Solutions Strategy Re-Defined

Blog header

This blog was originally published as part of Citisoft’s Outlook 2023

The blurring lines between software and service providers has been a topic at the forefront of industry conversations (and in our Outlook) for a few years. The trend picked up pace after a frenzy of acquisition and partnership activity between service providers and software vendors trying to achieve a holistic front to back offering. While being a one-stop-shop solution provider is still at the forefront of many provider strategies, a sub-trend has emerged in this space where traditional service providers are now leading conversations with talk of technology.

Historically, the differences between an outsourced or in-house operating model were fairly black-and-white, and the subsequent procurement of services or software in support of each followed suit. If an asset manager was evaluating a service provider, they would focus on outputs: does the provider have the ability to meet data requirements, timing requirements, functional and product coverage, and—perhaps most importantly—will they be a cultural match as a partner? Conversely, if evaluating software in support of an in-house operation, they would look more at the user experience, functionality provided in the application, the underlying technology, as well as the outputs that could be achieved in the application. Recently, we have observed a shift where service providers are increasing their focus and investment in their technology, thus changing the conversation.

Looking under the hood

Service providers sharing details on their underlying technology stack with clients and prospects is not a new concept. Most request for proposals issued by asset managers to service providers do ask for the make-up of the application model they will use to perform the scope of functions. In some cases, however, by the time requirements are fully agreed upon and the transition has started, the proposed underlying technology may shift based on functional capabilities required to provide the service.

In these cases, the expectation historically would not be for the service provider to have an in-depth conversation with the client about the change to the technology; the technology used should ultimately be inconsequential to the service that has been agreed to in the contract. However, over the last year, we have noticed that service providers are openly discussing their underlying technology stacks with their clients and prospects during discovery or due diligence periods and beyond, especially when there is a new application in the model. The explanation for this shift is that the decision to outsource operations is now being made at both the technology and operations leadership levels, a shift from the past where outsourcing decisions were made mainly on the operations side.

Recent announcements from several major service providers serves as an example of this shift—many firms have announced new partnerships with software vendors that are driven by the service providers’ desire to address functional gaps or limitations in their legacy technology stack. Innovation through partnership is certainly the path of least resistance when trying to meet client demand.

Changing the approach to transformation

With tech innovation driving solutions strategy, vendor and service provider models are being re-imagined and transformed. This puts their new offerings at the early stage of the maturity curve which in turn, influences all phases of the transformation lifecycle from strategy to partner selection, through to the outsourcing transition and implementation timeline.

The onus is now on asset managers to understand not only the promised capabilities of a new solution, but where the provider stands with respect to adoption, client pipeline, development roadmap, and ability to execute. The simple fact is that regardless of whether the solution is being natively developed or is an amalgamation of packaged underlying platforms, the transformation for both the asset manager and the provider will involve significantly more resources for discovery, design, and development than in previous transformation cycles.

In the years elapsed since first generation outsourcing offerings were introduced, service providers have refined and enhanced their standard service definitions, operating models, data models and delivery options, workflows, and transition approach. However, with recent developments in platform and service strategies, these definitions and models are, in many cases, a moving target. While the burden of documenting the requirements, market data standards and sources, data consumption layers, and controls still lies with the service provider, the importance of validation of these by the asset manager is much higher now. To aid this process in the past, providers were able to offer basic documentation, templates, and samples as an input to these activities, however many of these artifacts simply aren’t available or fully developed relative to the new solutions currently being incorporated into service provider offerings.

The new reality is that providers are maturing their solutions concurrent with the onboarding of the early adopters, and clients are triggering a heavy flow of activity into product development queues. The net result is that more time is required for implementation in order to accommodate the discovery phases, joint design of operating and data models, and identification of solution gaps. Experience tells us that this may extend an implementation by 1.5x to 2x historical norms until solutions exit the early adopter phase of maturity.

Embracing the role of the early adopter

There is significant upside to planning transformation at the early adopter phase when it comes to gaining a competitive edge, negotiating financial terms, and ensuring that third party solution design will be influenced by an early adopter’s goals. However, there are also new challenges introduced and more resources required during the implementation phase.

Executive management must understand that they are embarking on a journey with their providers to jointly design and deliver target state solutions and operating models. At the end of this journey, asset managers will optimally realize increased efficiency, improved data quality, a reduction of their technical and application footprint, and cancel years of technical debt accrued from workarounds, bespoke solutions, complex integrations, and ungoverned data architectures. But there is no out-of-the-box solution for this. It is incumbent on asset managers and solutions providers to jointly solve these problems through discovery, design, and development of the holistic platform functionality, the data integration model, and the business operating model.

Organizations that place the burden of design and delivery disproportionately on the provider and expect the existence of “standards” to drive the transformation (whether pertaining to the definition of the technology, services, or implementation methods) will experience elongated implementation cycles, missed objectives and expectations, degraded organizational commitment, scope creep, and a deterioration of the relationships with their selected partners. Firms that acknowledge the maturity curve and embrace the opportunity to build a collective and mutually beneficial solution with their provider will experience greater success in meeting their objectives on a realistic timeline. It is nonetheless important to acknowledge that few asset managers have the resources to dedicate to fully shared co-development and must therefore set their goals and expectations with this in mind.