The innovation capacity scale

By Steve Young | 5 July 2018

Let’s imagine a scale against which all asset management firms could evaluate their power to innovate. In my opinion I do not think most asset management firms would appreciate where they would be located on an ‘innovation capacity scale’. If they had more of an objective understanding of their own characteristics, it would make it easier for them to identify a path toward change.

In the asset management industry today there is a wide disparity between firms in terms of their capacity to evolve through the application of new technologies. At one end of the spectrum are the firms that are true disruptors in the market and at the opposing end, there are those firms that are deeply entrenched in their ways, predominantly supported by ageing or legacy systems that hamper their ability (or reflect their unwillingness) to change. I have also observed four stages on the scale in between these two extremes, which some firms move along as they evolve over time.

Here are the six locations of the innovation capacity scale.

Location 1: The laggards

This is where there is no innovation whatsoever within the firm. In this space, firms avoid upgrades and new versions wherever possible, often ending up with bespoke or isolated versions of the application. Asset managers will often seem to work against the vendors, trying to ensure that they can maintain the current environment exactly as it is. These firms are uber-conservative and their culture seeks to maintain the status quo. IT costs are also kept to an absolute minimum as the firm pursues a highest margin – lowest IT cost position. Any change is slow, laborious and over-tested, and usually these firms are running legacy systems. Another key characteristic is long serving and loyal staff, well entrenched in their methods and working practices.

Location 2: Following the herd

Here, firms tend to be influenced by their peer group and wait until others have taken the early releases, ironing out the bugs and issues. As a result they have to take the functions as delivered, although often firms will shun upgrade modules and functions if possible to maintain a known and stable environment. The culture is risk-averse and the firm never attempts anything original in the market. As an analogy, if the firm was an iPhone user it would update its operating system six months or more after the latest release was issued. At present this is probably the most common category in our industry, although I suspect many senior executives would be in denial of this.

Location 3: Ahead of the crowd

In front of the rump of asset management firms that move late, slow and together as in ‘Following the herd’, those firms in ‘Ahead of the Crowd’, whilst not exactly innovators or early adopters, will upgrade to a new version of software relatively swiftly. These firms are more interested in new functionality than the majority, but will generally still wait for a few other asset managers to make the first move and therefore take any early ‘pain’.

Location 4: Early adopters

These are the firms that really want to maximise the functionality to stay ahead of the curve. Such firms will take new releases, participate in beta testing and generally seek to unlock the value of technology as much as possible. By being early adopters they can often have an influence over the way the functionality works and also be first to market to take advantage of the new features.

Location 5: The innovators

These asset managers are actively working alongside current or emerging vendors to develop new functionality. Such firms are pushing the boundaries within the communities that they operate and want to use technology to provide competitive advantage. These firms usually see technology as strategically important and have developed a culture of change and evolution. Innovators see technology as key to growing their business and invest in it constantly to ensure that it is at its optimum. Sadly, these firms currently constitute a tiny minority across the industry.

Location 6: The disruptors

Disruptors view the market from a completely different perspective. They seek to utilise technology from any industry in order to change the prevailing business model and gain a massive advantage, exploiting a niche in the market. These firms are risk-takers that will evolve continually.

 

In general terms, the further to the right along the scale a firm is, the more likely it is to be utilising the full functionality of its IT applications. The speed of change also increases dramatically, the further to the right that the firm is located. After ‘The Laggards’, the proportion of the market in each category decreases as a firm moves along the scale to the right, with the largest grouping of firms ‘following the herd’ and only a tiny proportion being true ‘disruptors’. Indeed it could be argued that there is only one real disruptor in the asset management market at present, namely Vanguard.

The further to the left a firm is, the more its problems are being multiplied. Change will become more difficult and the associated risks will increase. These firms will therefore become progressively more reluctant to initiate transformational projects. 

Up to now the industry has taken an extremely cautious approach to technology, with an outlook on testing based on regression scripts and avoiding errors. Whilst this is important, it is of growing significance that firms evaluate how new technology can effect change, generate business and improve business efficiency. Investor demands are changing and I believe the industry incumbents must start to evolve quickly or new entrants will quickly move in to meet these demands.

I believe that the speed of change in the asset management industry is unsustainably slow, and unless firms become more adept at accelerating their evolution they will suffer badly once disruption occurs.

 

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