In the pursuit of efficiency and cost reduction, Economic Development Authorities (EDAs) might consider outsourcing their loan programs to third-party vendors. While this may appear as a promising solution to streamline operations and access external expertise, it comes with a multitude of risks and challenges that need to be carefully evaluated.
Here are three risks associated with outsourcing loan programs to consider:
1. Loss of Control and Customization: Outsourcing can lead to a loss of control over the nuances of loan program management, including operational details and servicing customization. This may result in generic services that are misaligned with the specific economic needs and development goals of the communities served. Many EDAs have goals to strengthen economic and community vibrancy, which are often facilitated by being able to "meet people where they are." With outsourcing, you lose the flexibility needed to fully accommodate your community members.
2. Erosion of Community Connection: Outsourcing can introduce a layer of impersonality, potentially alienating stakeholders and weakening the trust-based relationships that are crucial for successful economic & community development initiatives. This disconnection can undermine the core goal of economic development, which is to foster strong, collaborative relationships with local businesses and residents. Your borrowers want to hear from you and you need to hear from them. This communication is the best way to understand the financial needs of your community, but it risks being lost when a third-party program manager becomes the primary point of contact with your clients.
3. Hidden Costs and Dependencies: While outsourcing may initially seem cost-effective, it can introduce hidden costs such as unexpected fees for additional services and the time and expense associated with managing the outsourced relationship. Moreover, becoming overly reliant on external partners can stifle an EDA's ability to adapt and innovate. Some lenders often struggle acquiring detailed information regarding their borrowers and programs when introducing an intermediary.
EDAs contemplating outsourcing their loan programs must proceed with caution and weigh the risks against the potential benefits. To mitigate these risks, it is essential to conduct thorough due diligence on potential partners, establish clear agreements with well-defined quality benchmarks, and maintain an ongoing dialogue with community stakeholders to ensure their needs and expectations are met. Only through a mindful and strategic approach can EDAs leverage outsourcing effectively, without compromising their core mission and values: to make your community the choice for people and local businesses.
