Plansmith Blog

The Outsourcing Dilemma: Time, Cost, and Control

Posted by Dave Wicklund on 12/1/20 10:58 AM

Is IRR and Liquidity Cash Flow Model Outsourcing Right for You?

That is a question a lot of CFOs and Presidents struggle with. Here at Plansmith, it really doesn’t matter to us whether you run the model yourself, or you outsource it to us. In fact, we have many clients on both sides of that fence, and even some that do a little of each. We just want you to be comfortable with whichever option you choose, be confident in your model results, and be sure your ALM process will pass the test at regulatory exams.

Since most people would generally agree that having experts do it for you will result in a better product, the outsourcing dilemma usually comes down to three things: time, cost, and control.


Let’s look at the time question first, because it’s the easiest. When you consider the time that you spend updating and running the model, developing and documenting assumptions, preparing for exams and audits, and running reports, it’s pretty easy to say that “yes, outsourcing will definitely save you time.” Plus, by getting it right the first time, you reduce the risk of spending time on responses to exam and audit criticisms.


That brings us to the question of cost. Typically, the direct costs of outsourcing are more than running the model “in-house.” However, when you consider all the indirect costs, you may find that the difference between the two options is not as great as you first thought. You need to also look at salary and benefits costs of the time you and your employees are spending on developing and documenting assumptions, gathering monthly files, updating the model, reconciling errors, running reports, and trying to figure out what they’re telling you (or why the results are different than what you had expected). Outsourcing still might be the more costly option, but the true “cost” difference between the two options may not be as much as first thought. In some cases, even the direct cost of outsourcing is less than an “in-house” software license.


And now the last issue: control. Do you want to control the modeling process and keep the responsibility that comes with it? Many of our clients do, and that’s why they want to keep it “in-house.” They like being able to get into the model and see all the details. They like to run multiple simulations and “what-ifs.” They enjoy developing the key model assumptions like deposit pricing/betas, loan prepayments, and non-maturity deposit decay rates. They’re comfortable doing correlation studies, analyzing historical data, and discussing it all with examiners. For those clients, running the model “in-house” is a good choice. But for those clients that don’t find as much value in having control of the model or don’t want the responsibility of it all, outsourcing tends to be a better option.

If you’d like to discuss options for outsourcing all, or even just part, of your ALM process to our experts and former regulators, we can schedule some time to look at what might work best for you. In the meantime, click here to look at the checklist we put together to be sure that your IRR model assumptions measure up to regulatory expectations.

Headshot2About the Author:
Dave Wicklund, Director of ALM Advisory Services 

Dave Wicklund is a Former Senior Bank Examiner and Capital Markets Expert for the FDIC. He is also a director and ALCO chairman for a bank group that employs a complex Liquidity management system and uses material levels of non-traditional funding sources.


Topics: interest rate risk, asset liability management, alm

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