Faced with a slew of new industry, client and technology pressures, today’s assetmanagement landscape looks quite different than it did just 10 years ago. Inthis article, Manish Moorjani discusses the evolution of the asset manager’secosystem, looks at the technology solution transformation with the advent ofcloud computing and details the decision criteria CIOs can use to determinewhether cloud solutions fit into their future plans and strategies.

CLOUD-BASED SOLUTIONS: why the time is right for asset managers to consider adoption

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 wasprimarily influenced by the importance of the business function, the ability of the internal technology team to supportit 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 couldlower 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 differentcloud services, platforms and cloud-based solutions. And while the potential benefits are clear, firms must conductproper due diligence and understand the impact before making the move. In the case of SaaS, for example, it isimportant 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.

CROSSINGS: The Journal of Business Transformation

CROSSINGS: The Journal of Business Transformation

These market pressures are forcing asset managersto think about optimizing operations in order to deliverhigher operational efficiency, which in turn would leadto more profitability for their clients. Asset managersare discovering ways to broaden their product offeringsand improve the quality of information they provide totheir customers. The matrix in Figure 2 defines specificthemes for business functions based on their impact.The two main themes are as follows:

› Optimize and Differentiate: Offer a unique valueproposition 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 bystandardizing 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 1: Key business and market pressures.

Figure 2: Business functions and “new world” themes.

CROSSINGS: The Journal of Business Transformation

Figure 2 shows that the paradigm of a profit center versus a cost center is far less relevant in the new world and thelines 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 morestandardized across the industry. Today, however, customers increasingly evaluate asset managers on their otherfunctions, such as risk management and client reporting. In a CEB TowerGroup survey, 53 percent of executives saidthat 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 tomeet 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 breakfree from application hosting responsibilities and reduce maintenance overhead. Cloud-based solutions, however, areperceived as posing challenges in terms of information security or leakage (specifically when the solution is built andmanaged by a competing firm), integration to a firm’s existing technology infrastructure and change requirements forexisting 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.

WeaknessStrength

Some of the factors listed in Figure 3 complementeach other and hence cater to different businessfunctions. For example, SaaS provides the ability tostandardize, which is helpful for regulatory reporting,where organizations want to stay aligned with industrystandards. Custom solutions provide a greater degreeof differentiation, which is something an asset managerrequires for activities like portfolio management.

The other point of caution while looking at the strengthsand weaknesses of these solution models is that theyare based on a set of assumptions and trends typicallyseen in the industry, but there are always exceptions tothe rule. For example, several SaaS-based products areable to provide information security and can be easilyintegrated. Similarly, some custom-built products weredeveloped in a way that can lower the cost of ownershipwhen compared to a SaaS offering.

TECHNOLOGY SOLUTIONS FOR THE NEWWORLD OF ASSET MANAGEMENT

To stay competitive and ahead of the curve, assetmanagers must evolve as a response to industrychange, maximize opportunities and successfullytackle new challenges. The difficulty, however, liesin determining what to change and how to make thechange in terms of people, processes and technology.Figure 4 offers a point of view on answering thequestion, “Which solution model best caters to theneeds of specific business functions in the assetmanagement world?” Areas in blue highlight the mostpreferred solution, while the red areas highlight theleast preferred one.

Figure 4: Solution model table.

Most Preferred Least Preferred

CROSSINGS: The Journal of Business Transformation

The solution model table highlights an interesting pattern around the use of SaaS specifically for middle- and back-office functions. It shows that SaaS (point 2 and 3) is the preferred option to solve problems when lower cost andstandardization are the most important factors, whereas a custom solution (point 1) is the right approach for functionswhere 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 thebusiness model, size and focus area of an asset manager, and may require adjustments to meet specific needs. Forexample, if an organization with a world-class trade execution system that is tightly coupled with an upstream (ordermanagement) and downstream (trade confirmation and accounting) system wants to replace or upgrade the tradeconfirmation 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 businessrequirements 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, takinginto 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 willhappen when firms feel more comfortable with SaaS-based solutions and the right products are available for adoptionthrough the cloud.

Interestingly, the survey says that 2015 will be the year in which product vendors will start supporting a majority oftheir products as cloud-based solutions. Providing cloud-based solutions also benefits service providers; it helps toreduce software upgrade and maintenance costs, as well as optimize application performance and support through acentralized application and client support team.

A number of players in this space offer product suites(in addition to stand-alone products) to reduce theintegration challenges associated with cloud computing.For example, Charles River’s Investment Managementsolution is a suite of products for portfolio management,compliance, trading and order management, execution,trade settlement, risk and attribution, position and cashmanagement, covering almost all functions across thefront and middle offices.4

Similarly, Bloomberg Asset and Investment Manager(AIM) is a SaaS-based solution that focuses on portfoliomanagement, order management, compliance andtrade matching/settlement and integrates well withother Bloomberg platforms like EMSxNet, BloombergFIT and BVAL. It also integrates with BVAULT, which isBloomberg’s data archiving platform, and can be usedto meet regulatory and legal reporting needs.

Newer asset managers who are still building theirclient bases can opt for a SaaS-based solution ratherthan making a significant investment in building andmaintaining a technology infrastructure. Likewise,these solutions are appealing to niche asset managerswho want to focus on specific client segments and maynever want to grow too large.

On the other hand, solutions like Barclays POINT,BI-SAM Go and Wilshire AXIOM, focus on providingbusiness value in specific areas such as case risk,analytics and attribution. Risk and performanceattribution functions require software to process largequantities of transactional and reference data usingcomplex mathematical models to generate the desiredoutput. This activity utilizes considerable computingpower in short periods of time. In this scenario, SaaS-based solutions are ideal since computing power canbe made available on demand.

In the back-office space, products from SIMCORP,such as CORIC Web Report, and Kurtosys are providingSaaS-based solutions for client reporting. This isone area that is growing in popularity as more assetmanagers look to support changing client needs acrossmultiple platforms, including tablets.

With so many players in this space offering avariety of cloud-based solutions (including stand-aloneand complete product suites) across the front,middle and back office, why are we still talking aboutcloud adoption?

Although a 2014 survey by the TABB Group claimed that71 percent of asset managers intend to use cloudsolutions, a TABB survey published in Q1 2015 providesa slightly contrasting picture.5 Only 23 percent ofrespondents said they were comfortable using apublic cloud and more than two-thirds cited concernssuch as compliance, security and data control. In asimilar survey by NASAQ OMX (for capital marketfirms) in 2013, the same number, only 23 percent ofrespondents, said that they are actively embracing thecloud.6 These results seem to suggest that perceptionsand adoption have not changed significantly over thelast two years. It also indicates that the conclusions thestudy drew around information security and integrationchallenges are still preventing today’s firms from fullyembracing cloud-based solutions.

To address these issues, companies have begun toexplore a hybrid cloud approach that connects datacenters, public and private clouds in any combination.In a hybrid model, firms have the ability to use a publiccloud for non-sensitive data or testing and rely on aprivate cloud for critical data and applications. Whileretaining their independence, the individual clouds arebound together to facilitate the portability of data andapplications. Products, such as VNS3:net by CohesiveNetworks, allow firms to build their own customcloud network, enabling them to extend onto a publiccloud infrastructure while remaining inside their ownnetwork. Even with new options like these, the currentadoption and usage of cloud-based solutions suggeststhat there is still some way to go before the industry isprepared to fully unlock the full potential of the cloud.

CROSSINGS: The Journal of Business Transformation

THE AUTHOR

Manish MoorjaniCFA, FRM, is a Senior ManagerBusiness Consulting at SapientGlobal Markets with more than 12years of experience working withfirms in the capital and commoditymarkets. Manish has worked onthe design and implementationof portfolio management, ordermanagement and trade executionsystems across multiple assetmanagers and investment banks.He has also led multiple businessand development teams acrossmiddle- and back-office functions.

mmoorjani@sapient.com

CONCLUSION

In today’s “new world” of asset management,cloud-based solutions are available to help assetmanagers gain a competitive advantage. Even thoughthe benefits of cloud computing have been welldocumented, firms still need to use a logical frameworkfor evaluating and selecting the right technologysolutions. They can choose to follow a bottom-up modelthat begins with the business need, such as the onepresented in this article, or a top-down model thatlooks at what other firms in the industry or relatedindustries are doing and then decide which technologysolutions to adapt. Regardless of the model, it isimportant to view adoption criteria through the samelens to ensure any new solutions will help firms achievetheir business goals.

Resources

1. 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

2. CEB, Use Client Reporting As a Market-Facing Differentiator, https://www.executiveboard.com/ blogs/use-client-reporting-as-a-market-facing-differentiator/

3. The Bull Run, Cloud Computing Adoption in Asset Management, https://thebullrun.wordpress. com/2014/03/19/cloud-computing-adoption-in-asset-management/

4. Charles River SAAS Managed Services http://www.crd.com/assets/pdfs/Charles_River_SaaS_ManagedServices_US.pdf

5. CloudTech, Cloud making inroads into the capital markets sector, http://www.cloudcomputing-news.net/news/2015/feb/23/cloud-making-inroads-capital-markets-sector-report-finds/

6. InformationWeek Wallstreet & Technology, Capital Markets Cloud Adoption: Food for Thought or Empty Calories?, http://www.wallstreetandtech.com/ infrastructure/capital-markets-cloud-adoption-food- for-thought-or-empty-calories/a/d-id/1267911?

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