Performance Measurement: Ripe for Disruption

A view on how the industry might evolve, particularly as performance professionals advocate for change.

Mark Goodey, Director & Senior Principal of Investment Analytics

The following is a summary of the article Performance Measurement: Ripe for Disruption that was published in the Fall 2018 Journal of Performance Measurement.

The thought of technological disruption in performance measurement generally makes professionals in the space a bit nervous. Rather than fearing change, however, performance teams have the opportunity to be agents of disruption and drive material advances that not only emphasize and augment the value of performance reporting internally, but also improve the customer experience for end clients. This is why the most accomplished performance professionals today are working closely with their software and solution providers to advance and evolve the function.

Against this backdrop of innovation, however, a misconception still exists that paints performance measurement as an area with little room for innovation. For the past 40-plus years, the mathematics of calculating performance returns has remained roughly the same. While attribution has been introduced and some of the iterations of these calculation methodologies have advanced, the underlying models and the science has not.

This creates a false impression that overshadows the significant change that is occurring, and somewhat rapidly. To be sure, this change is being driven by trends ranging from the explosion of and ability to manipulate both structured and unstructured data; regulations that amplify and propagate reporting demands; and new tools that facilitate improved process workflows or help manage growing data complexity through data lakes and governance models. Emerging technologies—from artificial intelligence (AI) and machine learning to distributed ledgers and natural language generation—have also either already made their way into reporting processes or promise to at some point in the future. But amid all of this change, the objective at its heart is to provide reports that are meaningful, useful, and easy to understand.

A Perspective on What Change Will Look Like
Traditionally, there have been two primary operating models for utilizing performance-measurement and risk-management systems. Firms were either ‘buy’ houses, leveraging software sold by third-party technology providers; or ‘build’ houses, developing software internally. The approach was often decided by the C-suite, who collectively considered variables such as the time-to-market, the skillsets and capabilities within the organisation, and the total cost of ownership. Spreadsheet solutions, in the recent past, were still quite commonplace.

Over time, a variety of sourcing and ‘shoring’ options came into play as firms looked to optimise their operations. These included outsourcing, insourcing, near-shoring, rightsourcing and rightshoring, with firms typically exploring any number of these options over the years. Some parts of the industry have toggled in between, depending on their maturity and the perceived value at a given point in time.

The emergence of cloud technology, however, is changing the game. It has already led a number of buy-side firms to move to hosted solutions, lured by the potential to reduce technology debt and leverage operational support. This in turn has led to the emergence and adoption of managed services—which is becoming an ‘auto-select’ option in certain regions and among more agile organizations aiming to focus intently on their core competency.

This has been a notable development that many in the industry are tracking closely. If a technology-solutions provider can bring a deep understanding about how to best leverage and deploy the software, bear the performance professionals who understand best practices, and make the software available via the cloud, the logical next step is indeed a managed service. The upshot, which is revolutionary to performance measurement professionals, is ready-for-consumption outputs that are available when and where it’s needed. Moreover, for buy-side firms that lack certain capabilities in-house—for instance, the ability to deal with ex-ante risk—they can outsource this function as a service entirely.

The cloud is redefining performance and risk management operating models in other ways and giving in-house teams greater flexibility to pick and choose the services they keep in-house and what they farm out to third-parties. By operating in this manner, firms are able to realize synergies of scale and pursue new opportunities quicker.

Consider, for example, a firm looking to comply with the Global Investment Performance Standards (GIPS®). There is no need to implement a system from scratch and bring teams up to speed. Instead, buy-side firms today can go straight to the market and find a provider that offers a managed service facilitating GIPS® compliance, complete with service level agreements. Notably, this should not be confused with trying to ‘outsource’ the claim of compliance to a third party; the responsibility will continue to reside with the asset manager or asset owner making the claim.

To be sure, one of the biggest roadblocks for asset managers pursuing transformation remains legacy technology. And manual workarounds or user-defined processing—endemic to outdated systems—complicate the support model for both vendor and client. Recent vendor consolidation has only exacerbated the gap between enterprise solutions and niche providers offering best-in-class solutions for sometimes very narrow demands.

But one of the most exciting possibilities presented by cloud technology, at least for performance professionals and vendors, is the ability to pick up information (data) in a semi-standard format and move it into client environments. With will and intent, the potential exists for us to club together with all of the same licences and share benchmarks and reference data, like the equivalent of listening to music via music streaming services.

To get a sense of what this will look like in practice, users will be able to get the licences they need, stream it and use it on demand. They can discard it afterwards and maintain a static record of the return series. This is not a collusion exercise, and this is not data redistribution either. It’s an area of illustration on how things might progress.

To put it into context, one example might be ESG (environmental, social and governance) and ETF (exchange-traded funds) index providers. They are in the game with those advocating for the free cost of index information. Costs must go down dramatically as we would all have the licences and access to the data. With widespread adoption, the net effect should mean cost reductions for clients (assuming they are passed on) and less barriers to entry, which is a common good. Some would say this revolution has been a long time coming.

In the Offing
So, how should performance teams advocate for disruption? We should be able to combine the data with the regulations; we should be able to combine the science with the art; we should be able to incorporate ESG information and other new factors into risk models. We can demand workflow tools that enable management information system (MIS) and client reporting. By taking advantage of the cloud and APIs, calculations can be completed lightning fast, with the capabilities available on demand.

We should all push harder for sharing much of the reference security masters as there aren’t many instruments available globally. Even at a few million, in big data terms, is not very big. Reporting continues to be a challenge with various ways to present data. Most global firms have to deal with multiple languages, and need to handle reporting nuances for different clients and stakeholders.

Technology has the potential to simplify and automate processes, and potentially enhance it in other ways through natural language, voice recognition, AI, blockchain, or other emerging technologies. Hunger for advancement and curiosity should not be limited to those in Silicon Valley or their global equivalent locations. This is why I am pushing for disruption.

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