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How Investment Firms are Leveraging Technology to Increase Profits and Efficiency in the COVID-19 Era

A discussion with Sandeep Gupte offers fascinating insights into the directions financial services firms are taking months after the onset of the COVID-19 pandemic radically transformed daily operations. Sandeep leads the ThoughtFocus Alternative Investments and Capital Markets practice bringing more than 25 years of experience in technology and operations. He advises and supports CTOs and CIOs as they develop operational business strategies and information technology initiatives.


The transition to the cloud has been instrumental in allowing investment firms to successfully continue operations, increase efficiency, reduce operational costs, and grow revenues.



Where are financial services organizations in their transition to the cloud?

Sandeep: Four to five years ago, most financial services organizations had already transitioned from on-premise data management to off-premises data centers. This was a big step that was difficult for many organizations; however, they managed the risks with redundancies and business continuity plans.


Now, having already created the structures and now comfortable with third-party data repositories, the move to the cloud is just the next step rather than a fundamental crossroads. Additionally, the move to the cloud accelerated as the cloud became increasingly affordable and on-demand servers or platforms-as-a-service offered the sophistication, capabilities, and control financial firms needed. While the move to the cloud was already accelerating, the onset of the COVID-19 pandemic added rocket fuel.


This said, a big challenge has been managing the tech debt firms accumulated over the years. Even though much data management had been moved to off-premise data centers, financial services companies’ systems were not true SAS solutions.


However, cloud management of tech debt is now so much easier. For example, Microsoft Azure’s data warehouse solutions offer the flexibility to transition legacy data to the cloud regardless of its current configuration. We can stand up a SQL Server in the cloud in a matter of minutes. For example, recently, we took one of our clients from no presence in the cloud to a full SQL server replicating Excel data in a couple of hours.


Start-up companies to large asset managers have concluded that the cloud is the way to go.



How has the COVID-19 pandemic impacted the move to the cloud?

Sandeep: While the industry was already moving to the cloud, the pandemic has made the cloud a virtual requirement. For some time, financial services companies’ c-suite executives knew that cloud computing would enhance collaboration. Greater collaboration would help productivity, increase transparency, and improve operations—the move to the cloud was important, but not necessarily a top priority.


With the onset of COVID, remote workers’ ability to collaborate was no longer a “nice to have,” it became essential. Team members could no longer pop into each other’s offices to work out a problem. They had to work on files and issues from their respective locations; working in the cloud is the only feasible way.


The ThoughtFocus team is currently doing a lot of work migrating legacy systems to the cloud or replacing those legacy systems with SAS solutions.


We’re building these solutions for our financial services clients, and although we work on all of the major cloud platforms, we tend to currently favor Microsoft Azure due to the robust capabilities Microsoft has built. Multiple capabilities like Jenkins and project management services are already built into Azure and don’t have to be managed separately.



Is it true that the cloud is creating the opportunity to build custom solutions, rather than only buying them?

Sandeep: Yes, the build versus buy dynamic has changed. In recent years, building solutions did not make sense in most cases—buying and customizing SAS solutions was the way to go.


However, the robust features of cloud computing platforms like AI, robotic process automation, and machine learning make it feasible to build solutions that meet 100% of a firm’s requirements for not much more than the annual licensing costs of a solution that might only meet 70% to 80% of an organization’s needs.



Does the cloud offer financial services companies other cost savings opportunities?

Sandeep: The cloud does present opportunities to streamline operations and reduce costs. For example, database administrator—a role with an annual salary of approximately $150,000—can increasingly be automated by turning on an AI database administrator with a click of a button. Organizations may obviously still opt for a full-time database administrator role, but the role can be more strategic, offering long-term benefits to the firm instead of performing monotonous tasks.



Cost savings are great, but revenue growth opportunities are even better. Are cloud technology investments helping to drive revenue and profit growth?

Sandeep: The Private Equity capital markets sector is a bit different than other areas of the financial services industry. Investors are typically locked in for five to seven years, which minimizes the pressures of redemptions or sell-off activity. This allows firms to think and behave in longer-term manners. Technology investments that enable revenue growth are part of this longer-term strategic thinking.


For example, I am working with clients who have identified the opportunity to buy and service huge blocks of loans. The profit opportunity comes from servicing large numbers of loans, in aggregate worth many billions of dollars. Investment in a cloud platform offering to scale rapidly is the only feasible way to realize the opportunity.

Depending on the opportunity, there might be half a million dollars in technology investment required. These investments will still deliver many millions of dollars in profit by increasing a substantial amount of revenue. Without these technology investments, there would be no way to capitalize on this opportunity at scale.



Aggressive M&A activity is happening and is predicted to continue across the financial services industry, most certainly including the capital markets sector. What technology considerations must firms consider?

Sandeep: Asset management firms tend to behave a bit differently. In most companies, you would not want to employ different systems that perform the same tasks. However, asset management firms strive to keep their key personnel, such as traders and portfolio managers, contributing substantially to their bottom line daily—happy.


Firms don’t want their traders and portfolio managers struggling to enter trades or run analyses. So, they spend money on the system individual traders or trading teams prefer.


Even without M&A activity, an existing fund generally employs multiple siloed systems. The firm then invests in creating integrations across the systems. However, when acquisitions do occur, the CTO makes decisions about integrating systems, converting the acquired company’s systems, or creating a new system.


Successful integration of disparate systems is a short-term solution, and with asset management firms, often a long-term approach for managing the fluidity. Integration helps firms achieve the best of both worlds. Traders and other front office people can use the systems they are comfortable with, and the back and middle offices are also happy because all the systems are integrated. Additional overhead is not created, and the firm can successfully scale.


The cloud is extremely helpful with these efforts. You can create data warehouses in the cloud and easily integrate across multiple systems—ultimately creating a hub and spoke solution that centralizes reporting and effectively manages the firm’s data.


The cloud allows organizations to change ownership or firms to change structure without disruption. Traders don’t have to spend time learning new systems; they can spend their time doing what they do best, making money.



Does the cloud still raise compliance and security concerns for financial institutions?

Sandeep: Of course, much banking and financial services data are already in the cloud facilitating online banking and services of this nature. Being in the cloud does present risk, but there was always a risk.


Hard wires carrying sensitive data are at higher risk than data going to the cloud using Advanced Encryption Standard (AES) which is 128-bit, 192-bit, and 256-bit SSL encryption. For someone to break 128-bit SSL encryption, for example, it would take a modern computer and billions of years.


Encryption is the safer route, so the cloud’s security and compliance concerns are practically gone. That said, financial services firms must hire CISOs and security teams with the right skills as an Azure implementation conducted incorrectly will put your data at a great deal of risk. But people with the right skills will leverage the security features Microsoft, and the other platforms, have spent billions of dollars to create.

Private Equity’s long-running love/hate relationship with Excel and what to do about it.


It starts innocently enough.  Private equity firms adopt industry-standard productivity tools to support essential processes and Excel is overwhelmingly the tool of choice to start.  Executives track their contacts and analysts build complex acquisition models using Excel’s feature-rich capabilities.


But Excel use rarely stops there.  Something happens over time as the firm grows in size and complexity.  Contact lists among the firm’s partners evolve into pseudo or micro CRM systems.  Financial models become increasingly sophisticated and evolve into deal flow tools that further morph into data sources for calculating investor returns, ROI modeling and sometimes the basis for investor reports.

Many firms continue to use Excel in this way because it still works for them and provides a level of flexibility for their unstructured data capture.  But generally, it’s just a matter of time before the “Excel for everything” approach hits a wall.  The issue is that Excel was never intended as an enterprise software solution to suit the broad functionality and data security required for Private Equity.


Manually prepared spreadsheets tend to accumulate errors over time that can show up as errors in calculations and reports.  Using spreadsheets to store accounting data shared between multiple Excel files for investor reporting is also a major source of errors.  A recent private equity survey conducted by E&Y found that CFOs have come to realize that manual data entry and reporting via spreadsheet are not an effective use of resources — almost 80% of CFOs said that the use of spreadsheets as data sources was a top management concern.


The solution is not to get rid of Excel but to optimize it.  Once the firm’s Excel usage creeps into spreadsheets specially purposed for investor returns and as accounting data repositories, it’s time to think about a master data management approach to centralize the data and provide controls.  Establishing a rules-based system to understand how data is sourced and used across multiple processes will dramatically reduce data duplication and reporting errors.  Master data management ensures the correct data is used across multiple applications and systems, including spreadsheets, workflow management tools and other homegrown & 3rd party software.  The result is better data management with fewer errors from erroneous data reporting providing overall greater efficiencies for resources and time savings.


In the near future, a thorough understanding of the firm’s data flows will be essential to take advantage of more advanced technologies like machine learning and robotic process automation (RPA).  But Excel spreadsheets aren’t going away any time soon.  Neither are the complex calculations and reports that rely on accurate data pulled from spreadsheets and a multitude of other systems.


Simple solutions built on Excel may not provide the scalability to support future business growth and complexity. Optimizing Excel’s capabilities is a short-term objective worth considering.  PEs can immediately reduce reporting errors and decrease risks by taking a master data management approach. Use the power and flexibility of Excel for the solutions it was designed for and don’t let Excel drive your core enterprise solution as you grow your business.