For years, fund sponsors searching for investment managers have graded the prospective managers against the four Ps: Performance, Process, People and Philosophy. I propose a T be added to this guide: Technology.
Why should fund sponsors be concerned with the technology of the managers they are considering? Because use or misuse of technology can have just as profound an impact on the success of the relationship as any of the four Ps.
I am not suggesting one must become an expert in technology in general or in the specific technology issues facing the investment management industry, anymore than one would expect to become a human-resources expert or a portfolio management expert. Yet, sponsors that are not necessarily human resources experts ask questions of the manager about people, human resources philosophy and such issues as retention. This same attitude should apply to questions about a manager's use of technology.
Here is a sampling of potential areas of inquiry, along with discussion of each. The emphasis is not on a given firm's implementation of technology; rather, one should focus on the philosophy behind that implementation. Additionally, there are certain foundational issues in an investment manager's use of both technology and its technology staff that should be included in fund sponsors' due diligence efforts.
Philosophy and strategy
What is the manager's philosophy about the use of technology? Many firms will say that technology is a key element of their strategic plan, but their integration of both technology and the technology staff belie their statements.
If a manager says, "We believe that technology gives us a competitive advantage," follow up by asking for examples. How has the manager used technology to gain that advantage, compared to the industry as a whole?
Or, if a manager maintains that "our use of technology makes us more efficient and effective," an appropriate follow-up question might be to ask about strategies to minimize costs while still maintaining or enhancing productivity.
There is a growing tendency to ask about a manager's strategic plan: to see if the vision of the manager matches the objectives of the sponsor. Concomitant to that, inquire about the manager's technology strategy or plan. Is it written? How will it affect the firm's investment management and servicing? How many years out does it go? How was it developed? Who approved it?
While there are not necessarily "right" answers to these questions, there is a basic value to having a coherent overall technology strategy that is informed by the corporate strategy. Having a plan doesn't guarantee success, but not having one almost certainly guarantees failure.
Staffing and organization
As already indicated, a well-designed technology plan should be tied to the overall strategic plan of a management firm. Many technology managers would comment at this point, "It would be easier to be strategic if I were privy to the strategy." Therefore, another avenue of sponsor inquiry should be the technology staff and its place within the overall organization.
A worthy due diligence exercise for fund sponsors is to find the people responsible for both the planning and the implementation of technology, then ascertain their organizational levels.
Many times, a senior level person has the responsibility for technology within an organization, though a person much further down the planning chain is actually the most technologically knowledgeable within the organization.
In large organizations especially, it is imperative to have a technologically astute person either within or near the senior management team. Technology is critical to the success of an investment management organization and should be included in the decision-making process and not merely informed after the fact.
Another issue coming under scrutiny is compensation and retention. Why is staff retention important in the technology area? Suppose a certain investment management firm uses a portfolio management package that was developed in-house. Suppose this package was written in an obscure language not known by most programmers. If the lead (or only) programmer, who knows this system inside and out, departs because of poor compensation, where does that leave the investment management firm? More importantly, what risk does it create to the investor?
While it is unrealistic to expect the sponsor to know going rates for various technological skills, questions can be asked. How do you ensure that the compensation of your technical staff is competitive and equitable? How close are your technology salaries to the market? Does the technology staff share in the success of the firm? These and similar questions should give the sponsor some insights into the likely stability of the investment management firm's technology staff.
Reporting, data sharing, data access
One practical issue often not discussed is the ability of the manager to get data to the sponsor in the manner and frequency that the sponsor requires. At the very least, sponsors should inquire about frequency and format of printed reports and should examine sample reports to determine efficiency.
For some sponsors, paper reports will be sufficient. For others, being able to get data electronically is either desirable or required. If this is the case, inquiries should be made about data formats and access to data.
Such inquiries should focus on the desired end result rather than on a particular methodology. By focusing on the result, the sponsor gives the management firm the freedom to fulfill the need in a number of ways. By the same token, investment managers should be communicating with their technology staff to understand the capabilities and possibilities for data sharing and data access.
Another issue becoming increasingly important is the ability of the manager to share data or coordinate data-sharing with trustees and consultants. Does the manager have the flexibility and willingness to facilitate the sharing of data for the benefit of the sponsor?
The main point to remember is to inquire as part of the search process and not to wait until the placement has been made. Frustration can abound if these issues are not addressed until after the search is completed.
Technology factor in success
It has become almost a cliche to say technology is becoming more important to business. Yet in the investment management industry, technology is quickly becoming one of the most important factors of a firm's success. As such, it should be an additional evaluation criteria in the search process, and sponsors must integrate meaningful questions about managers' use of technology into their interviews.
Likewise, investment managers must anticipate such questions and begin to examine their own firm's philosophy and use of technology, both to prepare for new searches and to take care of their existing clients, many of whom will begin to ask these same questions in the days to come.
Bruce Maples is director of technology consulting at Eager & Associates, Louisville, Ky.