September 2013: Cheap is Expensive

Afrikans might not be the easiest language on the ear, but most who are familiar with it would agree that it is beautifully onomatopoeic and graphically expressive. I remember being introduced to Afrikaans proverbs for the first time at school. One such proverb has stuck with me over the years, a truism that I suspect exists in one form or another in every modern language: goedkoop is duurkoop. Translated literally into English it means, "cheap is expensive." The English version of that proverb is, "buy cheap, buy twice," a truism that most native English speakers will know only too well.
This proverb popped into my head recently when I met up with an old school friend, who, until recently, had been working in the IT team at a London-based medium-sized traditional asset manager. We chatted about the tribulations facing technology staff in the wake of the 2008 financial crisis, the extent to which it impacted firms' willingness to spend on new technologies, and firms' proclivity for cutting all but the most essential services. This particular firm fared especially badly in the wake of the crisis, freezing a number of its most profitable funds and shedding staff hand over fist. Its head of operations, who also doubled up as the firm's CIO, made the disastrous decision to rip and replace its technology heart and lungs ─ its portfolio management/order management system and its entire back-office platform ─ a critical decision at the best of times, and one, my friend explained, that was predicated purely on price.
As with most knee-jerk reactions, the anticipated benefits failed to materialize, as the new infrastructure took well over a year to bed down, while the firm's end-users ─ the portfolio managers, traders and back-office staff ─ were up in arms due to sub-par performance and functionality. So the firm did an about turn-another knee-jerk reaction, although this one was borne out of necessity-and re-implemented the original system it had been using at the height of the financial crisis, again, another lengthy process that overran in terms of time and budget. Then, as if things couldn't get any worse, the head of operations, along with the core of his technology team, left for pastures greener, leaving the firm woefully understaffed in terms of headcount, experience and expertise, at precisely the time when the firm was at its most vulnerable. This extreme example of scandalously poor decision-making and disloyalty is by no means unique across the capital markets landscape. What I find astonishing, however, is the extent to which mistakes of the past are repeated in our industry ─ especially when it comes to system selection ─-and how that level of incompetence can be overlooked by new employers as technology heads apply to work at new firms. Cheap, as it turns out, is often prohibitively expensive.

Its head of operations, who also doubled up as the firm's CIO, made the disastrous decision to rip and replace its technology heart and lungs ─ its portfolio management/order management system and its entire back-office platform ─ a critical decision at the best of times, and one, my friend explained, that was predicated purely on price.