1. 15 PracticalSuggestions Managing the increased risks associated with outsourcingFTF’s 5th Annual OpRisk Conference, 2 March 2011, New York City Holly H. Miller, Founding Partner Stone House Consulting, LLC 1 © 2011 Stone House Consulting, LLC

2. You Probably Outsource Already © 2011 Stone House Consulting, LLC 2 Office cleaning Legal services Cafeteria management Fund accounting

3. Suggestion #1:Don’t Outsource What You Don’t Understand Lack of understanding actually increases risk If you are outsourcing out of fear, think again Outsourcing is not a fix for a lack of confidence in a department head Chances are, their job does not go away Ensure you can supervise what is outsourced and manage the vendor appropriately 3 © 2011 Stone House Consulting, LLC

4. Suggestion #2:Inventory Your Current Services and Costs What services do you provide today? Internally Externally What MUST remain and what can be outsourced? What really can go away completely once implemented? Can you do an apples-to-apples comparison? 4 © 2011 Stone House Consulting, LLC

5. Suggestion #3:Do Your Homework Perform due diligence Initial and ongoing Document it! Has the provider ever serviced the kind of business that you manage? Asset classes Investment vehicles Check references Consider on-site visits Create a scoring matrix Gain internal agreement on what is important—and what is not Consider size Independence Service 5 © 2011 Stone House Consulting, LLC

6. Suggestion #4:Manage Your Staff and the Rumors © 2011 Stone House Consulting, LLC 6 Secure signed NDAs from potential providers Keep potential providers off-site for as long as possible Prepare—in advance—statements for when the rumors start For staff For clients For investors For others Budget ‘stay’ bonuses Prepare for temporary staff Discuss contingency plans with potential providers and your consultant

7. Suggestion #5:Consider Hiring a Consultant Document your current state Give document to all potential providers Excellent for evaluating success later Document—but maybe don’t share!—your anticipated future state Obtain blind quotes from potential providers Manage the process Gain guidance and support throughout Current business heads often viewed as biased Let the consultant be the bad guy Provide a ‘cloak’ for activity 7 © 2011 Stone House Consulting, LLC

8. Suggestion #6:Document Workflows Current state Helps educate potential service providers Aids with identifying what can be outsourced and what cannot Helps ensure nothing is forgotten—or replicated Future state Ensures all parties know what to do Educational tool for new staff Assists with due diligence reviews 8 © 2011 Stone House Consulting, LLC

9. Suggestion #7:Examine Hand-offs Carefully Hand-offs are points of considerable operational risk Lost information Missed deadlines Unclear accountability 9 © 2011 Stone House Consulting, LLC

10. Suggestion #8:Establish Strong Service-Level Agreements 10 © 2011 Stone House Consulting, LLC Clearly delineate: Responsibilities Deadlines Turnaround Quality measures Escalation Communication Pay particular attention to hand-offs Ensure metrics are assigned to each Utilize during meetings with providers

11. Suggestion #9:Establish and Monitor Metrics © 2011 Stone House Consulting, LLC 11 Current state Future state Particular attention to: Hand-offs Service levels Business volumes

12. Suggestion #10:Consider Timing © 2011 Stone House Consulting, LLC 12 Timing of: Evaluation / selection Conversion Parallel Go live Year-end can be a good time for tracking books and records Year 1 on existing systems Year 2 with outsourcing provider But year-end is a busy time When are bonuses paid? Evaluate phased approach

13. Suggestion #11:Think About Duplicate Effort Some firms duplicate effort to: Obtain independence Improve timeliness of information Create checks and balances If you don’t trust the outsourcer, then don’t outsource 13 © 2011 Stone House Consulting, LLC

14. Suggestion #12:Confirm Record Retention Timeframes 14 © 2011 Stone House Consulting, LLC Investment managers must maintain records Legal and regulatory reasons To substantiate performance track record Retention timeframe for performance is for entire length of track record To substantiate performance, typically retain: Investment accounting records Partnership accounting records Fund administrator records Bank / prime broker statements Pricing documentation Investment management agreements Investment guidelines and restrictions Client correspondence Outsourcing providers often have record retention policies that are shorter than yours

15. Suggestion #13:Evaluate Privacy and Location Where will your provider: Store data Perform services Regulatory environment Privacy laws Client concerns Data protection Jobs 15 © 2011 Stone House Consulting, LLC

16. Suggestion #14:Prepare an Exit Strategy Outsourcing is the ultimate roach motel What happens if you are not happy? Contract language Consider a data warehouse Build interfaces to/from the warehouse 16 © 2011 Stone House Consulting, LLC

17. Suggestion #15:Control the Press Release Ensure the ability to review and approve it Only allow an announcement AFTER conversion is completed Consider agreeing to a case study 17 © 2011 Stone House Consulting, LLC

18. Contact Details Holly H. Miller Partner +1 610 358 1791 phone +1 917 587 2411 cell +1 509 479 1831 fax hmiller@stonehouseconsulting.com Stone House Consulting, LLC Strategic, operational and IT consulting for investment managers and hedge funds www.stonehouseconsulting.com New York | Philadelphia | Wilmington © 2011 Stone House Consulting, LLC 18