Global strategies of any kind can be tricky. There are so many variables to consider that it's all but impossible to achieve consistent outcomes and suit all business requirements with a single strategy. The situation is no different when it comes to technology and the Australian investment operations market.
There are standard requirements – compliance, risk management, cost effectiveness and the need to cater for growth - plus there are local defining factors. However, Australia remains one of a relatively small number of countries with compulsory superannuation. We also have an economy that has broadly held its own in the past few years despite global fluctuations. Then there's the competitive landscape. Within the past decade we've experienced increasing levels of competition from companies offering investment advice, management and operational support. The number of outsource suppliers, and software and technology vendors ready to assist the industry have also been growing.
Together, these factors are creating far more choice about how investment operations are run. They've also given rise to a new set of challenges that demand operational agility, flexibility and responsiveness. The ability to leverage systems for efficiencies and to ensure best practices is more important than ever but it's complicated by the need to also cater for local market requirements.
The two main technology approaches used by Australian investment managers are: to implement an in-house system (otherwise known as insourcing), or to turn to an external organisation with the right expertise and technology (otherwise known as outsourcing).
An argument for outsourcing
Outsourcing providers typically operate with a global technology strategy. Their platforms and systems are designed to provide a solid level of functionality for clients anywhere. Therefore they often appeal to funds that are growing and beginning to explore new asset classes. As a fund's scope moves beyond the Australian stock market, requirements become more complex. Adopting a system already designed to cope with these wider needs can ensure built-in best practices and save a fund manager valuable time.
Outsourced systems can also be a cost-effective solution, particularly for start-ups and smaller funds but this kind of solution consistency may necessitate additional customisation to reflect local market conditions.
One additional factor peculiar to the Australian investment operations market is that right now outsourcing entails an element of uncertainty. In its 2011 report “The Future of Investment Operations in Australia”, global management consultancy, Investit, states that there is not enough revenue to maintain the current number of providers servicing the Australian market. Therefore consolidation is inevitable. The report suggests that as providers seek to increase the cost/benefits of their Australian activities there will be increasing pressure to more firmly adhere to their global platforms, resulting in the provision of simpler, less customised services. In addition we can expect a range of new service models that will allow providers to charge higher rates and increase fees.
These likely changes along with the mergers an acquisitions that have been occurring within the industry in recent years mean that investment managers need to carefully consider their operational requirements and system capabilities. If a fund plans to increase in size and complexity of operation, will the existing outsourced system be capable of meeting anticipated needs? Or, can the fund cope if presented with system or provider changes? Shifting outsource arrangements takes on average at least 12 months so it's not something that can or should be rushed.
The arugment for in-house IT
The alternative to the global technology strategy is to deploy an in-house system. Such offerings typically include the best of both local and global strategies. They offer the learnings, processes and flows gleaned from supporting investment operations clients around the globe but also provide scope for customisation to ensure that the systems reflect local needs and will incorporate an investment manager's particular way of working.
This doesn't mean that an in-house system is automatically better than outsourcing. To begin with, in-house systems take time to deploy. Moreover, many of today's investment managers operate with legacy platforms that are inflexible, can't adapt to today's changing business strategies, new asset classes or are unable to readily expand to include acquisitions.
Whether insourcing or outsourcing, if the underlying platform involves a legacy system and its functionality starts to impact time-to-market or restricts business innovation, it's time to acknowledge that the system has become an operational burden and needs replacing. Don't wait until a failure before accepting there's a problem, because once again, this kind of change takes time.
It all comes back to the fact that there is no universally correct approach. In times of market change such as now it's essential to carefully evaluate business requirements and then match the right strategy for your needs. Look for something that can be relied on for the long haul. The best bet is to select a modern platform that has the faith of a vendor who continues to invest in research and development, enhancements and future functionalities. At the same time, it's worth remembering that a well performing system requires more than vendor commitment. The investment manager also has a part to play. They must take responsibility for ensuring the right people are available to manage the system. They should also ensure that the software is populated with correct data because the better the input, the better the output and the performance of the fund.
Nick Quin is the regional sales director of SimCorp