The typical reasons that prompt asset managers to acquire new software often include recommendations from regulators following an onsite visit or the realisation that their current resources cannot efficiently handle projected workloads. These decisions are predominantly reactive, seldom proactive.
Reactive vs. proactive
A reactive approach, particularly when a regulatory recommendation is the impetus, can be significantly stressful and more costly than a proactive one. The time constraints associated with reactive approaches often place a heavy burden on the employees of asset managers.
Reactive approaches typically involve choosing between implementing a tactical solution or a strategic one. A tactical solution is usually quicker to put into action but provides only short-term benefits, whereas strategic solutions demand more effort but offer long-term advantages.
Often, both a tactical and strategic solution are adopted.
Consider a scenario in which the Commission de Surveillance du Secteur Financier (CSSF) recommends that an asset manager promptly enhance its reporting of Ultimate Beneficial Owners (UBOs) following an onsite visit. Failure to comply could result in regulatory sanctions and reputational damage. In such a situation, management will go to great lengths to avoid these consequences.
Roadblock 1: A service can address the problem faster than software
The options available to management are to either (1) resolve the issue using internally available resources or (2) outsource the problem to a third party. In the short term, outsourcing is often the only viable solution, as the problem would have been handled internally if it were possible.
In this scenario, the asset manager will most likely engage consultants, possibly from one of the Big Four firms, to swiftly address the regulators’ concerns and ensure compliance. As a subsequent step, they will procure software to handle the issue internally in the long term.
Roadblock 2: It is challenging to compare software providers
Once the immediate issue is resolved, a shortlist of potential software vendors is compiled based on industry lists, recommendations, past experience, and previous demonstrations. This list is often poorly curated and requires considerable effort to differentiate between viable and subpar options.
Demonstrations and marketing materials can be persuasive, but those with experience understand that in software demonstrations, seeing is not always believing. The most reliable path forward involves time-consuming Proof-of-Concepts (POC) and Request for Proposals (RfPs).
Roadblock 3: Scope creep
Frequently, software can address more than one requirement, creating the potential for additional items not initially in the scope to be considered. This often draws other departments of the asset manager into the procurement process, introducing new requirements.
The project may then evolve into a quest for an all-in-one solution that can support the needs of multiple departments. Eventually, the project becomes unmanageable due to expanding requirements and internal politics, often leading to its abandonment.
Anyway, the immediate issue has been resolved, and new priorities have emerged.
Unfortunately, taking proactive steps to implement software that covers regulatory and operational needs remains uncommon. The difficulty in comparing software vendors and the challenge of scope creep mean that even a reactive approach, driven by external pressure, can result in outsourcing instead of software implementation.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at Finsoft Luxembourg.