The rush is on to refresh outdated technology in the investment management industry. DARREN BISKIN, lead implementation consultant at Morse Consulting is seeing a growing trend within financial institutions and their service providers to replace or utilise new technology to improve capability, support new product initiatives and reduce risk.

The process of selecting the right solution for your organisation is generally not an easy one and getting it wrong could be far worse than maintaining the status quo, both from a cost perspective and in terms of impact to the organisation and its clients.

More often than not major system implementation issues and the failure to fully deliver the potential benefits of a new system are the result of not placing enough value on the system selection process.

Is system selection a strategic decision or not?

Frequently seen as a necessity rather than an opportunity, selecting and implementing a new system can be complex, time consuming, costly and disruptive to an organisation even when done well. It’s often conceived by a particular area of the business without widespread collaboration or input from other impacted areas until formal approval, funding and resources are required. There is also a tendency to take the easy route and commence vendor discussions before clear objectives and requirements have been agreed by all impacted levels of the organisation. Differing and disjointed objectives in vendor briefings are a common occurrence. Going straight to known mainstream vendors and offerings has merit as they’re tried and tested, but this should not be done prematurely or it can create confusion and lead to a longer decision period or wrong choice of system. In addition, well known vendors may not provide you with any competitive advantages and the solution may suit current needs but not future ones.

This is a time when business leaders of these organisations should step back and consider the broader organisational objectives together with medium-term and future needs and make decisions in a strategic manner. They should be asking questions like:

• Is maintaining an in-house system our core strength?

• Are there other more strategically aligned or financially viable alternatives such as outsourcing?

• How do the new system requirements fit with the organisation’s overall corporate strategy?

• Are there additional opportunities that should be explored to include in the system objectives such as redesigning existing processes, additional or alternate product capabilities?

• How does it fit with the IT strategy and target architecture?

• How does the vendor’s vision align with the organisations future strategies?

In addition, an important point often overlooked is that an organisation is buying not just a system but also the vendor. The vendor and organisational fit is crucial. This relationship can be a long one and will work best when treated as a strategic partnership regardless of commercials.

Current strategic system selection thinking

A majority of the IT spend at investment managers has previously been targeted more towards back office functions. Over the last few years there has been a gradual shift to a greater proportion being spent on middle and front office initiatives. Investment manufacturing activities such as portfolio analytics, modelling, order management and direct front office support functions are generally now taking precedence.

One of the main reasons for this shift is current state operating models are limiting investment managers’ ability to meet strategic objectives. Their high risk operating models are leading to higher costs and lack of scalability. As a result, one of the top criteria for IT investment is risk reduction to remove manual processes, replace spreadsheets and implement better operational controls.

Clear separation of front and middle office functions has been a resulting strategic move to better enable control, efficiency and effectiveness to support growth initiatives. This leads then to reviewing front and middle office system requirements and what are the core and non-core areas with a view to looking at outsourcing options if appropriate. It’s crucial that system selection is driven by the operating model which should be reviewed prior to or as part of any system selection process.

Several investment managers have taken steps to invest in best of breed front office solutions with additional business drivers being:

• Requirement to support both alpha (asset complexity) and beta (scale and efficiency) investment propositions

• Due diligence being expanded to assess operational capability and process scalability of investment process

• Complex business models – multi boutique, multi asset class / investment styles

• Asset consultants and clients scrutinising operational capability more closely

• Increasing pre-trade compliance requirements

These business drivers and their priorities will differ between managers but they must be clear, agreed and communicated to ensure the right solution is chosen to suit the organisation’s immediate and future needs.

One of the main focuses recently of many managers has been unit pricing and validation initiatives. The raft of APRA enforceable undertakings has required many managers to tighten unit pricing processes and controls adding to the focus on middle office functions and the case to centralise. Creating middle office centres of excellence to act as a gatekeeper between business and service providers, oversee high risk operational processes and provide centralised data validation and support for the front office makes sense.

This adoption of a centralised middle office has increased demand for dedicated technology solutions to support key processes.

Pitfalls to watch out for

Once the strategy and operating model are aligned and the system requirement is clear, there are a number of pitfalls to watch out for:

• Organisation is not ready – minimal buy in (lack of support from senior management) and lack of organisational bandwidth

• Severe underestimation of the business involvement in the selection and implementation process

• A ‘total cost of ownership’ model should be used to compare costs, not just upfront costs

• Managing competing priorities within the organisation

• Not doing enough diligence on the system or vendor

• Don’t underestimate change management – a new system in isolation will not resolve all problems. Process and people also need to be addressed

• Don’t rely on the vendor to have all the answers

• You’re not only buying a system but also the vendor

• Large IT implementations have a high failure rate and require strong project management disciplines

• Interface and integration requirements are not clearly understood or documented

• Deferring commercial discussions until too late in the process

Getting it right

By selecting the right system there is real potential to add not only immediate, but long term value to an organisation. This can only be done by aligning the decision process with corporate strategies and the future state operating model. Once a solution has been agreed the implementation and change management is just as crucial to ensure the agreed solution is delivered effectively and the benefits are realised. The time and the dollars spent upfront on the system selection decision and implementation planning will drastically increase the likelihood of success.

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