A question for asset management firms: when was the last time you saw an exciting, truly innovative software vendor come to market? So asks Steve Young, CEO of Citisoft, the consultancy.

The following article is by Steve Young, chief executive of Citisoft, the consultancy. This publication has carried several guest commentaries from Young, and as on other occasions, is delighted to share these insights with readers. We invite readers to respond with comments of their own.

A question for asset management firms: when was the last time you saw an exciting, truly innovative software vendor come to the market?

As a result of the recent economic downturn and consolidation in the systems vendor space, there is far less choice for asset managers now than there has ever been. This lack of competition is unhealthy for the industry – and is actually holding it back.

Most of the true innovation in information technology is coming from horizontal applications. For example, in the area of client relationship management, it is now embracing true cloud technology. If you look at other industries, we are seeing more innovative tools, an app-style approach and much more attention being paid to groundbreaking systems delivery mechanisms than we are witnessing in asset management. This is largely down to a lack of competition.

Indeed, the recent Gartner Symposium in Orlando identified its “Top 10 Strategic Technology Trends for 2014”. These included: mobile device diversity and management; the era of personal cloud; mobile apps and applications; and hybrid cloud and IT as service broker. These trends, however, are yet to surface in the asset management world in any meaningful way.

However, if you read the marketing blurb and attend some of the industry seminars you may come away with a different picture. Many vendors are filling their market communications with the buzzwords of the day. But as an ex-colleague of mine who is something of a veteran of the vendor market said, “never confuse marketing with the truth”.

Many of these claims need to be challenged and fully understood. Sadly, terms such as “cloud” and “mobility” can be interpreted in many ways, allowing firms to make claims that at times stretch their credibility. Many firms are also using third party tools rather than truly integrated development to enhance their marketing messages in these areas.

My view is that asset management is not keeping up with other industries as a result of this lack of competition and a relatively low investment in technology. Since the credit crunch, many small innovative vendors that focus on doing one element of the investment management process extremely well have either gone to the wall or been snapped up by the big “multi-purpose” software shops. The net result of this has been an “innovation drain”.

For example, in the order management space, there used to be six or seven major providers. Now there are only a few. I hear of some asset managers complaining that vendors, due to the fact that they now have huge client bases, have become more conservative in their development programmes because the focus is on protecting revenues and servicing existing clients. Their ability to innovate has been constrained by their success.

Now more predictable long-term revenue is great for the software house, but for innovation into the market it is bad news. Many providers are utilising ageing technology stacks and continue to develop large and complex applications. To a vendor, the art of being hard to replace or “sticky” is a key facet and this objective increasingly constrains the industry. Asset managers have become too accepting of this situation and need to be more demanding of vendors.

Exacerbating the problem is the tendency in any downturn to move toward the “never been fired for hiring IBM” philosophy. This is where the procurement teams begin to exert an undue influence on systems selection and generally rule out the start-ups from the RFP (request for proposal) process due to their lack of a financial track record – in preference to the large, risk-averse vendors.

Some would argue that the procurement process itself has become very predictable, with the same two or three vendors being invited onto RFPs every time, with little imagination or research into new innovators being applied. The net result is a very static, slow moving vendor market with little true invention.
Yet the barriers to entry to the market are lower than ever, with nimble start-ups able to harness the cloud to deliver functionality that used to cost hundreds of thousands of pounds for a fraction of that investment. How then do they survive?

The small vendor survival guide
From the small vendor perspective, they need to:
-       identify the early adopters who can help get their new technology established;
-       understand the business issues they are trying to solve;
-       get close to the actual users;
-       clearly demonstrate business value – ROI, etc;
-       be able to demonstrate how they will grow, support the products and clients, undertake testing etc;
-       be disciplined and stick to their vision and principles - don’t allow their idea to become a bespoke software solution for a dominant client

How asset managers can help
From the asset managers’ perspective, helping the small vendors onto RFPs isn’t about altruism, it’s for the good of their industry. Other industries are moving at a lightning pace compared to asset management. Our industry has never been quick, but it appears to be getting slower, not quicker.

There also needs to be a return to the “early adopter” model. In the past, some firms had a strong vision in taking on new technology and as a result, I believe that these firms were able to gain competitive advantage from this approach. In some areas, such as data management or the front office, technology can be a significant enabler and allow investment management firms to steal a march on the competition.

In order to achieve this, firms need to stay informed of new applications and work more closely with emerging applications in an open minded and collaborative manner. If a traditional supplier/customer relationship is built then this will not aid either party.

Let’s get behind the small vendors more and press for real innovation in our industry.