Industry
Thought Leadership
July 08, 2024
3 minutes
Organizations in all industries are always looking to enhance operational efficiency. The latest strategy gaining popularity in private credit and private equity institutions is co-sourcing, a hybrid approach that combines the benefits of outsourcing with the security of in-house operations. Let’s dive into a little more about co-sourcing, how it differs from outsourcing, and what to keep in mind as you explore ways to grow and scale your lending business.
To understand co-sourcing, we must first understand two other means of loan administration: in-house and outsourcing. Most firms start by managing loan administration completely in-house–hiring enough staff to handle all back-office operations and day-to-day loan management in addition to client services and support. While many nonbank lenders start with Excel for loan management, a Loan Management System (LMS) provides greater flexibility, security, and control over operations.
When firms determine they need to scale further without adding headcount, they often turn to outsourcing. Outsourcing is when you contract out loan administration to a third-party provider, having them handle everything from loan origination and underwriting to day-to-day fund management. Loan administrators have their own data management and loan management platforms, meaning lenders lack control over their portfolio data. Data transfers and reporting requests are required to get any visibility into actual loan and client data.
Co-sourcing is a hybrid approach between in-house and outsourcing. With co-sourcing, lenders purchase their own technology platform and grant loan administrators access to run the operations on the firm-owned platform. This provides lenders with more control over their data, as it resides in their own tech stack. You’re still scaling operations by having a third party handle day-to-day loan operations, but with the security, access management, and accessibility of having your own, in-house, loan management platform.
When you outsource loan management, you’re handing over the data about your entire operations to a third party. That data is the key to your entire lending business—without it, you don’t have a business. With co-sourcing, you keep your data in-house, while letting a fund administrator borrow the keys. Co-sourcing enables you to maintain security, data privacy, and ultimately control over your data while letting someone else handle the operations and logistics.
Because your data remains in-house, co-sourcing reduces the need for shadow accounting, eliminates duplicative data entry, and enables self-service reporting and data analytics. If you’ve outsourced and need to swithc fund administrators, you first need to transfer all your data from the administrator’s systems to your own—a huge and complicated process. With co-sourcing, since data remains in-house, transitioning fund administrators is relatively seamless as the data remains with you the whole time. Simply train your new fund administrators on your LMS, and you’re ready to go.
The decision about what operating model to use comes down to scale and data management. For a lending organization to grow, they often need to start another fund. Managing multiple funds requires either additional headcount or more scalable fund administration and management. Start by evaluating in-house options for scale, like implementing a Loan Management System. Keeping operations in-house is possible if you implement an LMS, which provides scalability by streamlining manual tasks and providing out-of-the-box reporting and analytics.
To scale further, co-sourcing allows you to leverage your existing LMS while freeing up employees to focus on client management and support. You get the impact of scale with the benefits of in-house data management and security.
At its core, co-sourcing represents more than just a shift in operational strategy—it embodies a broader industry trend towards greater autonomy and control. As nonbank lenders navigate an increasingly complex regulatory environment and evolving market dynamics, the ability to maintain control over your data is key to maintaining growth and security at the same time.
Thought Leadership
November 27, 2024
