27 June 2022
Tech debt: The vicious cycle of legacy tech in asset management
By Thomas Kim, CEO, Enfusion
Published: 20 September 2021
There’s a tech debt crisis in the asset management industry
Every year, the sector’s average annual technology spend increases. Without fail, the headlines point to this upward trend as a signal of the industry’s digitisation. When you dig beyond the headlines, however, it becomes clear that this ‘innovation assumption’ ignores the full picture.
As leaders of asset management firms know all too well, large technology budgets do not always automatically translate to strong investments in innovation. The fact of the matter is, a very small amount of that spending actually goes towards true technology advancements. True technology advancements better enable the business, increase return on investments, decrease risk, improve operational stability, open up global access, scale up and down dependent on business needs and provide access to unified data for better decision making.
In this article, I will discuss a phenomenon, which I’ve coined 'tech debt', that is hampering real innovation in the asset management sector and contributing to ballooning annual tech spends.
If it’s not funding innovation, where is the money going?
The answer to that important question can largely be summed up in two words: legacy technology. An estimated 80% of technology budgets are devoted to simply 'keeping the lights on' and maintaining, repairing, and updating old, legacy technology systems.
80% is a staggeringly high figure, particularly when you think about the billions of dollars the asset management industry invests in technology each year. Analysts expect the wealth management industry alone to spend more than US$24 billion on technology by 2023.
As investment technology has advanced, legacy technology providers have bolted-on additional functionalities to systems that are decades old. Each of those updates, in turn, carry a cost to the asset managers that rely on that technology.
'Tech debt' is a phrase I’ve coined to describe this phenomenon and what I view as an innovation crisis in the asset management industry. Put simply, tech debt is the perpetual cycle of spending to update and fix outdated technology that directly stands in the way of the business from evolving and developing meaningful capabilities that power growth.
Because asset managers have put so much money into their legacy systems, they often feel they have invested too heavily to change course. In essence, they feel “indebted” to their 20+ year old technology systems.
Escape the cycle of tech debt
When faced with the decision of whether to update ageing infrastructure or explore new, cutting-edge technology, it’s critical for asset managers to think about the long-term implications of the decision. While patching old technology might be a cheaper option in the immediate term, it’s not a permanent solution.
The reality is those costs add to a growing pile of tech debt that asset management firms eventually have to pay down at a higher interest rate when they are left with no other option.
It’s time for asset managers to confront their own tech debt and ask themselves:
- How much have we invested in repairing legacy technology already?
- How much will we be forced to spend to update legacy technology over the next five years? The next 10?
- What is our total tech debt?
- Where does our current technology stack fall short?
- Does our technology position us to serve the next generation of our clients effectively?
- How could adopting cutting edge technology transform our operations?
- What technology would we build if we could start from scratch?
The last question is an important one. The 'build-it' mentality is one emerging managers have adopted and it has given them an agile, competitive edge in some markets, but requires continued investments in order to keep it from going stale and then turning into tech debt.
The opportunity cost of delaying the adoption of new tech
A lot has already been written about legacy technology’s stronghold on large financial firms. In addition to deepening their tech debt, asset managers also face an opportunity cost when they maintain their legacy technology and delay the adoption of new systems.
A recent Oracle study calculated that large financial institutions could lose up to US$1.5 billion in revenue for moving too slowly to integrate new technology. Oracle refers to this revenue loss as a ‘laggard penalty’. By contrast, firms that have already reached an advanced digital stage report more than an 8% increase in revenue.
When factoring in the opportunity cost and the full picture of asset managers’ tech debt, it becomes painfully clear that the cost of maintaining legacy technology is far more exorbitant in the long run than starting fresh with a new, cutting-edge system.
For many asset managers, the cycle of tech debt likely started more than 20 years ago. The question is: when will it end and why wait when newer technologies have removed the friction and lowered the risk associated with change?