4 Rules to Live by When Working With Investment Technology Consultants

Last time, we discussed the challenges investment teams face when it comes to reaching their Target Operating Model. This time, we bring solutions. Searching for a vendor that will optimize your tech stack is understandably overwhelming (especially with plethora of vendors available), which is why many organizations opt to work with investment technology consultants. As a vendor, we engage with this process on a regular basis (e.g., competing for the business, filling RFPs, and so on), giving us unique insight into the best practices for an effective vendor acquisition.  

A necessary disclaimer—given our vendor perspective, we are skipping the obvious, such as “you should perform a thorough due diligence on the qualifications of the staff.” These pearls of wisdom hold true in most industries and, frankly, are common sense. They apply to the choice of an investment consultant as much as they do to the choice of a landscape gardener.  

Let’s get into the rules.  

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Rule #1: Respect Intellectual Property 

Consultants offer high value in terms of creating consensus on a list of requirements and managing the overall vendor selection process. However, many consultants will be limited in their ability to portray a comprehensive view on what all vendors can and cannot accomplish, unless the discovery and information sharing is protected by NDAs between them and the individual vendors.  

This is an important point, because vendors eager to showcase their functionalities may often overlook setting a mutual NDA in place, not wanting to make the process excessively bureaucratic. However, this authorizes consultants to re-sell what they learn during the process, which is particularly damaging if done in the context of new investor pitches. In a few cases, we’ve witnessed investment consultants boast this as a value add, “We have relationships with most vendors, and we have deep experience on their capabilities.” Well, how did you acquire this expertise? Are you authorized to reveal what that is, or would you be infringing on intellectual property rights? 

As an investor seeking to engage with investment technology consultants, you should ensure that the consultant you seek to work with maintains a live set of mutual NDAs with all relevant vendors.  

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Rule #2: Size up your ROTI 

It’s very easy to spend the money, invest the time, and lose track of the target Return on Total Investment. We stress the word "Total" here, because the aggregate cost associated with the time spent by the investor is often a 4-5x multiple of the consulting fees charged by the investment technology vendor. 

As a general rule of thumb, investors should not be spending more than 20% of the total contract value in the selection process. Thus, if you’re expecting to contract with a system which will cost you USD 1 mn p.y. for three years in a row (three years would be the minimum contract duration), you should not be spending more than USD 600k in total fees. As discussed before, USD 500k of those dollars may be a result of the aggregate time spent by the organization for participating in the process.  

You need to consider that vendors operate by the same rule. Therefore, if your investment technology consultant architects a particularly burdensome process for vendors (e.g., long RFP, multiple sessions, excessive workshops and trials), rest re-assured that vendor fees will inflate accordingly. It would not make sense for them to cooperate otherwise. This creates a misfortune we’ve seen too many times: where investors end up spending about 3-4x what they would have spent had the process been less laborious.  

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Rule #3: Keep the Consultant for Contract Negotiations 

The role of consultants tends to end whenever the vendor has been selected, but this is a missed opportunity for them to add tangible value to the process. The contract negotiation phase is a crucial moment where the involvement of investment technology consultants would be beneficial.    

While the vendor and the client tend to spend an exorbitant amount of time marking up indemnities and other legal clauses, little effort is spent on detailing the service level agreement, modus operandi, and break-up clauses. In other words, little attention is paid to detailing what the operating model will be, which was the whole point of the search in the first place!  

Rule #4: Weigh Product Flexibility and Talent Against Features and Functionality

Here we have an eternal dilemma in vendor selection. Say you have two finalists, one checks all the functionality boxes, yet lacks an impressive team. The other lacks a feature that would support a particular workflow, yet has a track record for working closely with clients to develop bespoke solutions. Which way do you go?

Prioritizing prudence and risk aversion, many opt for the former. But is this truly the most prudent and risk averse option for a contract that is above six figures in yearly license fees, spanning a minimum of five years?

Protecting from risk indicates fear of the unknown. When an organization faces unforeseen challenge—fifteen months into a contract let’s say—a certain amount of flexibility and collaborative spirit from their providers can make all the difference. Creativity, talent, and a commitment to proving success in the long run suddenly become more valuable than the existing functionalities on the day the contract was forged.

Don’t misunderstand, existing functionalities are critical. Capable vendors will certainly supply all necessary functionalities for their clients. However, in a field where one-size-fits-all rarely applies, it’s important to work with a team that can adapt to your organization’s needs today and in the future.

Follow the Rules

The technology landscape has become more complex for institutional investors to navigate, which has triggered the emergence of investment technology consultants—a benefit to the whole ecosystem. The best practices detailed here can make the collaboration among all players involved more efficient, and mutually beneficial in the long run.      

As a supplement to this article, we created a comprehensive guide for Running an RFP for a Portfolio Monitoring Platform. Check it out >

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