In this blog article, Simon Cornwell, co-founder of Vermilion Software, explains why asset managers should seek alternatives to simply securing a basement price for all their systems.
It was interesting to read Citisoft’s recent blog concerning the need for fair and equitable prices between investment management firms and software vendors http://bit.ly/1J8JEIR.
Steve Young’s description of how an asset management firm executive ‘had pushed the vendor to the lowest point he believed they would get to, and that he thought that they would not be making much, if any, money from this deal’ is an all-too-familiar tale. The financial crisis strengthened the position of the Procurement Department in the selection and negotiation process and, in my opinion, many investment managers are unfortunately still locked in this mind-set of ‘Let’s nail the vendor to the wall’. Such ‘successful negotiations’ often come at a price.
As Young quite rightly points out: ‘Experience has shown that any deal where the vendor is not making a profit will in almost every case lead to delayed implementation timeframes, increased cost for all parties and often a failed or compromised final project.’ As the markets continue to thrive and spend on investment managers’ technology stacks increases, the best quality implementation resources will become a rare commodity. If the vendor is struggling to break even on the licensing fees, it will inevitably need to trim its costs elsewhere on the project.
It is also true to say that we, as vendors must take some responsibility for this situation. ‘Vendors often over-sell’ asserts Young, and I think that there probably isn’t a financial software firm in the land that hasn’t, at some point in time, been guilty of this misdemeanour. Unrealistic implementation timeframes may help win a deal but, when it goes wrong, vendors will find that the investment management community is an uncomfortably small world – one where the word gets round very rapidly.
Rather than seeking a basement price that will come back to haunt them, investment managers should consider asking for a Proof of Concept (PoC). The risks and rewards can be shared in this way, with a successful PoC being compensated with a fair price that secures a profit for the vendor, the best resources for the client and a fruitful project for everyone.
As Young concludes: ‘…the ‘best price’ makes money and success for all parties’.