CLOUD-BASED SOLUTIONS: why the time is right for asset managers to consider adoption
Faced with a slew of new industry, client and technology pressures, today’s asset management landscape looks quite different than it did just 10 years ago. In this article, Manish Moorjani discusses the evolution of the asset manager’s ecosystem, looks at the technology solution transformation with the advent of cloud computing and details the decision criteria CIOs can use to determine whether cloud solutions fit into their future plans and strategies.
Over the past decade, the asset management business has been impacted by several factors, including the popularity of exchange-traded funds (ETFs) as investment vehicles; new regulations; the rise of automated investment services, such as robo-advisors; increased scrutiny around risk management; and a focus on the end-user experience due to the growing popularity of tablets and smart phones. These factors have led to the “new world” of asset management with a different set of opportunities and challenges.
Technology solutions have also gone through a significant transformation. In the past, firms could either develop custom technology solutions or implement a commercially available “off the shelf” product. That decision was primarily influenced by the importance of the business function, the ability of the internal technology team to support it and the availability of mature products in the space. However, the advent of cloud computing has added a completely new dimension to this decision-making process. It has opened up avenues to host custom-developed applications on third-party-managed platforms and created opportunities to use software as a service (SaaS).
According to a recent survey, using cloud-based solutions versus onsite solutions over a four-year period could lower the total cost of ownership by 55 percent.1 Numbers like these are making CIOs around the world to take notice and realize that cloud computing provides an opportunity to shift to an entirely new technology operating model. With this shift, IT can move from managing applications on an internal infrastructure to managing the integration of different cloud services, platforms and cloud-based solutions. And while the potential benefits are clear, firms must conduct proper due diligence and understand the impact before making the move. In the case of SaaS, for example, it is important to consider factors such as information security and integration with the existing application architecture. For platform as a service (PaaS) offerings, it is important to understand the impact of adapting the new ecosystem to the existing IT organization.
THE “NEW WORLD” OF ASSET MANAGEMENT
Traditionally, asset managers view investment management, or front-office functions, as generating returns while the middle- and back-office functions diminish those returns. However, this perspective has been challenged in recent years due to several disruptions to the business model, as shown in Figure 1.
Figure 1: Key business and market pressures.
These market pressures are forcing asset managers to think about optimizing operations in order to deliver higher operational efficiency, which in turn would lead to more profitability for their clients. Asset managers are discovering ways to broaden their product offerings and improve the quality of information they provide to their customers. The matrix in Figure 2 defines specific themes for business functions based on their impact. The two main themes are as follows:
- Optimize and Differentiate: Offer a unique value proposition to the customer in the most optimal manner. For example, an asset manager can provide custom product offerings with risk and return characteristics that meet the requirements of sophisticated institutional investors.
- Economize and Standardize: Add value by standardizing a business function in a cost-effective manner. For example, extensive regulatory reporting is a reality for today’s asset managers. An asset manager who can meet regulatory requirements on time and cost effectively will add real value to the business and also build credibility with customers and regulators.
Figure 2: Business functions and “new world” themes.
Figure 2 shows that the paradigm of a profit center versus a cost center is far less relevant in the new world and the lines have become blurred between how asset managers look at the front, middle and back offices. For example, trade execution that used to be core to asset management and was expected to drive differentiation is becoming more standardized across the industry. Today, however, customers increasingly evaluate asset managers on their other functions, such as risk management and client reporting. In a CEB TowerGroup survey, 53 percent of executives said that client reporting provides high business value and is a key differentiator.2
TECHNOLOGY SOLUTION MODELS
The traditional approach to solving a business problem was limited to custom development or package implementation to meet the requirements—both of which came with the additional overhead of application hosting and maintenance.
The introduction of cloud computing has added a new dimension to these solutions, enabling firms to completely break free from application hosting responsibilities and reduce maintenance overhead. Cloud-based solutions, however, are perceived as posing challenges in terms of information security or leakage (specifically when the solution is built and managed by a competing firm), integration to a firm’s existing technology infrastructure and change requirements for existing processes.
Figure 3 describes the four major post-cloud technology solution models available plus their strengths and weaknesses.
Figure 3: Post-cloud technology solution models.
Some of the factors listed in Figure 3 complement each other and hence cater to different business functions. For example, SaaS provides the ability to standardize, which is helpful for regulatory reporting, where organizations want to stay aligned with industry standards. Custom solutions provide a greater degree of differentiation, which is something an asset manager requires for activities like portfolio management.
The other point of caution while looking at the strengths and weaknesses of these solution models is that they are based on a set of assumptions and trends typically seen in the industry, but there are always exceptions to the rule. For example, several SaaS-based products are able to provide information security and can be easily integrated. Similarly, some custom-built products were developed in a way that can lower the cost of ownership when compared to a SaaS offering.
TECHNOLOGY SOLUTIONS FOR THE NEW WORLD OF ASSET MANAGEMENT
To stay competitive and ahead of the curve, asset managers must evolve as a response to industry change, maximize opportunities and successfully tackle new challenges. The difficulty, however, lies in determining what to change and how to make the change in terms of people, processes and technology. Figure 4 offers a point of view on answering the question, “Which solution model best caters to the needs of specific business functions in the asset management world?” Areas in blue highlight the most preferred solution, while the red areas highlight the least preferred one.
Figure 4: Solution model table.
The solution model table highlights an interesting pattern around the use of SaaS specifically for middle- and backoffice functions. It shows that SaaS (point 2 and 3) is the preferred option to solve problems when lower cost and standardization are the most important factors, whereas a custom solution (point 1) is the right approach for functions where differentiation is the primary driver.
Where do packaged implementations and PaaS solutions fit in? These solutions are relevant when:
- Differentiation is important but cost is still a major driver
- The firm lacks the in-house capability needed to build a custom solution
- Time to market is critical
- The firm uses a mature industry product and customizes it to meet the business need
It is important to note that the model in Figure 4 is one point of view based on a certain set of assumptions around the business model, size and focus area of an asset manager, and may require adjustments to meet specific needs. For example, if an organization with a world-class trade execution system that is tightly coupled with an upstream (order management) and downstream (trade confirmation and accounting) system wants to replace or upgrade the trade confirmation system, it would need to decide between building a custom solution or implementing a SaaS. The firm would also need to understand how the new system would impact the trade execution and accounting systems. Additional factors to consider include the level of customization within existing user processes.
CIOs who follow this framework should take these steps to make an informed decision:
- Review the business needs in conjunction with the existing application ecosystem
- Short-list the business functions that need a significant technology investment to either meet critical new business requirements or an existing application that is unable to support the business
- Agree on the theme for each business need (Optimize & Differentiate versus Economize & Standardize)
- Prioritize the business needs based on themes and timelines which will lead to a roadmap
- Based on the proposed framework, select the top two recommended solution models for further evaluation, taking into account firm-specific factors such as size, technology capability, time to market, etc.
- Pick a solution model and begin defining the technology stack or evaluate off-the-shelf products
- Choose between using a cloud-based solution or one that would be hosted by the asset manager
- Perform a proof of concept to validate the approach and ensure the solution will meet the business requirements
- If it does, proceed with a full implementation
CLOUD-BASED SOLUTIONS USED BY ASSET MANAGERS
Cloud-based solutions are not new to the asset management space. According to a 2014 CEB TowerGroup report, more than 71 percent of firms confirmed their intent to adopt cloud computing or increase its usage by 2017. 3 This will happen when firms feel more comfortable with SaaS-based solutions and the right products are available for adoption through the cloud.
Interestingly, the survey says that 2015 will be the year in which product vendors will start supporting a majority of their products as cloud-based solutions. Providing cloud-based solutions also benefits service providers; it helps to reduce software upgrade and maintenance costs, as well as optimize application performance and support through a centralized application and client support team.
A number of players in this space offer product suites (in addition to stand-alone products) to reduce the integration challenges associated with cloud computing. For example, Charles River’s Investment Management solution is a suite of products for portfolio management, compliance, trading and order management, execution, trade settlement, risk and attribution, position and cash management, covering almost all functions across the front and middle offices.4
Similarly, Bloomberg Asset and Investment Manager (AIM) is a SaaS-based solution that focuses on portfolio management, order management, compliance and trade matching/settlement and integrates well with other Bloomberg platforms like EMSxNet, Bloomberg FIT and BVAL. It also integrates with BVAULT, which is Bloomberg’s data archiving platform, and can be used to meet regulatory and legal reporting needs.
Newer asset managers who are still building their client bases can opt for a SaaS-based solution rather than making a significant investment in building and maintaining a technology infrastructure. Likewise, these solutions are appealing to niche asset managers who want to focus on specific client segments and may never want to grow too large.
On the other hand, solutions like Barclays POINT, BI-SAM Go and Wilshire AXIOM, focus on providing business value in specific areas such as case risk, analytics and attribution. Risk and performance attribution functions require software to process large quantities of transactional and reference data using complex mathematical models to generate the desired output. This activity utilizes considerable computing power in short periods of time. In this scenario, SaaSbased solutions are ideal since computing power can be made available on demand.
In the back-office space, products from SIMCORP, such as CORIC Web Report, and Kurtosys are providing SaaS-based solutions for client reporting. This is one area that is growing in popularity as more asset managers look to support changing client needs across multiple platforms, including tablets.
With so many players in this space offering a variety of cloud-based solutions (including stand-alone and complete product suites) across the front, middle and back office, why are we still talking about cloud adoption?
Although a 2014 survey by the TABB Group claimed that 71 percent of asset managers intend to use cloud solutions, a TABB survey published in Q1 2015 provides a slightly contrasting picture.5 Only 23 percent of respondents said they were comfortable using a public cloud and more than two-thirds cited concerns such as compliance, security and data control. In a similar survey by NASAQ OMX (for capital market firms) in 2013, the same number, only 23 percent of respondents, said that they are actively embracing the cloud.6 These results seem to suggest that perceptions and adoption have not changed significantly over the last two years. It also indicates that the conclusions the study drew around information security and integration challenges are still preventing today’s firms from fully embracing cloud-based solutions.
To address these issues, companies have begun to explore a hybrid cloud approach that connects data centers, public and private clouds in any combination. In a hybrid model, firms have the ability to use a public cloud for non-sensitive data or testing and rely on a private cloud for critical data and applications. While retaining their independence, the individual clouds are bound together to facilitate the portability of data and applications. Products, such as VNS3:net by Cohesive Networks, allow firms to build their own custom cloud network, enabling them to extend onto a public cloud infrastructure while remaining inside their own network. Even with new options like these, the current adoption and usage of cloud-based solutions suggests that there is still some way to go before the industry is prepared to fully unlock the full potential of the cloud.
In today’s “new world” of asset management, cloud-based solutions are available to help asset managers gain a competitive advantage. Even though the benefits of cloud computing have been well documented, firms still need to use a logical framework for evaluating and selecting the right technology solutions. They can choose to follow a bottom-up model that begins with the business need, such as the one presented in this article, or a top-down model that looks at what other firms in the industry or related industries are doing and then decide which technology solutions to adapt. Regardless of the model, it is important to view adoption criteria through the same lens to ensure any new solutions will help firms achieve their business goals.
CFA, FRM, is a Senior Manager Business Consulting at Sapient Global Markets with more than 12 years of experience working with firms in the capital and commodity markets. Manish has worked on the design and implementation of portfolio management, order management and trade execution systems across multiple asset managers and investment banks. He has also led multiple business and development teams across middle- and back-office functions.
- Confluence, Five Drivers of the Cloud in Asset Management, http://www.confluence.com/uploads/ mkt-i-whitepaper_five-drivers-of-cloud-_final_ edited_2.pdf
- CEB, Use Client Reporting As a Market-Facing Differentiator, https://www.executiveboard.com/ blogs/use-client-reporting-as-a-market-facingdifferentiator/
- The Bull Run, Cloud Computing Adoption in Asset Management, https://thebullrun.wordpress. com/2014/03/19/cloud-computing-adoption-inasset- management/
- Charles River SAAS Managed Services http://www.crd.com/assets/pdfs/Charles_River_ SaaS_ManagedServices_US.pdf
- CloudTech, Cloud making inroads into the capital markets sector, http://www.cloudcomputing-news. net/news/2015/feb/23/cloud-making-inroadscapital- markets-sector-report-finds/
- InformationWeek Wallstreet & Technology, Capital Markets Cloud Adoption: Food for Thought or Empty Calories?, http://www.wallstreetandtech.com/ infrastructure/capital-markets-cloud-adoptionfood- for-thought-or-empty-calories/a/did/ 1267911?