Andrea Gentilini is Director of SEI Novus, SEI’s portfolio management and investment research solution for institutional investors.
The past decade has been defined by fintechs providing institutional investors with tools to help them improve their investment processes. The result was the massive proliferation of new vendors and the birth of so-called software as a service, an innovation boom fueled less by the invention and commercialization of new analytics frameworks than by moving applications to the cloud.
SaaS saved vendors significant implementation costs, while buyers adopted core processes where multiple users reach the same endpoint. The rise of new, easily accessible solutions was met with strong demand from the industry, which had historically viewed technology as secondary to success.
They were now able to rapidly modernize legacy infrastructure by dismantling outdated back-office, middle and back-office functions, allowing them to focus on what they do best: generating returns for end investors.
Not only did this shift alter the technological makeup of companies, but, coupled with the growing demand for greater transparency from both regulators and end customers, it opened the floodgates for a tidal wave of new data at the portfolio and market level. . As the volume of data in the market grew, so did the need for capabilities to process and analyze such large data sets, something for which SaaS providers and their computing power were perfectly positioned.
The initial exuberance of out-of-the-box technology vendor subscription models has had some unintended consequences, as blind fervor for new technology often outpaced coherent acquisition strategies. Instead of thinking about how complementary systems would work and communicate with each other, the binge on shiny technology from new vendors created a tangle of third-party solutions.
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While sometimes an effective short-term solution, cheap software that deals with just one aspect of an investment process can only go so far. Investment processes are multifaceted and in a technology stack made up of multiple cheap solutions, investors needed to manage and merge these disparate strands.
This intense fragmentation often compromised a company’s performance and the allocation of key resources, as the network of solutions grew to cause the same level of complexity it was intended to solve, resulting in three core problems.
First, the spiraling total cost of ownership. While individual solutions seem reasonably priced at first, cumulative costs can add up as companies add more vendor solutions to keep up. This is particularly acute when the subscription model commits companies to the provider without offering continuous innovation, creating problems that require further investment. Coordination costs grow with the power of the number of vendors adopted, causing companies to consume significant resources to manage a large number of SaaS systems.
Second, there is data degradation. With multiple independent vendor solutions in place, interoperability and the provision of clean, usable data related to a company’s investment ledger has become a significant but often overlooked issue. While some will see IBOR as a boring annoyance, these records are an integral part of portfolio analysis. Without an IBOR, there is no accurate record of a company’s investments and therefore no accurate notion of exposures, return and risk.
Provider fragmentation has led to IBOR fragmentation, creating cracks in the foundation of investment decision-making processes.
Finally, segregation of front, middle and back-office. Most inverters have different technology stacks from the back end to the front office. This is not surprising as workflows tend to differ between teams. However, all workflows stem from a cohesive IBOR. This setup has led to inefficient processes, reduced performance, and increased information leakage.
Lack of connectivity and interoperability between systems can mean vital knowledge is lost or communicated ineffectively from one desk to another – a big problem, especially in choppy markets when time is critical.
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It is always important to pause to take stock of what really creates value and what consumes valuable time and resources. Asset owners need to review their technology stack and consolidate vendors; Far from stifling innovation, vendor technology consolidation is critical to how companies plan for the future, avoiding long-term problems stemming from multiple solutions.
Knowing how and where to do this has a critical impact on reducing costs and improving functionality. When tackling such a large task, there are three key considerations critical to success.
First, prioritize facilitating a single, clean IBOR. By consolidating back office, middle office, and front office functions, companies must ensure that the technology selects the same IBOR. Only then can they be confident that portfolio analysis and investment decision making are supported.
Second, find the right vendor that can work across the enterprise and has the best chance of covering multiple workflows within its own system. Betting on the right supplier with a perspective of a decade will be crucial.
Third, be prepared to pay. We have come to think that software is cheap. However, complex problems where data remains highly unstructured and fragmented cannot be solved with a cheap one-size-fits-all solution: they require investment.
The plethora of providers that has emerged over the past decade has played a critical role in accelerating the technological evolution of financial services firms. But the end of the bull market likely means the end of the boom of new vendors entering the market.
Managers and owners need to think carefully about how to save costs and improve their overall operations by centralizing their technology stack for long-term success.