All firms have two engines of productivity that are intimately intertwined – human capital and technology capital. How a firm’s technology capital is utilized by its employees impacts the performance of its workflows, business functions, and the firm as a whole. This impact is defined as return on technology investment.
How to Measure Return on Technology Investment
To establish a formula for calculating return on technology investment, Alphacution Research Conservatory developed individual models of the technology spending of 60 of the largest banks to learn the impact of their investment over an 11-year period. Each model was based on publicly available financial and operational data harvested from annual reports. The individual models were aggregated into a segment composite model and normalized for scale using headcount.
Through this model, Alphacution was able to define the difference between revenue per employee (RPE) and total cost of ownership (TCO) per employee (TPE) as the return on technology spending.
Calculating return on technology investment:
This framework allowed Alphacution to quantify leaders and laggards among a community of key ecosystem participants.
For investment managers, return on technology spend is calculated similarly; however, relying on the same model as banks, brokers, or exchanges does not provide the necessary context. Assets under management (AUM) per employee provides managers reliable context for measuring return on technology investment as it is indicative of the nature of one’s trading strategy, and knowing one’s trading genre yields insights into inherent levels of automation and potential for various levels of technical leverage.
Calculating return on technology investment for investment managers:
Why Measure Return on Technology Investment?
Although investment management firms – hedge funds in particular – are unique in that they are typically very private enterprises, which makes establishing a benchmark or conducting comparisons to industry peers nearly impossible, measuring and tracking return on technology investment over time can provide valuable insight for firms as they make decisions about budgeting, resource allocation, utilization, and support.
- Budgeting: Establishing return on technology spending provides valuable insight into how resources are currently allocated and gives firms a more comprehensive understanding of technology budgeting requirements relative to trading strategy design, performance expectations, and AUM goals and gives guidance for future allocations.
- Degree of technological utilization: It can also reveal how well existing technology investments are being utilized. Do they require further investment in onboarding or training? Could solutions be consolidated to increase returns?
- Technology investment decisions: Being able to articulate a strong return on technology investment can give firms the confidence they need to invest in additional tools or capabilities that will be of value to them. And in today’s era of the investment ecosystem, this doesn’t necessarily mean having to incur the cost or hassle of onboarding additional vendors but, instead, extending the capabilities of existing platforms, further enhancing return on technology investment.
On the digital stage, asset managers can’t expect to remain competitive for long without this kind of navigational intelligence, and today’s environment has led to increased scrutiny by investors of how investment managers allocate resources. Knowing a firm takes a quantitative and methodical approach to technology spending can provide peace of mind for investors in their due diligence processes and throughout their relationships with the firm.
Return on Technology Spending: Enhancing Performance and Optimizing Cost Structures
Return on technology spending over time can be a great directional indicator for firms. Firms can use this insight to make iterative enhancements to technology investment and utilization, incrementally enhancing performance and optimizing cost structures in order to run with more efficiency, agility, and integrity than the competition.
If you’re looking to enhance your return on technology spending by switching investment management systems, check out this ebook for a look at the considerations you should be making.