How asset managers can deal with the mounting costs of data
Fund Operator spoke with a lead Vendor Manager at a large European Asset Manager to get the inside scoop on how rising data costs are impacting fund operators and the steps firms can take to thrive amid price hikes.
Sara Benwell POSTED ON 2/15/2021 3:39:01 PM
Sara Benwell: How is the cost of data changing – and what impact is this having on firms?
In general, the top three costs for a financial firm are its office premises including equipment, its employees and then market data.
Over the past 10 years, from this short list, it is market data costs which are shooting up the most and increasing rapidly due to multiple reasons.
Firstly, the requirement for more data to be able to create and explore new alternative investments such as the ESG arena where different types of screening and risk assessments need to be made.
“Price increases are a constant factor and boy, are they increasing!”
Secondly, more data to satisfy increasing amounts of regulation such as Solvency II, Sarbane-Oxley and other ESMA/SEC requirements that keeps coming.
Lastly, price increases are a constant factor and boy, are they increasing! The winners of all extra data requirements are the data creators and providers, who in some cases almost have the market cornered in their respective fields.
Some seem to be taking turns in recreating new commercial models so that they can double the customers costs without actually delivering anything different or extra; talk about ‘The Emperor’s New Clothes’!
As one could imagine, these increases of costs are unsustainable for many investment firms since their profit margins are being squeezed on their AUM management fees.
For the past several years many firms run annual cost-cutting exercises to reduce costs and look for efficiency. Yet, what do you do if the big part of the increasing costs is locked in areas where the internal business is saying it’s a must have; so naturally we are heading towards a big showdown where something has to give!
“As one could imagine, these increases of costs are unsustainable for many investment firms since their profit margins are being squeezed on their AUM management fees.“
In the beginning of the cost cutting exercises, the easy cost saving was achieved via what is called as ‘the low hanging fruit’. Many firms were wasteful in attitude of their data inventory such as unused terminals or real time data for areas where it wasn’t essential.
This was round one and when many firms achieved these savings the vendors fought back by slicing and dicing existing products so instead of charging one price for a lump of data, it would be broken down into packages and commoditised so for the same data before you would now pay extra!!
This example of commercial model change is now very typical in the market data world where extra profits for the data owners could be achieved without actually changing the manufacturing process; now who can’t but admire that… unless you are the one paying for it.
Sara: How can asset managers continue to thrive when data costs are exploding?
There are many firms who have internal teams responsible for the procurement and management of data vendors but long ago these teams were basically contract secretaries to the business, just getting what was needed without a structured process for budget approval or control of costs.
Those lazy days have gone and today Procurement & Vendor Management (PVM) teams need to be on top of things and very diligent, from having a complete transparency and overview of what contracts are in place, to know what the data is for, used & by which teams and of course how much is being spent.
In one sentence I made it all look so simple but in practise its far from that and on top of that, PVM teams still need to attend to BAU with new contracts & service issues, Vendor governance, budget control procedures, invoice control in some cases and PVM usually are the leaders in the area of Data Compliance in relation to all the data contracts for their firm.
“Procurement & Vendor Management (PVM) teams need to be on top of things and very diligent”
I may be biased but these people are the unsung heroes in many organisations because they fight fires and keep many things at arm’s length away that much of the management are not aware of and without this front line most investment firms could easily be paying twice the price for their data.
Yet, despite the best efforts of PVM teams, they are only treading water, at best trying to keep costs contained because the real difference to deal with the situation must be had at Boardroom level.
Decisions have to be rolled down to the Head Managers because the bottom-up approach is to ask for co-operation and that’s been tried many times and mostly ignored citing the need is greater than the cost.
Sara: What are some of the specific steps fund operators can take to deal with mounting costs?
For years firms have asked, argued and vented at Vendors and Exchanges to change their pricing models and fee hikes where even sometimes regulators have been asked to intervene citing unfair monopolies and abuse of power.
The growth and development of industry peer groups arose where one looked for harmonious environments to discuss and agree fair terms of engagement whilst there has also been a splattering of some groups who are more bold in their actions as they feel they are being ignored and bulldozed by what they feel is belligerent behaviour.
After years of witnessing all the various forms of engagement I would echo the sentiment from the ‘Circle of Influence’, if you want to bring about change then realise the only control you have is to change yourself.
Meaning don’t rely on others to change their behaviour or way of doing business but look at your own organisation. I hear often people say we are dictated to by monopolies but unless you are talking about exchanges, there isn’t actually a monopoly on most of the other market data providers.
“If you want to bring about change then realise the only control you have is to change yourself”
There are many types of terminal providers, news and research, index and credit agency providers.
If you choose to have all the top brands and take in two or three of the most popular sources for each specified category then it is your choice and that you must accept brand products come at a very high price.
Again, I often hear we cannot change our sources but then you need to accept that if you want to save money then achieve it through other areas in your company and not in the data category.
The alternative is to make some hard decisions, reduce terminals by sharing or looking for lower cost alternatives. Seek out upcoming and new entrants to the index arena or start charging customers if they want premier or custom benchmarks. Move from 3 to 2 Credit Rating agents and look to reduce your reliance on outsourced research.
“If you want to save money then achieve it through other areas in your company and not in the data category.“
If you are able to walk away from a vendor who you feel is not meeting your needs anymore price wise, know that the irony is, many times when you want to end the contract, only then do you have the power back. It is funny how many times I have heard then, these providers are prepared to negotiate.
Personally, if you have come to a decision to move away, stick to your guns because once you have resigned you will be back in the same position at the next renewal. Remember, a leopard never changes its spots!
Sara: Will costs continue to rise – and if so what steps can firms take to mitigate this?
It’s hard to predict the future with almost anything, for instance, who would have known just over a year ago that most of us would be working from home today.
However, many use hindsight and history for predictive outcomes and if you look at the recent past for the cost of market data costs, it’s almost inevitable fees won’t be going down, quite the opposite. We will continue to see the rapid rise in fees despite the fact that efficient and emerging AI technology actually decreases the cost of production.
We have seen in the past as Investment firms centralize more to become more organised, standardised and connected, data vendors have responded by charging more for the use of internal data distribution.
“If new outcomes are to be achieved, someone has to bite the bullet”
There are two side of the coin here and the vendors argue the more value you get from the data the more you pay but should you be penalised for just trying to be more smart in how you are organised.
This scenario will be played out again in the coming years because the emergence of the Corona Pandemic and national lockdowns forced on everyone means that the world is changing and the new way of working will almost certainly change too.
Remote working/Working from home will be the new normal and today that already brings issues about how should contracts be structured if the office will no longer be the main place of where work will be carried out as listed in contracts.
Terms & Conditions will have to be altered when they are based on location but who thinks this will mean costs will stay the same? Let’s just say nothing has changed but if new outcomes are to be achieved, someone has to bite the bullet.
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