Technology use time horizon not same as technology investment time horizon, says Milestone Group’s Geoff Hodge
Efficiencies in the asset management industry may be improved if more people recognised the difference between the typical five-year investment time horizon for buying new technology versus the fact a lot of technology may be used for up to 20 years, says Geoff Hodge, CEO at Milestone Group.
Technology plays a significant role in transformation initiatives, but decision-making models must be reviewed if funds managers are to achieve sustainable profitability. Operational efficiency has often played second fiddle to product and technical considerations with the latter consuming management agendas so long as products are delivering rapid growth and wide margins. Only when margins come under pressure does the core skill set of production management – namely, efficient use of resources, the elimination of non value-added activities and real process automation – become a priority.
At this point, many financial institutions turn to offshoring or other forms of labour market arbitrage to achieve new levels of operational efficiency. Yet this should not be confused with investment in genuine operational innovation. Cutting staffing levels can expose the business to increased risk or client dissatisfaction and ultimately this situation is not sustainable without genuine renovation of operating models and supporting technologies.
Similarly, the term scalability is often misused to refer to the ability of an organisation, process, or system to deal with significant volumes. A more useful definition incorporates the concept of a predictable and diminishing average unit cost as business volumes increase.
Recognising such distinctions is crucial, given that the mature product phase of the funds industry will demand a level of efficiency that challenges some of the business metrics, operating approaches and supporting technology capabilities widely accepted today.
Aligning strategic decisions with investment horizons
Firms typically consider a baseline five-year investment horizon as representative of the useful life of a solution when looking to refresh business architecture. It is also not uncommon to have a shorter target payback period, which may even be aligned with a single budget cycle. This may be well suited to opportunities for incremental change, but it seems fundamentally inconsistent with strategic decisions where technology choices often remain in production for 15 to 20 years.
The key question is how the cost of ownership of a given solution will behave outside of the typical five year window on which a specific decision is based. Where the useful life in the organisation has extended well beyond this, frustration with operating capability and associated levels of efficiency is compounded by the realisation that multiple solution components based upon these types of decisions are now well past their intended reset dates.
Furthermore, there is a tendency to disqualify ‘non-financial benefits’ from financial scrutiny and subordinate their role in the decision-making process. This approach was originally intended to ensure that investment decisions remain objective, but in fact has often resulted in a bias towards incremental shorter-term decisions under which potentially substantial competitive value is overlooked.
Examples of non-financial (but certainly not insubstantial) benefits are the speed, agility and reduced operational risk that can arise from simplification of the operating model, as well as reduced inertia associated with change initiatives. There is also the reduction in risk and costs associated with change initiatives that can be realised via simplified business architecture and reduced data movements, reconciliation and remediation overheads. Many organisations also fail to consider the fact that costs associated with time allocated to change projects by business resources would be incurred by an organisation regardless of whether or not the project is actually undertaken.