Institutional Firms Don’t Even Know Their Software Costs

The financial services industry is behind the times but is, ever so begrudgingly, starting to catch up. This is most evident in their technological development applications. A recent Greenwich Associates study estimates that “antiquated (technology) processes cost financial services firms roughly $1.5 billion annually on an aggregate basis.” There are solutions, but no one size fits all.

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Technology management is one area where consumer applications have been outpacing institutional investors, particularly regarding how they update software so seamlessly. With nearly 2.2 million applications now in Apple’s App store, the ability to seamlessly upgrade and install software in the mobile world has never been more accessible.

Likewise, with the growing use of HTML5 eliminates the need to code a variety of applications numerous times to suit the multitude of operating systems.

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“This has given rise to an explosion in innovation, as developers can spend more time creating value for their customers and less time worrying about distribution,” Greenwich Associates Managing Director Kevin McPartland wrote in a first-quarter report. But that innovation isn’t shared among institutional investors.

The process to install new software in financial institutions is considerably more complicated and time-consuming, as cybersecurity concerns and testing to ensure costly mistakes are not made predominate, as McPartland points out:

To install or upgrade third-party software, such as a trading application or risk system, the vendor must first supply the software to the client’s IT department, which then goes through a lengthy testing process, eventually repackaging the software with other applications to wait for the next scheduled deployment date. This is in stark contrast to the often daily updates we’ve come to expect on our mobile devices.

There are significant implied costs to upgrading and deploying software on institutional platforms. Exactly how much is being lost due to inefficient technology management is itself a problem. Greenwich found that the vast majority of firms, 65%, are not tracking the costs of upgrading vendor software.

Greenwich interviewed 65 executives from banks, brokerage firms, investment managers and technology providers to understand a problem that, conservatively, could be costing firms individually as much as $3 million to $5 million per year, a number Greenwich believes “only scratches the surface of the true costs.”

“Implied costs of sticking to the old way of doing things are much harder to quantify, but are arguably much larger,” McPartland wrote. “The complexity brings with it the risk of more human error, which can prove quite costly if an upgrade goes live with critical issues, or doesn’t go live at all despite a regulatory, or other, deadline.”

It is not just slow updates that are a concern, but also the convoluted process is time-consuming to correct software bugs. “This kind of delay should not be acceptable,” he wrote, pointing to a nearly two-week turnaround to fix bugs.

There are answers, he notes. Software teams have turned to “agile software” methodologies that encourage product development across a series of “sprints,” often as short as a week but lasting up to a month at times.

In assessing the various routes to deliver software updates, McPartland looks at Browser, Hybrid-Native and Desktop Web App systems, each with their benefits and detractions. “Those that are able to adopt these new technologies and get new innovation in the hands of their customers sooner will have an advantage over those relying on legacy, thick-client applications,” he wrote. “Burdensome regulations and compliance requirements play a part in Wall Street’s slow move toward more modern software deployment, but the lack of improvement and adoption of the latest technology is no longer acceptable.”

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com