While the industry hasn’t completely abandoned categorizing the front, middle, and back office as separate entities with discrete functions, it has become an extreme oversimplification, particularly in the front and middle office. The lines have blurred and this shift is evident in recent investments that asset managers, service providers, and vendors have made in technology supporting new hybrid operating models. The data supporting alternative investments is simply too complicated for legacy technologies, especially when the new name of the game is real-time decision support. Portfolio managers are demanding intraday risk and attribution information to manage these strategies that were formerly the sole province of the middle office.
As these walls continue to break down, many asset managers are allocating a large portion of their budgets to front office technologies. In turn, service providers who have historically focused on middle and back office tech have shifted their R&D dollars to front office decision support. Several of the biggest players in this space are focusing on a new wave of applications for the front office that utilize big data concepts, predictive analytics, and machine learning. If these investments mean anything for the future, it’s that the lines between the front and middle office will soon be a distant memory. But there’s no point in evolving the front office if downstream systems are still running on steam-powered technology, which brings us to our next point…
Legacy Gets Shown the Door
To say that legacy technology and aging infrastructure are dead may be a bit premature, so let’s just say that it’s finally being shown the door. There are still countless asset management firms running mission-critical functions on enterprise software packages and applications that are, at best, struggling to keep up with today’s operational challenges and, at worst, borderline obsolete. Citisoft often encounters this situation with clients and prospects; firms have “kicked the can” down the road for several years due to a focus on other areas of their business. The longer firms wait to address their legacy platform challenges, however, the more difficult, time-consuming, and expensive these projects become.
It’s no secret that legacy, sub-optimal technology stacks, especially in the middle and back office, can hamstring firms in their ability to stay nimble and respond quickly to front office demands. So why are so many buy-siders still tied to these platforms? Many implemented their enterprise operating platforms over a decade ago, and in some cases, more than 20 years back. This was before IBOR was a “thing,” data warehouses and marts were prevalent, and the advent of true middle office outsourcing. What was a diversified asset manager to do? They customized and, in many cases, bastardized their platforms, thus making it difficult or impossible to upgrade or transition to something else. Deconstructing these ecosystems that were used for years is akin to open-heart surgery and not for the timid.
Citisoft’s business pipeline indicates that the buy-side asset management community is acknowledging the inherent risk of running daily mission-critical functions on technology that simply can’t keep up with their evolving needs. Band-aids or swapping out system A for system B is a short-sighted approach; it is imperative that firms step back and take a strategic view of their business. Embrace the journey, do the due diligence, and reap the rewards.
The Cloud Breaks Through
The adoption of cloud computing and the various deployment options under its umbrella is not new to the industry. Per a 2014 CEB TowerGroup study, more than 70% of firms intended either to adopt cloud computing or increase its usage by 2017. For years, we’ve been reading about the need for asset managers to focus on their core competency, driving performance returns for their clients. We would all agree that running data centers, employing countless DBAs, and upgrading software packages is not what any of us have in mind when entrusting pension funds, 401K investments, or institutional accounts to our selected money managers. Despite this, our industry has been predictably slow in adopting the cloud and entrusting critical IT services to third-party providers. The reasons are obvious: data security, lack of control, business continuity risk, and a perceived inability of the providers to adapt to shifting requirements around scalability and system performance.
However, the barriers to cloud-based adoption are finally coming down. Software vendors and service providers are rapidly aligning themselves with premier cloud providers, offering benefits difficult to ignore: rapid deployment, standardization, scalability, data insulation in multi-tenant environments, information security certification, and lower total cost of ownership. Providers that dominate our space are making big bets with their cloud strategies and in many cases pushing their current clients to adopt these deployment options. We don’t doubt that there will be firms that insist on sticking with installed, on premise deployment models, but that will be the exception and not the rule.
Curious about other trends we’re seeing? From fintech to data management, we break it all down in our2017 outlook.