What will drive more investment firms to the cloud?
Agility or cost?
Operating models utilizing proprietary systems were once the province and competitive advantage of large incumbent investment management (IM) firms. Some large IM firms even advertised to investors about their level of technology spending on proprietary systems.
February 28, 2018
A blog post by Doug Dannemiller, Investment Management research leader, Deloitte Services LP.
Firms are now much more focused on the customer experience and the investor’s outcome, rather than investing in their proprietary infrastructure. To be sure, IM firms protect and value their core intellectual properties, such as their investment decision process. Even with protection of the secret sauce in mind, firms are starting to use cloud-based applications for differentiating processes, but there is clearly a distribution of perspectives about doing so.
As the results of a recent Deloitte poll of IM firms suggest, cloud adoption viewpoints are diverse (figure 1).
- Some firms want to host their critical processes in-house (22.6 percent), while others (13.5 percent) are moving as much as possible to the cloud.
- Many of the respondents reside somewhere in-between. They are considering and implementing cloud-based applications for critical processes. These firms, in the middle, represent the transition in thinking about the cloud.
A diverse range of viewpoints on cloud adoption
Why the dispersion of opinion?
Firms have different strategies, legacy system architectures, cultures, and risk appetites. Firms considering the cloud, but not yet using it for differentiating functions (39.3 percent), are likely wrestling with identifying the benefits of cloud migration beyond using it as a method for cost savings. With these differences in mind, the results make sense. This may explain why some firms moving to the cloud in such a committed fashion with revenue-generating differentiating functions. These firms may have a plan to achieve additional value from the move. One possible benefit these firms see is agility that would be too costly to maintain with in-house systems. This ability to use storage and processing as-needed can enable certain business processes.
Imagine a small firm that has adopted a new alternative data augmented investment selection process. This strategy requires the accumulation, testing, and manipulation of large data sets. The demands for storage and processing capability to test and fine-tune algorithms using alternative data in-house may be prohibitively expensive. In a cloud-based world, those costs transform from fixed, upfront costs to variable costs, based on usage. The cloud in this case clearly enables the strategy.
In addition, the cloud may also help firms manage data proliferation decay that often occurs with alternative data strategies. When alternative data sets are widely used, the information advantage, and potential for alpha they provide can decay. At which point, something has to change, either the algorithm extracting insight from the data has to improve, or a fresher data set has to be found. IM firms can flexibly deploy computing power and storage enabled by the cloud to find solutions. Alternative data may be setting off a small arms race for data and computing power among IM firms. This strategy, in particular, points out the need for agility, and that moving to the cloud is not just about cost savings, but also about creating an agile infrastructure that can enable new, differentiating processes.
With these concepts in mind, the idea of utilizing the cloud only for its cost savings attributes seems short-sighted.
What are your thoughts on cloud-based critical processes? They certainly are not an area where cost alone should drive the decision. However, perhaps the question should be, what new product or processes would be enabled if our firm considered moving some critical functions to a cloud-based model?
Let us know what you think. Follow the conversation on Twitter @DeloitteFinSvcs.
Do you think competitive advantage will be held by firms that keep critical processes in-house, or will the cloud circumvent that competitive advantage through borrowed scale and improved operational agility? We will likely get some indications over the next year by watching the firms that are moving to the cloud at full speed.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.