By Chris Grandi, CEO at Abacus Group
Ten years ago the concept of cloud computing was being talked about more than it was actually being deployed.
The global investment management market had been trained for years to prioritize ownership of its IT assets. This, we felt, was the right time to start our managed cloud services company, Abacus Group LLC.
The common solution then was to procure your own equipment, hire your own staff and manage your IT stack directly out of your physical office. In accordance with industry standards, this was the only way to truly protect your data, and guarantee you will have persistent connectivity to the markets and other third parties. The idea of outsourcing all of your infrastructure, data management and services to a third-party cloud provider ran against the commonality of control that investment managers were used to. Time does change perspective and technology changes quickly — almost always for the better.
Today these same managers are outsourcing their e-mail messaging to Microsoft’s cloud. They are quickly turning up and turning down servers in the Amazon and Google clouds. They are also leaning heavily on “private cloud” providers to tie these services together and manage the last mile to their fund’s employees, who need to be able to work from anywhere. The equipment has been moved out of the office, IT staffs have been trimmed, and their desire to move IT spending from a capital expense to an operational expense has been realized.
How did an industry that trusted no one with their data, evolve into a place where their data is now everywhere, and being managed by engineers they have never met? As we see it, there were a few main drivers: Cost, Flexibility, Security, Utility and Psychology.
Like any business manager, investment managers have year-end P&L statements which dictate the profitability of their business and how they are able to compensate their teams. The traditional method of outlaying large capital expenditures to procure IT hardware was very expensive. Further, in accordance with IT best practices, this would have to be done every three years. Often times these lumpy expense years seemed to coincide with a year of sub-optimal performance. The cloud-based model eliminated these cap ex expenditures and moved IT expense to a predictable monthly or quarterly operational expense. The cloud model also provided fund managers with new flexibility to expand their IT footprint as they grew, or reduce during downsizing. The flexibility allowed managers to only pay for what they needed.
But what about the cloud’s 500-pound gorilla — security? The previous perception was that in order to protect your data you needed to own and control your equipment and know the person who manages it. The market has now come to understand that cloud providers are able to deploy effective large-scale, enterprise cyber security solutions to their clients. These solutions, if deployed on their own, would cost fund managers millions of dollars. Cloud providers have the benefit of utilizing their economic scale across their client base to provide better cyber solutions than the funds could provide themselves. Further, fund managers are now aware that their biggest cyber risk resides with their employees and in the office, not with their technology solutions. The concept of protecting your data by keeping your servers in the office has been turned around. Unless you have 24-hour security managing your on-site communications room, and bio-metric protections to access where the servers sit in your office, you are not protected.
Cloud services are providing managers with many new products and services not possible 10 years ago. Investment managers are now using more data-sets and applications in their research process to support investment decisions. Artificial Intelligence and Big Data tools have moved from buzzwords to utilized and productive data points. Most of these tools have been developed over the past five years, and almost all of them were built and deployed in public clouds. As managers look to use more of these tools, they now have to accept that the only way to do this is through a public cloud such as Amazon, Microsoft or Google. We have seen many instances where the utilization of these tools has quickly convinced fund managers of the effectiveness, speed and reliability that public and private clouds can bring to their businesses. This comfort level will quickly open their perspective to outsourcing other parts of their infrastructure, or all of it to, to a third-party cloud provider.
Geoffrey Moore published his book, “Crossing the Chasm,” more than 25 years ago. His evaluation of why certain technologies gain mass consumer acceptance, while others die on a vine had to do with a number of factors, a couple of which were psychology and timing. He pointed out the many hand-held computing products which did not make it (remember the Palm Pilot?). The ones that failed were not inferior to the ones that did succeed. The principal difference was that the successful products were launched at a time when the market was ready for them. It is hard to believe how we ever lived without our iPhones and Androids.
Similarly, there has always been a herd mentality in the investment management space. I have always attributed this to the nature of this business, in that great managers know how to manage risk. Moving everything to the cloud ten years ago, would have been risky. Managers do not seek to obtain first mover advantage when it comes to operations management. The mentality has always been to let others try it first, and then allow more funds to work out the issues and improve the experience. Once new operational technologies are proved out, have demonstrable benefits in service, function and cost, and lastly have become the norm, then it is time to change.
Investment managers do not want to be the first to deploy innovative services, but they also do not want to be the last. We have crossed the chasm with cloud computing, and there is no going back.