For buy-side firms, the need to manage operations with more efficiency has never been greater. Rising regulatory costs and fee compression driven by passive funds have caused asset managers to scrutinise every area of their processes like never before.
The relationship between an asset manager and its vendor partners is one such domain that is being questioned. Is the IT team in a client firm as ‘good’ as a vendor’s? How do they generally compare in terms of industry knowledge, technical skills, project management and implementation prowess? Is there a ‘better way’ of arranging and deploying resources between asset managers and their software partners? These are questions that one commonly hears in off-the-record discussions between executives in our industry concerning comparative costs, yet rarely appear to be openly discussed between the two parties themselves.
Ideally, the technological expertise within any client - vendor relationship should be complementary, with different skills in each firm. It is not a question of criticising the IT teams within asset management firms, but is a buy-side firm in the business of running IT, internal platforms and managing support, or is it in the business of managing money? As much as an IT team can be highly skilled, can they really be expected to be proficient in all the underlying systems when there may be literally hundreds of them?
There is a case for saying that there is more benefit to the client if the individual vendors have more ownership and management control over the functionality of their systems, rather than an IT team that is trying to manage multiple systems without perhaps always knowing the true value of each one. One might argue that the client’s technology team should be focused on where it can really add value, as opposed to duplicating the work that the vendor is already undertaking.
It goes without saying that software vendors should be experts in their own product. Their developers, implementation and support staff only work on one application, day in, day out. It is rather like going to the Mercedes dealership to get your Merc fixed; you have a sense of comfort that these guys never look at any other car. If you opt for the Mercedes dealer you expect that it will cost you more than your high street garage, but you know that your car will be running at optimal capacity as a result. Mercedes will squeeze the peak performance from every component that it has created in its multi-million-dollar R&D investment in order to make the car run slightly better in every way possible.
The alternative is taking your Mercedes to a generic garage, which could well be cheaper because the team there is not provided with that up-to-the-minute product knowledge of Mercedes. A generic garage will undertake the broad activities as if it was any other car; the Mercedes dealership will help you solve problems that you didn’t know you had.
Similarly, in terms of industry knowledge, IT departments rarely have the opportunity for research, attend industry conferences or converse with a large number of other asset managers about a singular topic. It is therefore almost impossible for an IT team to stay up-to-date. A vendor that specialises in a particular functional element (whether it is performance measurement, corporate actions, trade processing or whatever) has an entire team whose jobs are devoted to maintaining that high level of industry knowledge. A client’s IT department has to have some understanding of a plethora of technology subjects; therefore deep domain expertise is not practically possible.
With respect to technical skills, these undoubtedly move in association with each individual application. It’s not possible, for example, for an asset management firm to simply decide that all of its applications will go on Oracle, or in the cloud, because from a technical perspective each platform is different. The vendors would be in a better position to decide.
Regarding project management skills, asset managers would justifiably argue that they have excellent team leaders, often superior to that of a vendor. In terms of implementation skills to deploy their own application, however, the vendor should always have more capability.
In my opinion, the implementation skills associated with a software application, the management of the technology that applies to that individual application and the specific, related industry knowledge should be the domain of the vendor. In this way the asset manager’s IT team can then have more oversight and control over their infrastructure, all of the different component parts that integrate with an application and the requisite change management associated with a transition project.
For asset management firms, the objective should be getting the value out of a system without the overhead of having to look after it all.