowment, say, their core competency is making grants to push their goals forward, not building investment portfolios,” Tepper said. “All this economic dislocation and related capital market volatility should drive continued — if not accelerated — growth of the OCIO business.”
