December 21, 2020 | Blog
Adapting to An Accelerated Pace of Change in 2021
By Thomas Kim, Chief Executive Officer, Enfusion
As asset managers prepare for the new year, their chief objectives remain the same as in years past: deliver the best returns to their end-investors and maximize profit margins. The challenge for small, midsize, and large asset managers alike in 2021 will be achieving those outsized returns in a volatile and rapidly changing world.
In this environment, strong and resilient technology systems will be more critical than ever. Asset managers need technology systems that are flexible and able to quickly adapt to support complex business strategies and operations.
Asset managers should consider these four questions to assess their technology strategies and resilience for the new year:
1. Are you funding true innovation or are you stuck in the cycle of “tech debt”?
A large technology budget does not automatically translate to strong investments in innovation. In fact, many large asset managers spend a high percentage of their annual tech budgets on maintaining, repairing, and updating old legacy systems instead of funding future-focused innovations. As investment technology has advanced, legacy technology providers have bolted-on additional functionalities to systems that are decades old. Each of those updates, in turn, carry a cost to the asset managers that rely on that technology.
This is a phenomenon that I’ve coined as “tech debt,” a phrase that refers to the perpetual cycle of spending to update and fix or patch outdated technology. It’s a trend that is all too common in the financial sector. Because asset managers have put so much money into their legacy systems, they often feel they have invested too heavily to change course.
I would challenge asset managers to confront their own “tech debt” and ask themselves: Where does my current technology stack fall short? What technology would I build if I could start from scratch? Emerging managers have adopted this mentality and it’s given them a competitive advantage. When they launch new funds, emerging managers choose to integrate new technology that is built with the speed and agility needed to keep pace with today’s rapidly changing investment landscape.
2. What’s your cloud strategy?
While the transition to the cloud was already underway, the pandemic significantly accelerated asset managers’ migration to the cloud. The realities of managing global operations in a remote environment have put a strong emphasis on some of the cloud’s core benefits: 1) unifying systems, data, and information; and 2) simplifying workflow and collaboration. Every global asset manager—of all sizes—should have “the cloud” on their 2021 roadmap.
Regardless of where asset managers are in their cloud journeys, it’s critical that they understand the different options in the market. Take Enfusion, for instance. Our technology was built natively in the cloud as a framework that can be delivered as a true SaaS. This stands in contrast to many of our peers that originally designed their solutions for on-premises installation, hosting, and maintenance, and have only migrated those solutions (along with their legacy problems) to the cloud in recent years.
This might seem like a small detail at first glance, but there is actually a huge difference between solutions that are cloud-native and those that have been retrofitted to the cloud. When a technology provider migrates its legacy solutions to the cloud, their asset manager clients don’t actually benefit from any of the fundamental benefits that cloud-native systems are designed to embrace – rapid change, large scale and overall resilience. Not to mention that transitioning legacy technology to the cloud does not eliminate inherent functional gaps or infrastructure challenges–it simply relocates those problems from an on-prem server to the cloud. Front-to-back systems which are not seamless but have disparate parts that have been “frankensteined” or artificially patched together lead to data loss and degradation.
For a solution that was not natively designed for the cloud, there is a long, tedious, and expensive implementation process to get a new client up and running. Every time new features are available clients must endure a full upgrade. This can be extraordinarily costly and time-consuming; and, it affects not only the core system but often every ancillary system which is patched to attach. This type of model lacks flexibility; instead of easily scaling up or down depending on market and operational conditions, asset managers are locked into fixed costs.
Conversely, cloud-native solutions are designed specifically to take advantage of all that the cloud has to offer. For example, native cloud solutions enable an asset manager to get up and running in weeks not months. On a weekly basis, clients can take advantage of automatic system enhancements not only without a re-implementation, but without disruption. Because the infrastructure was born in the cloud, asset managers can take advantage of true cloud benefits like unified systems, data, and information, enhanced security, and simplified workflow and collaboration.
As adoption of the cloud continues to accelerate, the question will no longer be: “should I consider a cloud model?” Instead, asset managers will begin to ask: “what is the best cloud solution and partner?
3. Are you in control of your data and using it to its fullest potential?
Asset managers that have harnessed the power of their data will have a leg up on the competition in 2021. This will be no easy feat and will be a core focus for many top asset managers.
In a recent global survey of hedge fund managers we conducted, the number one data challenge was combining data from multiple internal and external sources. Two-thirds of managers cited this challenge. This comes as no surprise, given how many data streams investment managers have to process and manage—from the market, from service providers, and from their own internal activities.
Competing data sets and taxonomies can cause extra reconciliation work, data breaks, and general headache for operations teams. The last thing managers want is for their front, middle, and back office to be simultaneously looking at different data sets. The ability to easily tap into clean data, make it available across the entirety of your ecosystem, merge that data with other data sets, and quickly glean insights is a gamechanger for investment teams.
4. Could I reallocate my team to focus on alpha-generation?
As asset managers evaluate their technology strategies, talent is an important part of the equation. A key to success in the new year will be assembling a strong team focused on higher value and alpha-generating tasks. This means minimizing their team’s time spent on rote middle and back office administration. With the right mix of technology and a strong outsourcing partner who is able to scale up/scale down as businesses require, asset managers can fully manage the routine data management operations of the middle and back office without draining talent and resources.
I expect more asset managers to explore the unique benefits of middle and back office outsourcing and automation in 2021, which will allow them to rethink their approach to talent and resource allocation.
Technology should be a competitive advantage for asset managers, and an invaluable piece of the business that fuels the front office and contributes to generating strong returns. Going into 2021, it’s critical that asset managers evaluate their technology platforms, test their tech resilience, and ensure their systems are built to support operations not just today, but for years to come.
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