However, with more than half of the worlds 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?
As revealed in the recent financial crisis, however, bigger is not necessarily better when it comes to capital management firms. Firms responsible for capital management may have outside interests that conflict with their clients personal, specific interests.
An outside firm may be less risk-adverse in terms of their short-term rather than long-term perspective than the entity which they are representing. A firm sacrifices the ability to exercise oversight and control over its investments when it chooses to outsource. If the ethics of the contracted firm are called into question, this can tarnish the contracting firms reputation.
Confidentiality of information, control, and also the risk that the contracted firm may go out of business or make a major error — or have a conflict of interest — are all reasons to keep capital management in-house (Advantages and disadvantages of outsourcing, 2010, ICT Standards).
Advantages and disadvantages of outsourcing. (2010). ICT Standards.
Retrieved October 1, 2010 at http://www.ictstandards.com/Advantages_And_Disadvantages_Of_Outsourcing.
Garris, Leah B. (2006, June), Capital budgets: A step-by-step approach. Buildings.
Retrieved October 1, 2010 at http://www.buildings.com/ArticleDetails/tabid/3321/ArticleID/3162/Default.aspx
Wells Capital Management. (2010). Official Website. Retrieved October 1, 2010 at https://www.wellscap.com/.