Effective and robust ODD ensures that a portfolio is well-run and that the underlying investments are being managed in accordance with agreed guidelines and best practices.
But, there’s a debate amongst some allocators about whether to outsource this function, manage it in-house, or a bit of both. We decided to do some research into the pros and cons of in versus out and to see if there was a correlation between AUM, size of team, location or investment portfolio composition and how a firm performs ODD.
One of the most obvious advantages of outsourcing ODD is that it can save time and resources. Conducting ODD in-house can be a very resource-intensive process, requiring significant time and manpower. With a real variance in due diligence and research team sizes, ranging from a single person to full teams, for allocators that are already stretched thin, outsourcing ODD exercises that take hours per manager, can be a viable way to free up some much-needed time and effort.
Outsourcing can provide access to a wider range of skills and expertise too. ODD professionals are hard to find and may not always have the cross-asset class experience that firms would benefit from. Institutional inflows into asset classes like crypto and alternatives, and allocations made to emerging managers require a different approach, with specific knowledge. By outsourcing, allocators can tap into a pool of ODD expert resources that can provide a more comprehensive and effective, practitioner-led review.
There are some perceived disadvantages to outsourcing ODD. I say perceived because a good consultant would allow full transparency into the process beforehand and resulting reports, post review. Some allocators fear a loss of control. When another party is conducting the due diligence, there may be less visibility into and control over the process. This can be a concern for some investors who prefer to keep a closer eye on this function.
Depending on the level of engagement, outsourcing may work out more expensive than conducting due diligence in-house, however, economies of scale may come into play if allocators can access ODD reports outside the scope of their specific engagement.
Does it make a difference how large a firm is, whether they should outsource or keep ODD in house? Honestly, not really. We have found that small organizations can benefit from outsourcing, to as great a degree as larger businesses. Conversely, firms with assets of over $1bn are just as likely to outsource ODD, as smaller firms. Despite the fact that large businesses have greater capacity to conduct ODD in house many often understand the benefits that outsourcing can bring.
In some sectors, where it has been common practice to use outsourced ODD, firms are switching to in-sourced teams to reduce costs and get greater control. We've noticed this happening across the superannuation sector in Australia and New Zealand as firms seek to rationalize their costs in a low-growth environment. This shift is also being seen across sovereign wealth funds, endowments and family offices.
There are two sides to every story and the challenges of in-sourcing reflect the reasons for outsourcing originally. ODD is a specialist function and can be hard to staff. There can be a lack of objectivity from an in-house team. And conducting ODD in-house can be resource intensive, particularly with a small team, or as portfolios grow and evolve.
If you do decide to outsource ODD, what type of consultant should you look for?
When selecting an ODD consultant to undertake the reviews, you should consider a number of factors, such as:
Again, there's no one-size fits all - some firms have a preference for working with larger ODD consultancies, while others prefer smaller, more nimble firms.
Quentin Thom, co-founder of perfORM Due Diligence Services, provides liberated ODD services to asset allocators, service providers and investment managers. He believes his team of senior allocator pedigree ODD practitioners are ideally placed to meet the exacting needs of clients, and the firmly falls into the "nimble" category.
"We pride ourselves on being practitioners and working within clear industry best-practice frameworks, but being flexible enough to also ensure clients' unique needs are met properly." Whilst we are unwavering in our quest for facts, if a client requires a deeper dive into certain areas, then we will absolutely accommodate that."
If bringing the ODD function in house, asset allocators can use technology to help. Asset allocators said in a study that they would consider automating their ODD processes if the technology was available. Technology can help firms to:
Firms that are considering automating their ODD processes should consider the following factors:
If you are considering whether to bring ODD in our out, it doesn’t have to be black or white. You could consider both options. An in-house ODD team could benefit from outsourcing particular reviews, bringing in specialist expertise when needed, or just having some extra resource at times of growth.
Talk to the Dasseti team about your current situation and we might be able to help you with a Dasseti Collect demo, advice or signposting to a reputable consultant.