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Platform Costs

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:

• Fixed charges from vendor providers (market data, reference data, fund administrator, execution venues) become baseline expenses. 

• Variable charges for associated processes can be invoiced as value-added service fees. 

• Monthly maintenance charges can be added to customer services, especially for connections where a file may need to be sent or received.

• Customized procedures programming, at an hourly engineer rate (ie- $250/hour, likely expected minimum statement of work at $2,500) with potential for more than bespoke usage.

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 technology 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:

• trade analytics,

• managed services operations, 

• custom function development, 

• variable support requirements (how often the help desk is needed for various inquiries), or 

• other contract value features. 

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

• Transmission Connections (Brokers ~$450/month)

• File Management (data integration ~$1,000/month)

• Portfolio Value Reporting (historical reference in file format ~$100/month)

• Portfolio Operations Functions (clearing and settlement files ~$100/month)

• Custody Operations (movement of assets for investors and trading purposes ~$100/month)

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.

• A vendor may charge a small 3-person hedge fund $500 per month per user due to low monthly maintenance in receiving a pricing file from a market data provider, receiving a position file from the fund administrator, receiving reference data modifications from an analytics provider, and requiring little to no human support for platform function operations. 

• A vendor may charge a mid-size 10-person investment manager $1,500 per month per user due to greater interaction required both daily and at month-end, receiving some files may require additional transformation, human error correction, or a manual file merge before integration to the platform's data warehouse, ongoing bespoke vendor function modifications may require additional checks, and historical transmission issues require confirmation. 

• A vendor may charge an annual fee of $1,000,000 for a segment of an asset manager's portfolio (e.g., high-yield strategies) due to a package deal for programming resources to modify routines as strategies change due to market conditions or firm directives, monthly user charges may vary between $500 and $2,500 based on role (e.g., operations associate, portfolio manager, or execution trader). It's significant to note the number of large customers a vendor has that may take focus off core business activites diminishing the services provided to the larger user base.