Andrea Gentilini is head of SEI Novus, SEI’s investment analytics and portfolio management solution for institutional investors
The past decade has been defined by fintechs providing institutional investors with tools to help improve their investment processes. The result was the mass proliferation of new vendors and the birth of so-called software as a service, an innovation boom driven less by inventing and commercialising new analytical frameworks as moving apps onto the cloud.
SaaS saved sellers significant deployment costs, while buyers adopted central processes where multiple users hit the same endpoint. The surge in new, easily accessible solutions was met with strong demand from the industry, which had historically viewed technology as secondary to success.
Now they were able to quickly modernise legacy infrastructure by decommissioning antiquated back, middle and front-office functions, allowing them to focus on what they do best – generating returns for end investors.
This shift not only altered firms’ technological make-up but, coupled with surging demand for greater transparency from both regulators and end clients, opened the floodgates for a surge in new data at a portfolio and market level. As the volume of market data grew, as did the need for capabilities to process and analyse such huge data sets – something SaaS providers and their computing power were perfectly positioned for.
The early exuberance for off-the-peg technology vendor subscription models has led to some unintended consequences, as the blind fervour for new tech often trumped coherent procurement strategies. Rather than thinking of how complementary systems would work and communicate with one another, the binge on shiny new vendor technology created a tangle of third-party solutions.
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While sometimes an effective short-term solution, cheap software dealing with a single aspect of an investment process can only go so far. Investment processes are multi-faceted and in a tech stack made of multiple cheap solutions, investors were left to manage and amalgamate these disparate strands.
This intense fragmentation often compromised a firm’s performance and allocation of key resources, as the web of solutions grew to cause the same level of complexity they were intended to solve – resulting in three core problems.
First, the spiralling total cost of ownership. While individual solutions appear reasonably-priced at first, the accumulated costs can grow as firms add more vendor solutions to keep up. This is particularly acute where the subscription model commits firms to the vendor without delivering ongoing innovation, creating issues that need further investment. Coordination costs grow to the power of the number of vendors adopted — resulting in firms burning significant resources to manage a plethora of SaaS systems.
Second, is data degradation. With multiple independent vendor solutions installed, interoperability and the provision of clean, usable data related to a firm’s investment book of record has become a major but often overlooked issue. While some will view IBOR as a boring nuisance, these records are integral to portfolio analytics. Without an IBOR there is no accurate record of a firm’s investments and therefore no accurate notion of exposures, performance, and risk.
Vendor fragmentation has led to IBOR fragmentation, creating cracks in the foundation of investment decision making processes.
Finally, front, middle and back-office segregation. Most investors have different technology stacks from the back to front-office. This is not surprising as workflows tend to differ across teams. However, all workflows stem from a cohesive IBOR. This setup has led to inefficient processes, reduced performance, and increased information leakage.
The lack of connectivity and interoperability between systems can mean that vital insights are missed or are ineffectively communicated from one desk to another – a big problem, especially in choppy markets when timing is critical.
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It is always important to pause to take stock of what is truly delivering value and what is draining valuable time and resources. Asset owners must review their technology stack and consolidate vendors — far from stifling innovation, consolidation of vendor technology is critical to how the firms plan for the future, avoiding longer-term problems stemming from multiple solutions.
Knowing how and where to do this has a critical impact on cost reduction and improved functionality. When approaching such a large task, there are three key considerations central to success.
First, prioritise facilitating a unique, clean IBOR. When consolidating back, middle and front office functions, firms must ensure technology curates the same IBOR. Only then can they trust that portfolio analytics and investment decision making are supported.
Second, find the right vendor that can work across the business and has the best chance of covering multiple workflows within their own system. Betting on the right vendor with a decade-long perspective will be crucial.
Third, be prepared to pay up. We’ve grown to think that software is cheap. However complex problems where data remains highly unstructured and fragmented cannot be solved by a cheap one-size-fits-all solution – they require investment.
The plethora of vendors that have emerged over the past decade have played a vital role in accelerating financial services firms’ technological evolution. But the end of the bull market will likely mean the end of the boom in new vendors entering the market.
Managers and owners should think carefully about how they save costs and improve their overall operations through centralising their technology stack to succeed in the long-term.
Gloss