Hybrid economics

Talent questions impact cost as much as capability. In simplest terms, when you compare the total cost of ownership — salaries plus benefits plus technology plus training — against managed service fees, the economics often favor the hybrid model.

But there's a less obvious cost, as well. Having senior staff spend time on operational tasks rather than revenue-generating activities creates an opportunity cost. When your COO is troubleshooting why reconciliation breaks are piling up instead of thinking strategically about how to scale the business, you're paying for that in ways that don't show up on a budget line.

Finally, technology adoption also requires significant organizational change that many firms underestimate. Even the best platforms need skilled operators who understand both the technology and the business. As discussed in our earlier article, where firms do have the ability to pull in a tech person and train them on the business case, it means longer time to productivity. It means investment in that person.

The hybrid model shifts this burden to the provider while giving firms immediate access to that expertise. PwC research finds 81% of managers are contemplating options, including strategic partnerships, to enhance technological capabilities.ⁱⁱ

Choosing the right model

Different operational models suit different situations. The key is understanding which complexity triggers demand a different approach.

Direct hiring remains the best approach for firms with stable volumes, asset classes, and investor bases. For these, operational requirements are relatively straightforward, including standard IBOR, collateral management, and corporate action processing. For firms with existing infrastructure that meets requirements and expectations, plus a strong track record of long-term talent retention, building an internal team makes sense.

The hybrid of technology and managed services model works best for firms facing rapid growth trajectories in volumes, managers, strategies, or asset classes. It's particularly valuable for complex, evolving operational needs such as managing multiple admins and technologies, growing legal entity complexity, or sophisticated investor pools. Firms with limited internal technology resources or those looking to refocus on core investment and revenue-generating activities will find the most value in this approach.

Finally, large institutional investors (think, insurance companies, endowments, and pensions) present their own nuances. These firms often don't use administrators and instead focus on talent attrition and infrastructure modernization issues. Their challenges differ from those of hedge funds and private market firms. However, the underlying tension between operational complexity and available talent remains. Paradoxically, it means that hybrid models make sense at both ends of the firm size spectrum.

A shrinking window

As talent rotates out by changing jobs, leaving the industry, or retiring, the window becomes narrower. Yet, firms still want strategic space to maneuver as markets change. Those expanding into private credit, adding infrastructure investments, managing sophisticated cross-border structures, or scaling rapidly across multiple strategies can't wait for the talent pipeline to replenish itself magically. This will be true for the next waves of market innovation, as well.

The firms adopting hybrid models gain advantages that compound over time. They can scale into new strategies without the need for long and cumbersome hiring cycles. They maintain full transparency into reconciliation lineage. Regulatory changes get absorbed by the provider instead of triggering internal scrambles.

The veterans who understand esoteric derivative breaks and complex accrual flows will continue to age out. The talent pipeline shows no signs of replenishing itself. Firms expanding into private credit, infrastructure investments, or sophisticated cross-border structures need operating models that can support that complexity. Building that infrastructure now means having strategic options. Waiting means explaining to investors why operational costs continue to rise while capabilities struggle to keep pace.

This piece builds on our previous discussion of the talent crisis in investment operations. For the full context on why traditional solutions are falling short, see "The Talent Crisis in Investment Operations: Why the Problem Is Accelerating."