Outsourcing versus insourcing: A Luxembourg perspective

The outsourcing versus insourcing question is not new. It is a topic that companies operating in Luxembourg have had to address on a regular basis over the past 10 to 15 years. With the world seemingly confining the days of COVID to the past and with inflation having a significant global impact on prices, it’s time to look at this age-old question again.

 So, let's look at eight aspects of outsourcing vs insourcing that help companies ultimately decide, and more specifically, whether this is still the case in Luxembourg in 2023.

In the past, outsourcing has traditionally meant lowered labour costs over the long-term. Yes, at face value, a certain number of FTEs may seem less expensive than entering into a multi-year outsourcing arrangement. But when we look at this question through the lens of Luxembourg in 2023, some key questions arise. What is the cost of your HR function? What is the cost of recruitment? What is the cost of training? How will potential long-term sick leave affect the team? What is the cost of laying off employees? And as many teams have become acutely aware of, finding employees is one issue, but finding the right talent for your company’s needs is probably the biggest challenge in the local market. All of these labour-related questions are important when making the outsourcing versus insourcing decision at this time.

When discussing staffing, scalability of operations is crucial. Outsourcing allows companies to scale much more easily - simply because it enables quick access to a talent pool which is already trained for the job. This flexibility is important in the current environment.

The line “outsourcing allows you to focus on your core activities” is a widely used remark among sales teams in outsourcing firms. And to a certain degree, it rings true. For example, with real estate firms, their core business is to source, acquire, fund, manage and sell real estate assets, usually over an extended period of time. We know from experience that this sector is constantly demanding new information on the performance of specific assets. This data is used for group reporting purposes, for performance analysis, for next year’s budget… So, does it make sense for management to further burden their stretched staff with additional compliance tasks? Probably not if their intention is to keep the staff for the long-term.

This point is somewhat related to scalability. A lot of compliance tasks are strictly time-bound: VAT returns need to be submitted monthly, corporate tax returns need to be submitted within a certain window each year, investors expect to have their reports each month or each quarter, financial statements should be filed by the end of July of each year... Due to the fact that outsourcing firms have a large pool of specialists (both in Luxembourg and abroad), servicing a large number of deliverables within tight deadlines is what they are there for — it’s their core business. Would it not make sense for a private equity or real estate firm to avail of these specialist services for some non-core tasks? Most PERE firms find that it is a convenient and reliable solution.

When we ask firms about why they choose to insource our outsource, very often the answer is that they want quick and cheap access to the latest technology, the appropriate expertise, and the latest updates to the regulatory environment. From the perspective of the outsourcing firm, probably their two biggest costs are technology and knowledge. Outsourcing firms are in constant competition to ensure they have the latest, the most efficient and advanced technology and the best teams. They are always looking for a key differentiator. And this comes at a huge monetary cost. Most clients are unwilling to enter this technological and talent race which is why outsourcing is attractive in this respect. Clients can choose an outsourcing provider which they feel has the best tech and team to suit their needs. It is a major advantage for clients.

It’s widely known that today’s labour market in Luxembourg is particularly competitive. Outsourcing firms and clients compete for the same valuable resources – which usually aren’t available. This leads to a stretching of existing resources and with this, comes quality and delivery issues.

Clients are often unwilling to outsource tasks as they somewhat lose control of quality. Most clients are placing their trust in the hands of a partner who they probably haven’t worked with before. It will take a big effort on both sides to build a sustainable long-term oriented relationship. This is always a factor in the decision. Successful solution providers therefore place a premium on building and maintaining client relations and creating teams with experts. By ensuring that the client and the outsourcer are on the same page, it eliminates any stress regarding deliverable quality.

Very often, Luxembourg is the continental hub of investment firms and managers with headquarters in London, Paris, Frankfurt, the United States or elsewhere. The insourcing versus outsourcing question might simply be decided by what the group’s strategy is and what they have always done.

If the group is looking to get immediate assistance with projects and to reduce costs, then outsourcing is the likely option. However, if a group takes a long-term view and wants to gradually develop their own capabilities and resources, then insourcing is the likely option.

Yes, there are macro-events that will affect group’s decisions from time to time. However, in Luxembourg, firms pursue outsourcing as it is what they have traditionally done, and it works for them.

Substance has always been talked about in Luxembourg when making decisions regarding insourcing versus outsourcing. There was once a time when substance consisted of a part-time bookkeeper working in an office of 12 sqm. But it’s safe to say that those days are long gone.

Brexit and other events have meant that companies and groups have re-examined what substance means for them. Entire group functions such as the treasury function, the IT function, the tax function, the accounting function have been relocated to Luxembourg. Executives and C-suite employees of groups are now based in Luxembourg. Mind and management are now firmly located in Luxembourg.

So given the large shift in actual substance (mind and management) to Luxembourg, firms are now more comfortable outsourcing the non-core non-business activities to firms.

This last point might be one of the most important factors for firms to consider. Can companies and groups realistically expect to offer fruitful careers and paths to employees working on non-core activities? Outsourcing firms can offer careers in these areas as it is their speciality, but can companies attract and motivate people for a career that is clearly non-core to their business? This is a difficult one to answer.

This above is written from the perspective of an outsourcer however the points made are as unbiased as possible. There is no right or wrong answer to this question, only different perspective and viewpoints. And macro-factors will play a huge part in answering the question at any point in time. For now, this is part of the story for Luxembourg in 2023. Look forward to addressing this in 2028!

Interested in outsourcing your non-core activities? I encourage you to discover what KPMG Real Estate Fund Administration has to offer. We are a team led by experts with decades of experience and we’re familiar with every phase of the alternative fund lifecycle and focusing on ensuring that you can quickly respond to shifting market conditions.