Build Versus Buy: A Delicate Balancing Act
For investment firms, the build versus buy decision revolves around reducing costs of expensive IT infrastructure while retaining a measure of control over key business processes.
“As a result of our IT outsourcing framework, we are able to realize a significant cost savings versus building everything in house,” David Becker, chief technology officer at Chicago Fundamental Investment Partners, told Markets Media.
Chicago Fundamental Investment Partners, an SEC-registered investment management/advisory firm based in Chicago, focuses on a variety of opportunistic investment strategies and products based upon fundamental research. The firm manages or advises (or sub-advises) multiple hedge funds, customized separately managed accounts, collateralized loan obligation vehicles, and other products.
The firm’s primary investment strategies rely on well-executed fundamental research and proactive risk management. The major IT issues it faces, said Becker, center on maintaining a robust technology framework, ensuring a secure network environment, staying on top of mounting SEC regulatory and reporting requirements, and integrating and managing the IT services that it outsources, all within the context of smaller firm with limited resources and budgetary constraints.
“We meet on a regular basis with our IT service providers, counterparties and partners to make sure those issues are addressed and that we have clear and open lines of communication around them,” Becker said.
As CFIP is a small firm and not primarily technology-driven (as, for example, high-frequency trading or quantitative strategy-driven firms would be), it’s comfortable with outsourcing or buying many of its needed IT services and much of its IT infrastructure.
“Doing so allows our IT team to operate more efficiently, and also permits the management team to focus on more strategic business initiatives,” Becker said.
Since technology and IT infrastructure remain important components of CFIP’s business, however, when it looks to outsource IT functionality, it conducts extensive due diligence in seeking to engage high-quality, cost-effective, and reputable IT vendors.
“The availability of commoditized infrastructure in today’s marketplace means there are a large number of IT vendors that fit our criteria and are competitive on cost,” Becker said. “We also are mindful of being locked into a particular vendor or incurring switching costs, and seek to negotiate reasonable contractual terms on those points.”
CFIP is highly sensitive to confidentiality and security issues, said Becker, which it manages both contractually and by confirming that its IT vendors conform to requisite security processes and functionality according to internal specifications and applicable law.
In its November 2013 thematic review into outsourcing, the UK Financial Conduct Authority cautioned financial services firms about the inherent risk of outsourcing their key operations without more effective and timely business continuity plans. The FCA warned asset managers that they have inadequate contingency plans in place to deal with a failure of their service provider and inadequate oversight of their service provider.
Citisoft, an investment management consulting firm, has launched an exit strategy and planning service to help asset managers mitigate the risks of a forced or voluntary exit from an outsourcing agreement.
Steve Young, CEO at Citisoft, said in a statement: “The key point about exit planning is that it has value not only in the event that an outsourcer should fail. We consider other exit triggers, such as approaching the end of a contract or unsatisfactory outsourcer performance.”
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