What is the productivity cost of investment management technology solutions?

The usual question; Buy or build?

Technology is essential for every aspect of investment management due to the fiduciary responsibility of those involved.

Technology vendors' revenue targets dictate user charges in that technology, once built (connections established, workflow functions and feature settings programmed, user-facing interfaces), can be used over-and-over for all customers.

Operations related charges (communications and data suppliers) are passed on to the user. However, there is frequently a need to create an interface with a third-party provider for specific data types not native to the technology vendors platform. That would require customized work which yields an acceptable revenue stream. Additional revenue is generated from:

As a user looking for features it often appears as though 'one simple change' would make the otherwise perfect product work for their use. However, from the vendors' point-of-view the incremental number of users or market segment that the feature addresses may not be worth the investment in programmers time or at the expense of other more requested features.

For example; A vendor may be working on improving short locate functionality that is scheduled to involve 50% of annual resources. A new but influential customer, willing to pay for the work of implementing a special feature for their workflow, would require 75% of resources for a short time that would derail the scheduled work. The vendor would need to decide on and then manage a change to customer expectations for delivery of the promised workflow product.

It's also significant to keep in mind the size of the technology vendors business. There's the total addressable market (TAM) and then there's My TAM which is likely a much smaller percentage of the TAM. Different tecnology vendor products appeal to different types of portfolio managers due to their functions, features and costs. Managing assets can have unique operational parameters whch no system out-of-the-box could handle well.

A reasonable estimate for a small to medium-sized portfolio manager would be $2,000 per month per user. This would yield a technology vendor revenue of approximately $25,000 per license.

Editors note: At this time, it's estimated that Bloomberg charges ~$30,000/year ($2,500/month) for their function and data terminal. Additional services such as AIM (portfolio management system) or B-Pipe (a raw data feed used by analytics users) come with additional charges. 

Users believe that Bloomberg provides the most comprehensive network, data and function package for their asset classes. Bloomberg's network effect of connected sell-side brokers and buy-side interests is unmatched and many believe deserves the premium cost. 

However, different size portfolio managers have individual needs which may require a more customized solution.

Technology providers will aim to balance the cost of providing the services associated with the product with the cost of supporting the customers' use of the product.  A technology vendor is free to base charges for software and services on any number of factors. 

Individual charges vary depending on bundled service value. Services could be:

There may be generally accepted industry charges that are passed-through from the supplier to the consumer (i.e., market data charges) 

The technology vendor will need to attribute work required and a profit margin to each tier of customer to cover the lifetime value of the customer.

The cost of value is based on demand