Avoid Turning your Investment Firm into a Technology Company
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As information technology’s development accelerated, the investment industry took notice and began developing systems that would automate formerly manual tasks. Over time these systems have evolved into something more. While their benefits are continually vaunted by vendors and end users alike, the processes of ensuring that these systems are properly implemented and maintained belong, first and foremost, to the firm.
It is easy to become seduced by the technological attraction that systems offer but if an investment firm does not clearly and thoroughly understand the purpose of a system, the technological dream will quickly turn into a nightmare. In general, systems are there to facilitate tasks, such as data management, analysis and reporting. Once that is known, a system must be properly “placed” within a firm. That is, it is to be maintained by the operations team, supported by IT, managed by specialists (performance, risk, etc.), used as a feedback tool by the front office and fund sponsors, and as a means of communications to the clients.
Firms who have poorly managed their systems have many common characteristics. It is not uncommon to find the executive level disconnected from everything except front office and sales, an IT department that assumes a larger role than it should, consultants whose contracts are continually rolled over, and the role of the specialist relegated to that of a “middle man.”
The glamorous aspect of the investment business is in the front office; there are no movies of performance managers living the “dull” life. This is also the revenue generator and, as it should be, the executive level will focus more on this part of the business. But this does not absolve them of having a basic understanding of the role of systems. They are too focused on the cost aspect and are not able to see the benefits that can be derived by these systems. The portfolio managers and analysts follow suit and can begin making unreasonable requests as to what these systems should produce for them, thus overextending the operations, IT, and specialists departments. In the end it becomes a self-fulfilling prophecy, where by burying your support staff in unnecessary requests results in no added value and a system functioning as predicted, a cost center.
Moving away from the front office and into the IT department, we find a group of programming savvy workers who are “tech happy” when it comes to systems. The advent of systems created the need for IT personnel, an indispensible part of the today’s investment firm. A negative aspect of IT when it does come to systems is that they overplay their role. In other words, they tend to take the lead in system selection and management when they do not have the necessary knowledge to do so. Imagine performance and risk specialists playing a secondary role in system selection and management to the IT department. The work of the specialists will be at the mercy of the IT department’s lack of finance expertise. What this does is place a greater importance on IT and less on the quality of data analysis, thus eliminating any added benefits.
In a firm where systems are wreaking havoc you will more than likely find specialists who were overconfident in it being the panacea to all their needs. As tempting as the Sirens were in Homer’s Odyssey, so are vendors to specialists and IT. Vendors’ sales teams will never stress on the weaknesses of the product and will oversell the benefits. The unprepared specialists will rely heavily on the sales pitches of the vendors, the opinions of consultants whose next contract is dependent on your firm buying that system, and an IT department over-passing its role. The end result is purchasing a system with a lot more bugs than initially thought. Through no fault of the vendor, the lack of preparation and due diligence of the specialist will result in the firm being stuck with an underperforming system. Relying on the vendor to solve your problem will also be time consuming since much of the customer support is manned by juniors who will know less about the product than the specialist. Furthermore, the experts the vendor does have are usually overextended; the vendor business is a cutthroat one where firms try to operate as lean as possible resulting in the limited availability of their system experts to the clients.
One of my inspirations into entering the world of consulting is to provide quality service. Through my experience, I can categorize consultants into three categories. The first two are the ones that firms with system issues have most probably hired.
The first category can be labeled as “Insciens Consuasors.” Loosely translated from Latin, it describes consultants who have limited knowledge of the system and the financial understanding to translate the requests of the specialist to that of the system. Their hourly rate is usually cheaper than the more qualified consultants but they end up costing your firm much more since you’ll end up correcting their work once they’re gone. They also tend to have short life spans within a firm but quickly find new work.
The second undesirable type of consultants can be described as “Deceptios Consuasors.” These consultants are quite knowledgeable about the technical and finance aspects of the system and can provide excellent service, if they desired to do so. The issue with them is that they view the target date of a project as open ended. They will seduce you with their knowledge and constantly find issues with the system or your firm hence justifying extensions to their mandates. They tend to favor workarounds and recommend systems they specialize in rather than put the client’s needs first. Worst of all, due to the firm’s lack of preparation, they will convince you they are indispensable.
Lastly, the third and most desirable type of consultant is the “Pius Consuasors.” These consultants have the knowledge and expertise your firm requires, along with the professionalism to provide a service that is truly in the best interest of your firm. They are able to clearly define and meet the target date. Moreover, they are able to communicate issues in a clear and concise manner and will not overwhelm you with technical jargon to ensure any unnecessary extensions of their contract.
Committing the procedural errors described above, coupled with poor choice of consultants, will result in firms overpaying for a system, from both a monetary and personnel point of view. Even if a system is finally implemented, a firm with too many negative practices will probably have to replace that system and the whole process is repeated. The end result: you now have an investment firm transforming into a technology company without the high multiples that tech firms usually carry.
Having focused on the “what not to do” aspect of systems, it is only appropriate that we spend some time looking at a better way of using and implementing systems. Getting lost in the confusion of mismanagement and bad advice, it only takes a little common sense to ensure that systems benefit the firm as advertised.
It is imperative that the purpose of the system is clearly defined, communicated, and understood by all parties. The front office needs to understand that they are best served by a system if they rely on the knowledge of a specialist specifically trained to delve deeper into the numbers than they are capable of. Once this is done, the specialist will have the support at the executive level and will be able to focus on adding value in the information supply chain by using their expertise to provide beneficial analysis that otherwise is not achievable by any other department in the firm. Supporting the specialists on a technical basis will be the IT department. Understanding their role as a support tool for the specialist and the firm, the IT team can focus on using their technical strengths in systems and automation. The less they are involved in the finance aspect of the system, the better off the firm will be.
The best way to avoid having poorly functioning systems begins before the system selection process. The following steps are a general guide to minimizing system issues and avoid writing blank checks to vendors and consultants.
The Audit: The specialist should conduct a full audit of any of the firm’s current system(s) that will have an impact with the one being proposed and a full audit of the operational tasks currently being used. This must be done before the search for a vendor has begun. The benefits of this audit are that it will identify any weak points the firm has and provide the time to make operational improvements without having the meter running on the hourly rates of vendors and consultants.
The Vendor Search: Once the audit of the firm’s operations has been completed, the specialists, along with support from IT, can begin the vendor search. The audit will have provided the necessary knowledge of what data your firm has and any possible interaction with established systems in your firm to ask the proper questions in the vendor evaluation. Once you have sent out requests for proposals, you must also meet the vendors’ technical staff who are system experts and can provide you much more feedback than a sales team can ever do. Further, system experts take pride in their knowledge and will be more forthcoming about the system’s weaknesses than the sales team would.
With a vendor selected, a detailed implementation schedule should be set up and broken down into phases with fixed deadlines. The firm should have an agreement in writing indicating who will be supporting the project from the vendor’s side. It is quite common for a firm to find itself without the adequate support once it has signed the vendor agreement. As stated earlier, the experienced employees of a vendor firm are always in great demand and their time is limited, consequently making it imperative that their time is allocated to your firm as per the agreed upon schedule.
The Consultant Search: If your firm lacks the in-house expertise to implement a system, then it is advisable that a consultant is hired to assist you in the implementation. Due to the time limitations of the vendor, relying solely on their staff is unadvisable and will delay the implementation. An experienced consultant can bridge the gap between the needs of the specialists with the technical requirements of the system. Many of the guidelines in finding a qualified and professional consultant are similar to that in the vendor search. Basing the firm’s questioning on the specialist’s knowledge of the subject matter and the possible issues found during the audit, the consultant will be capable in providing clear and detailed answers during the interview process. Finally, it is important that you verify their previous work with other firms by talking with those firms and discussing the consultant’s work from the accuracy of his time estimate to the quality of his work. Remember, you do not want a consultant who will constantly bring up issues and recommend workarounds, when in fact there are no issues.
Having selected a consultant, the firm must include in the agreement that the consultant thoroughly tests his/her work. If you have hired a qualified and professional consultant you will not have to worry about receiving poorly tested work. The specialist will still have to test the consultant’s work to ensure that he/she has done the work as directed. This is a secondary quality control measure and should not be uncovering significant issues if the consultant has done the work properly.
By deciding to purchase a system and implement it in-house, a firm has taken on a significant project that can bring great benefits if done properly. The executive level needs to understand and support the team that will be using and implementing the system. The specialist, who will lead this team, will audit his firm’s operations and conduct a thorough due diligence of the vendor system and any consultant being tasked to assist the implementation. IT will play a support role to the specialist with respect to the technical aspects of the system and the interaction between the other systems. Lastly, the vendor and consultant will leverage their knowledge to help best meet the needs of the firm.
Implementation can be a daunting task and many firms would rather have their specialists spend their time providing quality analysis to the benefit of the firm and its clients. The option exists of outsourcing the system management to firms offering investment management solutions. These technology firms serve the investment management field and can manage system maintenance while providing the same access you would have if you had you implemented your own system. The higher initial costs of outsourcing will more than make up for the additional costs incurred by maintaining a larger IT department and hiring external consultants.
Firms introducing investment systems rarely give their selection, implementation and maintenance enough consideration. At the same time, the investment industry now takes their benefits for granted. It is essential that every department of an investment firm fulfills its role to maximize the benefits of a system. Too many firms today are in the habit of selecting systems that do not fully fit their needs and proceeding in an ill-prepared manner only to end up with a tool that requires more work to maintain than it is worth.
With the proper approach and preparation an investment firm can greatly profit from the advances technology has to offer. Which firm would not want to have an efficient flow of data and analysis that it can rely on in evaluating and building its strategies to help outperform and contribute to the bottom line; a place where the front-, middle-, and back-office can work in unison without exhausting each other’s resources? Portfolio managers would not have to maintain their excel schedules breaking down data and operations would not have to spend needless time dealing with system caused data-related issues. All you need is a little common sense.
-Ioannis Segounis, Founder and Managing Director of Phocion Investments, founded the firm in 2010 with the goal of influencing the investment industry to adopt best practices. Ioannis earned a Bachelors degree in Engineering from Concordia University and an MBA from HEC Montréal. He also earned the CFA and CIPM designations from the CFA Institute.