CIO Senior Contributing Editor Randy Myers spoke recently with Chad Erwin, Senior Vice President, Asset Owners, at Backstop Solutions Group, to find out what CIOs can gain by implementing modern systems that streamline their research and portfolio management processes.
Q: Managing information has always been a big part of the CIO’s job. Why is it more challenging today?
CHAD ERWIN: We’ve seen an explosion in the availability of data, partly as a result of regulatory reforms enacted since the financial crisis and partly as a result of technological advancements that make it easier to store and manipulate data. So there’s just a bigger sea of information out there. Also, the low rate environment that’s persisted since the crisis has made it hard to differentiate returns in certain asset classes, so we’ve seen a lot of investment managers producing more information about their work to demonstrate the value they’re bringing to the table. Now, the onus is on the asset allocator to do something with that information.
Q: Fair enough. But this is an established industry. Haven’t most CIOs already developed systems that work for them?
ERWIN: Some have. Others have systems, but they’ve become outdated. And some, surprisingly, really don’t have systems. There are a large number of asset allocators out there who still manage billions of dollars on Excel spreadsheets, Word documents, shared drives, and other static systems. The reason is fairly simple—everyone knows how to use those tools, and they’re fairly adaptable. If something changes, they can put it in a document and email it to their team. The problem is that this requires a lot of manual work and doesn’t promote consistency. Each member of the team might do things a little differently. And, of course, there are always problems around version control in these manual systems, especially with spreadsheets.
Q: Beyond short-term inefficiencies, what are the long-term shortcomings associated with working like that?
ERWIN: As people leave their jobs in the normal course of business, organizations lose their institutional knowledge. What those departing employees know isn’t catalogued, stored and readily accessible in a standardized format. This can really be a problem when you’ve been working with certain managers or deals for extended periods of time and the person overseeing the relationship leaves. Or when you have investment managers who stay with your organization for three to five years, but investments that have life cycles of 10 to 15 years. The people who remain, or who come in to replace a departing team member, then have to dig through that person’s emails or personal shared drive to find information. Sometimes, they can’t find everything they need and wind up duplicating work.
Q: What’s the solution?
ERWIN: Asset owners need a way to centralize both their quantitative and qualitative information and share it consistently across the organization. For most, this will start with creating a central repository of data—a data warehouse—that maps to all of their data systems. They also have to make sure the data coming in, whether from internal or external sources, is scrubbed to meet their needs. Once they’ve done that, they can create, or more likely buy, a highly automated portfolio management system that lets them see everything they need—portfolio performance data, documents, you name it—from every data source they have, on one screen. Now, when they need a document or piece of information, they know where it is. They can create audit logs to prove what they did. From a fiduciary and regulatory compliance standpoint, they need a solution like this that encompasses their entire workflow from start to finish.
Q: Where are the efficiency gains realized?
ERWIN: When you’re emailing spreadsheets back and forth, you’re always going to have workflow issues and some duplication of effort because people don’t always know what their colleagues are working on. When you’re working on one system that ties in all of your team members, you’re less likely to duplicate someone else’s work because you know what they’re doing and you’re able to rely on what they’ve done. You’re not worrying about whether their work is current, where they got their data or what they did with it before you saw it.
Q: How steep is the learning curve when you’re installing one of these new systems?
ERWIN: Adopting a new technology always involves some work. That’s why we still have people leveraging spreadsheets and Word—they don’t want to take on that work. With a platform like ours, though, which we’ve been refining for years, we find that the advantages become obvious so fast that most people embrace it fairly quickly. They see that the number of clicks they need to get information shrinks dramatically. They see they’re getting actionable insights into what’s impacting their portfolios. They realize that if they need to look at something they did two years ago, they can quickly access it, see how they approached it, see how it worked out, and factor that into decisions they’re making now. As the amount of available data continues to grow, these kinds of capabilities will determine which CIOs and investment teams are able to differentiate themselves.
Q: Have you tried to calculate a hard return-on-investment figure for implementing one of these systems?
ERWIN: The return-on-investment is freed-up time that can be better spent pursuing higher-impact work. We have worked with clients to calculate their time savings task by task, and how much of that time could be reinvested into more productive work. We’ve seen that the overall return on investment tends to show itself quickly and then continues to compound over time. The time savings come from a lot of places. Analysts spend fewer hours searching for information. New analysts need less time to get up to speed because they can easily see the consistent methodology used by their colleagues. Creating board books becomes a lot easier, and your quarterly reviews smoother, because all the information you need is right there online for everybody to see. And this doesn’t account for the value you’re creating because your analysts are spending less time gathering information and more time developing actionable insights into that information.
Q: What should a CIO be looking for when choosing a new system?
ERWIN: Configurability and adaptability are the biggest things to focus on. How easy is it to add fields on the fly, or add elements to their process? How easy is it to report on that, or generate alerts about a new risk indicator? Another thing they want to ensure is that the system can handle both the quantitative and qualitative sides of the business and easily merge the two. Let’s say you’re qualitatively assessing scorecards for your underlying investments. Being able to combine your record of that with actual performance data can give you real insight into your process, how much value you’re creating, and how consistent you are with your thoughts. Finally, you want to pay attention to how data elements are able to present themselves in your system. We’ve seen some of the benchmarking partners in this space starting to hoard data a bit. But systems with open API capabilities are able to talk to any platform. In our system, for example, you can push and pull information from any field you’ve created in that system. Being able to tie in seamlessly this way is going to be a big deal going forward.
Q: Can you share a concrete example of how a highly configurable system can make life easier for asset owners?
ERWIN: GDPR in Europe was a great example. When that new privacy regulation went into effect, asset owners had to be able to run new sets of reports on all of their client types. They had to be able to produce every single information element of their client data, including how they housed the data and who touched the data. Then they had to be able to reproduce the final documentation. It was a real hassle for some asset owners, but for those who had our system and had the necessary information stored prudently, it turned out to be a very easy exercise.
Q: What can asset owners do to make implementation of a new management system go more smoothly?
ERWIN: The first thing they can do is make sure they understand their own process. They also want to understand where their data is and try to get that normalized or scrubbed to some extent. That’s actually fairly easy. It’s the qualitative stuff—information from your meetings, your calls, your various notes, your shared file documents—that can be a little more time-consuming to get ready. Where is that stored? And is it consistent? Those are the types of things they’re going to want to consider.