Outsourcing and capital management strategies

Outsourcing and Capital Management

Would you outsource capital budgeting or would you utilize internal resources? Explain your rationale. Describe one situation where outsourcing is definitely advantageous and one situation where using internal resources is a better approach.

Outsourcing capital budgeting can bring an added layer of objectivity to assessing the profitability of projects, endeavors, and standard operating procedure. Additionally, individuals at the firm may not have the specialized knowledge or resources to calculate the likely costs and risks of a capital proposed budget. For example, a construction firm that wishes to embark upon a 'green' building project may not know how to account for the additional initial costs and long-term savings of building an environmentally-friendly structure. Outsourcing the budgeting of this proposed project can be useful for a firm with experience in accounting for green buildings. Additionally, in very diffusely-organized firms outsourcing can act to consolidate the structure of the budget, as in some organizations "no one division owns the capital budget, and anticipating costs for upcoming projects and systems is easier said than done"(Garris 2006).

In other instances, however, the firm may have highly specialized knowledge about the functioning of its industry and how it relates to the capital budgeting process. There is little purpose of bringing in individuals with additional skill sets if the firm already possesses them in-house. Conversely, if the capital budgeting process is relatively routine and systematic, members of the firm may be sufficiently familiar with the process to conduct it in-house, without the additional costs and logistics of outsourcing.

Question 2: Why, if at all, does outsourcing offer more advantages over utilizing internal resources in capital management?

Experienced capital management can bring a wider base of knowledge of current, past, and future market conditions and more experienced knowledge of risk management. A firm specializing in capital management can often offer a more international perspective on its ability to seek out wealth. One capital management firm specifically advertises that "Many institutional investors emphasize local investments, exhibiting a home-country bias. However, with more than half of the world's total stock market capitalization defined as international equity, international equity assets merit a meaningful allocation" (Wells Capital Management Official Webpage, 2010). The justification of outsourcing is that the businessperson contracting the outside services can channel his or her focus upon the business, while the firm that specializes in seeking out sources of capital can focus upon what it does best.

Diversification is seen as an essential part of risk management, and a specialized investment firm may have more diversification strategies at its fingertips, given that it is constantly researching new and innovative channels of financing, rather than focused upon day-to-day business activities.

Question 3: What are the disadvantages of outsourcing capital management?