The dilemma of whether to build or to buy fund managers due diligence solution – how to decide what´s right?

With so many managers and the numerous strategies they offer, selecting the right one from the crowd is a complex operation.

When reviewing external asset managers from either an investment or operational perspective, efficiency, time and cost related to this process need to be taken into consideration. Even though plenty of asset owners and investment consultants are aware of some inefficiencies when assessing external asset managers they have been very slow to adopt the change.

In our last article “Due Diligence Of External Investment Managers – Digitize or Jeopardize!” we described how asset owners and investment consultants have for many years been reluctant to change towards more digitization. We have also concluded that digitizing the due diligence of external managers to improve the process efficiency and scalability is inevitable. The question we’re focusing on in this article is – whether to build your own solution or to use already developed packaged solution?

Every organization, naturally, wants the most cost-effective, functional, and feature-specific solution, that will completely support the processes for which it is aimed. Institutional investors and investment consultants are not an exception to such wishes.

So what are the objectives and features these companies are looking for?

The optimal investment manager due diligence technology needs to:

  • Centralize the collection of data and analysis procedure
  • Enable transparency and traceability of exchanged data, documents, and communication
  • Integrate the best practices and industry standards
  • Ensure security of sensitive documents and data handling
  • Enable real-time collaboration
  • Be customizable and intuitive
  • Provide accurate managers’ scoring and comparison
  • Reduce the overall time of due diligence procedures

Who knows your due diligence processes better than you!

Each firm knows its needs and procedures better than anyone else. When considering a technology change, these firms could build (or outsource the build) of a solution precisely according to their specific required functionalities. They may have direct control over the development of this software and be immediately able to react with modifications in case of business or market changes.

But the odds that those institutions have dedicated development teams fully available for a long time and focused only on developing their solution are not big.

It´s not as easy as it may seem at first sight – the obstacles in developing your own due diligence software solution are sometimes hidden behind the obvious.

We face different scenarios: small to medium size companies don’t have enough internal IT resources, and Tier 1 type firms with larger IT teams are often stretched between different tools, needs, and deadlines.

Some would think about outsourcing the work to external IT development companies. One big challenge with this approach is that IT development companies are generic and don’t typically have the industry knowledge. Thus, a significant involvement from the business/investment teams would be required to make sure the specifications are well defined, understood by the developers and that these individuals could help with the testing. How many man-hours can your organization afford to spend on building a solution that has no guarantee of working?

Commitment to timelines is another challenge, as deadlines keep being pushed due to non-availability of business resources to validate, to the unsatisfaction of some users, to some misunderstanding from the developers, etc.

Cost is also a considerable challenge. Developing a solution from scratch can become very costly and without any guarantee of the results. This has been proved not once but many times.

Once you have your due diligence solution delivered, it might seem like your project is finished. However, it´s not – you still need to devote time, resources and finances to fix undiscovered bugs, to general ongoing software maintenance and upgrades.

Why should you consider a “buy” option for your investment manager due diligence solution?

Use of the commercial-off-the-shelf software means lower initial costs and faster deployment, release from the obligation to fix bugs and upgrades, as well as exploiting other company’s resources for support and user help.

We see numerous pros of buying specifically tailored software, especially when talking about such a narrowly specialized solution like investment manager due diligence software. Here are the pros that we consider to be crucial for making a decision on whether to build or to buy:

Cost savings

Building new software implies research and development costs. Today’s practice among software vendors is to pay those expenses by spreading them over more clients trying to accomplish similar tasks. Thus, they do not represent a burden on a single company, as it would be with in-house software development.

Another argument regarding the cost-savings on the side of subscription software is that most of the newly developed solutions are cloud-based, which significantly reduces the maintenance costs and speed of upgrades.

Quality assurance

Software providers aim to become leaders within a particular segment of the market. Thus, the pressure on delivering the highest quality and solution stability result in rigorous quality assurance.

Security

Credible commercial software has built-in information security standards, and they are continuously upgraded, which is very important in the process where numerous sensitive information and documents are exchanged.

Knowledge share

Commercial solutions enable their users to leverage the best practices shared by other clients and benefit from the experience of each through product enhancements.

Conclusion

The built-in transparency and traceability offered by a technology solution instantly become compelling when the board of directors, regulators or clients inquire about a particular decision. Being able to easily see the full cycle of the due diligence process in one central location has massive advantages. We hold that only solutions that are created with a good level of flexibility and easiness of use can cope with the requirements for the most cost-effective and efficient product. So, when it comes to the consideration to build or to buy, one of the main questions is – would building your external asset managers due diligence solution in-house be the right focus and the best use of your organization resources?

 

Diligend is a feature-rich and customizable software solution for digitizing external asset managers due diligence processes. If you would like to test its capabilities and applicability to your own processes, please request a free demo via Request a Demo form on www.diligend.com.

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