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3 Reasons Why Your Firm Might Be Making Bad IT Decisions [1 of 3]

How a showdown between Iron Man & Superman suggests that picking good stocks can be unrelated to picking good data infrastructure.

Andrea Gentilini
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Investing is a very different vocation from fighting evil in the pages of a comic book, but maybe it takes someone with a superpower to do it right. What sort of superpower would that be, though?

Strip away all the tropes and there really are just two classes of superpowers:

  1. Those you’re born with, like Superman, and
  1. Those you build for yourself, like Iron Man.

Figure 1—Superman V.S. Iron Man, the past V.S. the present.

(There’s a third category: those you get by accident, like Spider-Man. And, while there are people who’ve made money on just dumb luck, let’s just go with the other two for now.)

All that’s required to be successful with that first skill set is to be blessed from Above with gifts others lack. The second, though, requires the kind of learning and experience that leads to technological sophistication. And, while acquiring innate talent is beyond the span of control for most of us, diligence and forward thinking are well within our grasp. For every blessed individual such as Warren Buffet, George Soros or Steve Druckenmiller, there is a team of quantitatively sophisticated individuals pulling together at DE Shaw, Renaissance or Two Sigma.

While talented standouts dominated the 20th century, it is proving true that tech-savvy firms own the 21st. And yet, the Financial Services sector is not nearly as good at making decisions about how it processes its data as it ought to be.

Wall Street’s Kryptonite

According to McKinsey & Co., the sector lags travel, retail and even manufacturing when it comes to the pace of digitization. And it has literally no excuse. While other industries can cite revenue, supply chain or workforce skill constraints, Financial Services is the only major segment of the economy that faces none of these challenges.

Figure 2—Digitization by sector. Sources: McKinsey Digital Survey 2018, Novus Partners

Making matters worse, finance is in top quartile in terms of digital intensity, according to an Organization for Economic Cooperation and Development study, up there with information services, telecommunications and scientific research. That ranking should not surprise anyone. Finance is made of numbers, produces more numbers and spends 24 hours a day shifting numbers from one side of a ledger to the other.

And still financial services firms routinely make bad decisions about technology. Or even more damning, they make no decision at all.

Make Progress, Not Excuses

In my experience at Novus Partners, I have come to identify three major reasons why the Financial Services sector continues to lag:

  1. Looking at the wrong data. You might have heard of the “resource curse” that affects many developing economies. It describes how countries with vast natural resources such as oil or minerals stay impoverished and economically unstable. We see the same thing in our industry, where it seems sometimes that quants get paid by the formula. We might want to measure a useful bit of information – say a potential investment’s return versus that of a risk-free asset’s – then develop dozens, hundreds or even thousands of metrics around that. Do we need all of them? Of course not, although it gets practitioners paid and academicians published. Do we need any of them? Only if there is any predictive value to them, which is very rare indeed.
  1. Insisting on DIY technology. The buy-versus-build decision is often warped by internal politics. The rational decision might be to buy an off-the-shelf software package that, without tweaking, does 80% of what needs to get done. The alternative is to find something that does it all, even if it means hiring an entire floor full of IT architects, database administrators, integration consultants and other people who are off the beam of the firm’s mission of returning value to investors. If that executive is compensated in part by how many employees report to them, that could color their judgment. And, while this is true in any industry, it is particularly true in the one in which CIO stands for Chief Investment Officer rather than Chief Information Officer.
  1. Talking too much, analyzing too little. Technologists have themselves to blame here, at least in part. We take it as a given that people who understand investment in securities are not generally the same ones who understand investment in technology. Decision makers need choices presented to them in a manner that translates the underlying facts into English and into dollars. Technologists need to find a way to oblige. Otherwise, we end up with the current status quo, in which long, contentious meetings prove to be poor substitutes for empirical data and hypothesis testing.

An Urgent Need

One hypothesis that has been amply tested to my satisfaction is that there is a pressing need for Financial Services firms to move past these three stumbling blocks.

Not only would an Iron Man approach – as opposed to a Superman approach – be more effective in meeting the sector’s current challenges, it would also open up new possibilities to dealing with issues that are still on the frontier of most of our executives’ awareness. Next time, I will present how environmental, social and governance data as well as skill-set analytics present compelling opportunities for institutional investors.

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