You can be forgiven for thinking that differentiation is directly at odds with the work being done to standardize investment operations. After all, the current consolidation drive directly responds to the tangle of spaghetti systems accumulated over the previous decade, where best of breed solutions held their reign. Yet, while many firms are busy unravelling this state of affairs, there are still investment areas such as the portfolio management space, where asset managers use anywhere between three, four or more, best of breed tools to construct, optimize and calculate risk. All to gain a competitive edge in a low-yielding market.
The question is, can innovation support a balance between differentiation and standardization?
In short, yes. However, the sheer choice in the market and the idea of maintaining multiple vendor relationships and integrations is creating a drag, taking already scarce resources away from delivering investment returns and risk management. In fact, the wealth of fintech start-ups and scaleups available, makes it actually quite difficult to really understand the difference between those that sell fiction and those that really generate value.
No longer a question of buy vs. build
In true fashion, many firms have taken the age-old approach of either buying or building their own innovation projects. The aim as always, is to perfect the data they see alongside their peers, to create competitive insights that give them an edge. This is particularly the case for portfolio construction and optimization, as well as ESG data and research, which were highlighted in a recent global SimCorp poll, as the top two investment areas that could benefit from innovation.
But the pandemic has put much of this on hold, and where there are still live in-house projects, they are subject to a long and arduous procurement process. As for the ‘buy’ option, our recent poll indicates as many as 61 percent of you struggle with the sourcing, due diligence, integration and compliance aspects of such projects.
There is a however, a new alternative that is gathering pace in the industry and breaking through the buy or build dilemma. And it comes from the market desire for a balance between retaining a core platform that delivers operational efficiency and having the choice to experiment and pick the tools that can really set firms apart from their peers. This shift is driving what we see as a desire for optionality. It is a shift we believe will shatter the operating models of the past. This time it’s not about buy vs build, or best of breed vs consolidation. It is about achieving the best of both worlds while retaining choice and full control.
This is equally important for those firms still working towards consolidation. To pursue value-add strategies, there first needs to be a ‘single source of truth’ established as the foundation for future innovation. But this doesn’t mean pushing innovation to the bottom of the shopping list. If anything, the availability of value-added services, be it access to new technologies or partnerships within the broader buy-side ecosystem, should be a key component in the search for a core platform. Firms should be confident that their chosen provider can demonstrate not just what they can deliver today, but how they will commit to evolving their services in the future too.
