Uncovering the Hidden Costs of Technology Investing
New technology can give family offices a big boost in efficiency, financial insight and client service. But we’ve all seen situations where someone made a decision to implement new technology and didn’t think it through well enough. Not getting it right can be costly.
While the purchase price of a technology may be clear, hidden costs may also arise—and understanding the ramifications is essential to a successful project. Today, a technology upgrade often involves some fundamental choices: Do you select an all-in-one solution or an integrated best-of-breed solution? And do you locate the technology on premises or in the cloud? Each of these choices involves trade-offs and costs.
All-in-One or Best-of-Breed
A benefit of all-in-one solutions is that you are dealing with one company for each functional category, from general ledger to bill paying to reporting. A downside is that all-in-one solutions are generally not very flexible and require extensive customization to meet your specific needs. That entails added cost.
Best-of-breed solutions enable you to select the software that best meets your needs in each category. In previous years, it could be difficult to integrate the various products, but today’s interfaces make it much simpler. They enable movement of data between products based on industry standards used by most vendors. So be sure to select products that have modern interfaces.
On Premises or in the Cloud
Owning your own technology may sound attractive, but comes with many costs beyond the purchase price. Those costs include administration of the solution and management of software licensing, either by your own staff or a third party.
An alternative is to move to a cloud-based subscription model where you purchase the capability but not the hardware, and avoid administration and licensing headaches. Using a public cloud is flexible and cost-effective. You can turn up capacity on a moment’s notice for a busy reporting cycle and then turn it back down when the cycle is over, paying only for what you use.
Another choice is to combine these options. You might decide to use a best-of-breed approach in the cloud for some solution areas, and an all-in-one approach on your own premises or private cloud for others.
The technology with the lowest purchase price may not be the best bargain if it involves hidden costs. To determine these costs, it is necessary to look past the technology itself and consider factors such as business controls, transition costs, workflow, and security.
· Business controls: You should expect your technology platform to help keep your business organized and under control—for example, by giving you control over who has access to systems and data. If business controls are not built into a solution, they can be costly to add later.
· Transition costs: It is easy for these costs to sneak up on people. If you are moving from an in-house implementation of a portfolio accounting system to a modern, cloud-based system, the cost of moving historical data to that new system can be higher than the cost of the software itself. You may require professional help to estimate the transition cost before you actually get into the implementation.
· Workflow: Is the solution solving one problem, but creating a new one? For example, does it give the portfolio manager new reporting tools and analytics, while making it difficult for the operations staff to do their job efficiently? The resulting drop in productivity is a hidden cost. Getting buy-in for all aspects of the workflow is important to the success of an implementation.
· Security: Many technology customers assume security is being handled by the third-party vendor or the software company. But in reality, they take it only to a certain level. Be sure the security extends throughout your workflow and your business controls, even if you need to pull in a third-party expert to make that happen. Security considerations can be well worth the added cost.
When considering a technology change, be sure to ask key questions: What are the drivers for bringing in a new system? Can some of these drivers be addressed without building an entirely new system? For example, if you like the workflow of a solution but not the reporting, it may be possible simply to swap in a different reporting product.
Finally, tie your new technology acquisition back to a business goal, to help see the forest for the trees. This will help you weigh both the costs and the benefits, to make any trade-offs in a fully informed manner.
Thinking about modernizing your family office technology? Learn more from our recent webinar, “An Inconvenient Truth: The Hidden Costs of Technology Investing.” You can access the recording of this webinar here and the accompanying slides here.
Family Wealth Alliance and Risclarity are not a City National Bank affiliate