Performance measurement platforms are experiencing growing pains as the investment management industry consolidates, and as firms stretch their systems across the globe to branch offices, according to participants in last week’s 4th Annual Performance Measurement conference in New York, organized by the Financial Technologies Forum.
In general, the major components of a comprehensive performance measurement system include the ability to calculate price and risk data for financial instruments, the analysis of large volumes of complex financial data, the analysis of market and credit risk exposures for financial instruments and portfolios, and calculated risk adjusted performance measurements.
Panelists at the event say that business process management (BPM) tools would help the growing workflow issues of performance measurement. For instance, customers want attributions down to the individual securities level, better analytics to provide more details on outliers and exposure and weekly and daily attributions.
Yet there are complications to gathering this data for performance measurement systems, according to panelists.
Business and IT silos plague many investment management firms, creating challenges for a centralized system and the consolidation of disparate platforms and data stores. As firms expand their global reach, they will also need platforms that reflect the varying business practices found in multiple geographies.
The push for globalized performance measurement usually leads to a strategy of buying over building a proprietary system, and a best-of-breed approach when selecting IT systems, say the panelists in a session focused on the issue of system selection. The panelists also urge that firms rely heavily on checking references when deciding upon suppliers.
Before embarking upon a system replacement or an implementation from scratch, firms should set the bar high and address major problems. For instance, to cite an extreme case, if a firm has to dedicate 10 to 15 staff members to conduct an ex-post risk analysis—a technique that exploits historic returns to predict the risks of potential investments—would constitute a pain point that needs to be rectified, panelists say.
“If you don’t have significant pain, don’t do it,” says a panelist who urges firms and their project teams to do a thorough analysis of the business situation. He also stresses the importance of finding a champion for the project and creating a team that has members from areas other than the performance measurement group.
The best case scenario for coming to a decision on system selection is three to six months, panelists say. In many cases, it will take longer. From the decision point to actual implementation can take up to “five years after the fact,” says a panelist. Expect it to hurt a little, too. “Without pain, there is no experience.”
A global performance measurement project will require “significant resources,” a panelist says. So much so that firms with assets under management in the billions are more likely candidates than firms with AUMs in the millions “who are married to their vendors.”
Consensus-building within the firm is extremely important for the success of the project, according to the panelists. The team will need buy-in and possibly representatives from multiple business disciplines such as IT, sales and marketing, client support, and accounting. It’s also extremely helpful to have the support of an executive “who’s got skin in the game,” a panelist adds.
While there are proprietary advantages to internally developed systems, the industry and the technology are likely to outpace a homegrown platform, say panelists from two major firms. They add that internally developed systems are often a last resort. There is greater security with a best-of-breed, plug-and-play strategy because systems can be swapped in and swapped out with greater ease and less disruption to the enterprise.
The champion for the project will need diplomatic and political skills as well as business and IT acumen to navigate the “cylinders of performance measurement” within a firm, says one panelist. “You need to be a politician to shepherd this through the organization.” The project team should include an internal staff member who has experience in implementing an enterprise-wide system. This person will have the perspective and “bridge experience”—reaching out business and IT factions—that will help pave the way for enterprise-wide implementation.
Another caveat is that the firm should not ask the project leader to treat the post as “a side job” because it is a major undertaking that will eclipse the project leader’s other job responsibilities, a panelist says.
A key function of the project team is defining a set of requirements that is as complete as possible to avoid insufficient systems coverage as the implementation progresses, says a panelist who recently completed a global, performance measurement overhaul spanning five years. During the initial phase of deployment, it became clear to the panelist and others at his firm that the requirements were insufficient, which meant going back to the drawing board. Had the requirements been adequate from the start, “the first phase would have been less painful,” the panelist says.
At the same time, firms should have a scorecard of sorts in mind when setting the business requirements, adds a panelist. The project team should know what is absolutely critical and “what is nice to have.”
Another panelist says that most teams will find that suppliers can cover about 80 percent of a firm’s common performance measurement needs and that the crucial problem areas will constitute approximately 20 percent of business requirements, which should be the main focus of the team. “The more upfront planning you do, the better,” a panelist says.
Firms should also be flexible in setting their requirements and broaden them when business goals change as they might during the course of multiple-year implementations. One panelist with a major firm started a project looking for performance measurement systems to support a long-only, limited asset class strategy only to have it evolve to include multiple assets and currencies.
As the project team begins to evaluate vendors, the reference checks will prove to be “extremely important” especially as the list of candidates grows shorter, says a panelist who urges that firms avoid “the vendor-endorsed” references. The independent references usually appreciate the call. “People seem really glad to do these calls,” a panelist reports. Firms can get insights such as knowing that the sales team of a vendor is more informed and responsive than the vendor’s implementation team, panelists say.
As the team comes closer to selecting a vendor, firms should investigate and try to get sign-off on key issues such as service level agreements (SLAs), market data licensing and the hardware necessary for high-volumes of data and transaction processing. The project team will have to consider legitimizing some of its market data implementations, which may be the result of “a lot of runarounds.” In addition, the hosted delivery of market data may have hidden costs that the firm mistakenly thinks the third-party provider has covered, says a panelist. “Some market data costs might exceed the software cost.”
Implementing a new performance measurement system will impact other platforms and might require several adjustments and the hiring of consultants that will need sign-off from the chief financial officer, according to panelists. In fact, unexpected market data, software and hardware costs are likely to need sign-offs from the CFO.
When putting together a short list of vendors, firms should not rule out the incumbent supplier even if the relationship is in trouble, panelists say. It may turn out to be far less expensive to salvage the relationship rather than start over. One panelist reports that the firm he’s with “saved seven figures easily” by sorting out a challenging situation with a vendor. Firms should also consider contracts that specify the completion of key tasks before the vendor gets paid, panelists say.
Once a new system is place, firms should have as top priorities the need to train staff on the system and to onboard clients as soon as possible, panelists say. Implementing a new performance measurement system does have to be all strife and can become an interesting journey, reminds a panelist; at the very least, the process will enable firms to find the IT vendors that “are keeping up with changes in the industry.”
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