This month saw Nucleus acquire Genpact Wealth Management in a move designed to “increase control over its processes, service offering and product development”. Bringing administration in-house is quite a big step for a platform which has been a vocal advocate of business process outsourcing (BPO) over the years. In 2018, I chaired a panel session debate between Nucleus, Novia and Parmenion to discuss just how much of an investment platform’s operation it made sense to hang onto. Nucleus MD, David Ferguson, was firmly positioned as the BPO champion, Novia’s Bill Vasilieff argued for buying the IT but using it in-house, while Parmenion CEO, Martin Jennings, was the self-build evangelist. In reality, their positions were never as starkly contrasting as I painted them but there were clear differences, so what has changed?
No doubt there are some very specific considerations behind this Nucleus acquisition, but could the move be part of a broader sea change in the platform sector? Yesterday I read another unrelated news story about a Japanese company that commissioned a complete teardown of a Tesla Model 3 and discovered it was at least 6 years ahead of its competition. The reason was the computer control unit sat at the heart of the Tesla and known as Hardware 3. This unit was designed, engineered and manufactured by Tesla themselves and it manages the full suite of electronics including the famous self-driving feature. Every other manufacturer requires at least 20 different control units each responsible for managing a subset of Hardware 3’s functions and all needing to be coordinated. No wonder Tesla is so far ahead.
Interestingly, according to the article, Tesla’s DIY approach was driven less by technical philosophy and more by commercial necessity. As a high-risk start-up business, Tesla found it difficult to get a credit line to supply standard components let alone persuade manufacturers to develop new ones for them. So, they were forced to build them from scratch and now competitors are struggling to catch up.
A similar story played out in the platform space 20 years ago as both Hargreaves Lansdown and Transact boot-strapped their businesses with DIY technology. As first movers in their respective markets, with little in the way of off-the-shelf software available at the time, both firms have gone on to post some of the most impressive results in the industry. Nowadays it is perfectly possible to rent commercial software systems to manage a platform or to pay a third-party outsourcer to administer one and several recent entrants to the sector have chosen this route. However, very few organisations have made anything like the levels of profit achieved by HL or Transact via this route despite some very substantial investments.
It is perhaps not surprising, therefore, that the in-house route has been attracting more attention recently. Wealthtime and SECCL were both snapped up last year having built platforms on their own technology. And now we are seeing more start-ups, such as Adalpha and Fundment, following in those self-build footsteps. It’s an interesting development, but what happened to that phase the motor industry went through of developing complex supply chains of specialised components that could be plugged together to produce vehicles faster and cheaper? After all, even Tesla don’t manufacture their own brakes or tyres.
The root cause is a lack of standards or specification. Tesla can put Michelin Pilot Sport 4 235/45 ZR18 98Y XL tyres on a Model 3 without drama because they know the tyre will fit and can cope with the speeds and forces the car generates. In the platform sector, that level of precision around what any given component should do and within what tolerances is typically absent. The uncertainty and ambiguity this creates is what leads to the huge project overruns we see on re-platforming projects. Attempting to fit together a jumble of jigsaw pieces that change shape as you move them and without a clear picture on the lid is almost impossible.
Nevertheless, there are some platform components where clear standards have been agreed and systems created which can be safely fitted to any platform chassis and even interchanged if necessary. Portfolio transfers are the obvious example given that my company (Altus) and others provide software to manage them. Our system, ATG, has been fitted by several of the platforms mentioned above as well as many more across the sector with implementations completed in as little as a few weeks. It’s a similar tale for other well defined and standardised services such as address validation, BACS payments and fund trading.
So, whilst there may be a dwindling market for chassis manufacturers, there is still plenty of scope to supply standard components and services. The key is to make sure they can be fitted and changed quickly without the need for a huge team of mechanics.