How much does a cheaper fund administrator actually save?
A proposal 80,000 lower on the invoice, priced as a service model rather than a fee: the rework, the reissued notices, the data work and the move itself.
A challenger administrator quotes 540,000 a year against the incumbent’s 620,000. Once the internal hours it creates are costed at 95 an hour, the saving is not 80,000 but 17,488, and the move, at 188,000 all in, takes 10.7 years to pay back. To recover it in three years the cheaper provider would have to get more deliverables right first time than the one it replaces.
Chapter 8 of The Private Markets COO says it in a sentence: administrator cost includes internal review, rework, technology, data transformation, audit support, transition risk and the capacity consumed by exceptions, and a lower invoice can create a higher operating cost. It tells the manager to measure right-first-time delivery and to price the service model, not only the fee. It never does the arithmetic. The second of the three cases in the companion files does, for Northbridge Private Capital, the fictional firm the book follows.
The setup
The deliverable counts come from workbook 4, the capacity model: 56 NAV packs a year (fourteen vehicles closed four times), 26 capital-event packs (16 calls and 10 distributions), 56 investor statement batches and twelve monthly reporting cycles. Everything else is an input the book does not print, marked ADDED in the workbook, and every one of them can be overwritten.
Each deliverable takes a fixed number of review hours whoever produces it (6 for a NAV pack, 4 for a capital-event pack, 2 for a statement batch, 5 for a monthly cycle), and a larger number of rework hours when it arrives wrong (24, 10, 8 and 6).
Of the investor-facing deliverables that arrive wrong, one in four escapes review and goes out. Each reissue costs 40 internal hours and 2,500 of portal, print and counsel.
Incumbent A: 620,000 a year, 92 per cent right first time. Challenger B: 540,000, 80 per cent right first time, 10 hours a month of manual data transformation because its extract does not fit the reporting model, and 120 more hours a year of audit support.
The move: 150,000 of external cost and 400 internal hours. Internal time is costed at 95 an hour throughout.
The invoice against the operating cost
A, incumbent
B, challenger
B less A
Review hours
612.0
612.0
0.0
Rework hours
169.9
424.8
254.9
Reissues to investors
1.64
4.10
2.46
Reissue hours
65.6
164.0
98.4
Data transformation and audit support hours
0.0
240.0
240.0
Internal hours
847.5
1,440.8
593.3
Internal cost at 95 an hour
80,514
136,876
56,362
External reissue cost
4,100
10,250
6,150
Fee
620,000
540,000
−80,000
Operating cost of the service
704,614
687,126
−17,488
Case 2, sheet “1. Cost of service”, rows 32 to 41. Deliverable counts from workbook 4; every other input ADDED.
Rework is the largest line. If every deliverable in the year arrived wrong, the team would spend 2,124 hours correcting them: 56 NAV packs at 24 hours, 26 capital-event packs at 10, 56 statement batches at 8 and 12 cycles at 6. The incumbent gets 8 per cent wrong, which is 169.9 of those hours; the challenger gets 20 per cent wrong, which is 424.8. The reissues follow the same logic on the 82 investor-facing deliverables, the notices and the statements: one in four of the failures escapes, so the incumbent reissues 1.64 a year and the challenger 4.10.
The fee falls by 80,000 and the internal cost rises by 56,362. Together with 6,150 of extra reissue cost, the service is 17,488 cheaper to run, 21.9 per cent of the saving on the invoice. The other 78.1 per cent is paid in hours by people who are not on the procurement committee.
What a point of quality is worth
The 80 per cent is an estimate, and the proposal stands or falls on it. The workbook turns it into a price: each point of right-first-time delivery is worth 3,309.30 a year here. Of that, 2,017.80 is rework (1 per cent of the 2,124 hours, at 95) and 1,291.50 is reissues (1 per cent of 82 deliverables, one in four escaping, at 40 hours and 2,500 each, which is 6,300 a reissue).
Part of B’s cost does not depend on its quality at all. The data transformation and the audit support are 240 hours whatever its error rate, 22,800 a year. So of the 80,000 on the invoice, 57,200 is available to pay for quality, and at 3,309.30 a point it buys 17.3 points. Below that, B is dearer than A.
B right first time
B operating cost
Saving against A
Years to repay 188,000
Three-year position
74.7%
704,614
0
never
−188,000
80.0%
687,126
17,488
10.7
−135,535
85.0%
670,580
34,035
5.5
−85,895
90.0%
654,033
50,581
3.7
−36,256
92.0%
647,414
57,200
3.3
−16,400
93.7%
641,948
62,667
3.0
0
A at 704,614 throughout. Rows at 74.7 and 93.7 per cent are the workbook’s cells C46 and C49; the others move B’s rate in cell C19. Three-year position: three years of saving less the transition.
The move has to be paid for too
Changing administrator is not free. The case puts 150,000 of external cost on it and 400 internal hours, 38,000 at 95, so 188,000 all in. At the proposal’s 80 per cent the annual saving of 17,488 repays that in 10.7 years. Few administration contracts, and fewer funds in their investment period, last that long.
The non-obvious row is the fifth. At 92 per cent, the incumbent’s own rate, B is 57,200 a year cheaper and still takes 3.3 years to repay the move. The three-year payback a committee would normally ask for needs 93.7 per cent: a provider that is both cheaper and better than the one it replaces. That is not the proposal on the table, and a proposal that assumes it has assumed the conclusion.
That is why the right-first-time rate belongs in the contract as a measured service level rather than in the pitch as a promise. On these inputs every point below the assumed rate costs 3,309.30 a year, and the difference between the rate a challenger assumes and the rate it delivers is where the saving disappears.
What it does to the team
Money is one currency; hours are the other, and the team does not have spare ones. B adds 593.3 internal hours a year, 7.8 per cent of the team’s practical capacity of 7,614 hours in workbook 4. Workbook 4 already has April, the month after the year-end close, at 118 per cent of monthly capacity on the current run rate: 749.6 hours of demand against 634.5.
April demand, hours
Monthly capacity, hours
Utilisation
Current run rate, incumbent (workbook 4)
749.6
634.5
118.1%
B’s extra hours on the quarter-end profile (15% in April)
838.6
634.5
132.2%
B’s extra hours spread evenly (one twelfth in April)
799.1
634.5
125.9%
Monthly capacity is 7,614 / 12. The case applies workbook 4’s quarter-end profile, 15 per cent in April, to all 593.3 hours; the even spread is shown as a floor.
The case treats the extra hours as quarter-end work, because rework and reissues arrive with the NAV packs and the statements: 89.0 of them land in April and take it to 132 per cent. Spreading every hour evenly across the year still leaves April at 125.9 per cent. Either way the switch deepens the one month the team already cannot staff. The hours come out of the same people who are meant to be reviewing the administrator’s work, so a provider with a lower right-first-time rate is reviewed by a team with less time to review it.
What to do with it
Price every proposal on the operating cost of the service: fee, plus review, rework, reissue, data and audit hours at a loaded internal rate, plus the external cost of what escapes.
Compute the break-even quality before the pitch meeting, not after it. Here it is 74.7 per cent; a challenger whose evidence does not clearly clear that line has not shown it is cheaper.
Add the transition cost and ask what rate repays it in the period the committee actually cares about. Here that is 93.7 per cent, above the incumbent.
Put the right-first-time rate in the contract as a measured service level, with the scorecard of appendix D to measure it.
Run the extra hours through the capacity model before signing. A saving in the procurement file can be a hire in the operations team.
Reproducing it in the workbook
Open Three_Cases.zip and the file Case_2_The_Cheaper_Administrator.xlsx. On sheet “1. Cost of service” the inputs are amber: deliverable counts and hours in C5:E8, the internal rate in C10, the reissue assumptions in C11:C13, the two proposals in C15:C21, the transition in C23:C25, and the three figures carried over from workbook 4 in C27:C29. The operating costs are C41 and D41, the gap C44, the value of a point C45, the break-even rate C46, the transition cost C47, the payback C48, the three-year rate C49 and the April utilisation C51 and C52. Sheet “2. Checks” runs six controls, among them that B costs exactly what A costs at the break-even rate, and ends ALL OK.
The carried-over figures come from workbook 4: practical capacity in Team!C14, April demand in Activities!O20 on the peak basis, April at 118 per cent in Capacity Results!I5, and the quarter-end profile in Profiles row 7. Replace the ADDED inputs with your own hours and your own rate and the break-even and payback rates recompute; the conclusion to test is whether your challenger’s evidence clears them.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
The Private Markets COO, which also hold the capital call, the fee and waiver, the administrator scorecard and the capacity model, with the other two cases. Each model ends with a Checks sheet. No account and no email address.
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