Head to head: Should platforms use their own technology or outsource?
Hugo Thorman and David Ferguson offer two contrasting views on platform business strategy.
Source: Michael Walter/Troika
Platforms are accepted as an essential, albeit not exclusive, part of the future for long-term saving. At the same time, it is evident that platforms will have to work hard to justify the already low charge they levy for complex administration. Those charges have to cover the costs of administration staff and the IT to make it all happen.
There is also widespread acceptance that the route to lower administration cost is increased automation. Greater automation requires more IT functionality and the quality of that functionality depends on the quality of specification, design and development. Excellence in these areas emanates from experience and short lines of communication, which are best provided by a platform that owns its technology.
Ascentric/IFDL is such a platform and it means we can offer stock-broking and fund supermarket functionality on one platform.
The speed of market development and specifically the need to provide access for clients through advised, direct and employer platforms, with the ability to change channel, puts such a platform at an advantage. A common challenge to this model is that the costs are huge and it is better to spread those costs across several user platforms. Experience does not support this.
The desire for a tailored version of the technology and a need for the technology provider to maximise charges and profit shows those sharing an IT platform rarely, if ever, spend less than one who owns it. The fact that Ascentric/IFDL is profitable and owns its own IT while users of one particular software provider are not, in spite of many more assets under administration, emphasises the point.
The advantage of the latter model of having only one client, one code base to maintain and clarity of specification is compelling. The argument applies to the outsourcing of administration. Again, this removes control from the proposition and vital margin. If you outsource administration and technology, what are you left with? A speaker at the recent Platforum Conference forecast platform numbers will fall to 10 or fewer.
Which model will dominate? The US seems to suggest that a model where the whole value chain is owned by one provider and used in many different channels through many distributors seems to be the common attribute of the survivors.
Hugo Thorman, managing director, Ascentric
There are many reasons why the platform market is an interesting place to be but there is one key topic that goes largely undiscussed - the various business models being run in today’s market.
Alongside key elements such as ownership and sales strategy (distribution to legacy thinkers), there are diverse views on in/outsourcing administration and technology.
Not to mention the interesting question of funding for what remains a largely loss-making sector. Despite all the noise and the wild, vanity-fuelled (and misleading) claims about deep pockets, the eventual winners will surely be those who design the best operating models and then execute excellently?
After all, admired, well designed, profitable businesses have never feared raising capital to fund more rapid growth whereas wealthy investors have been quick to shun dismal, loss-making operations. Indeed, it is often claimed that the wealthiest investors have done more of the latter than the former.
The Nucleus model has always been built on owning every detail of the customer experience and then outsourcing those components that will allow us to create better outcomes or generate greater efficiency.
This generally extends to areas where we believe massive scale is a benefit and/or where component activities have already been heavily commoditised. There are few businesses that are successful in the modern day while doing everything.
If one takes the legacy life company model as a reference point and benchmarks against, say, how the iPad is built, one would completely reject in-sourcing and move almost everything outside.
Operating as we do allows us to be much less capital-intensive and (perhaps counter-intuitively) responsive to change as we know our partners are required to deliver for all of their clients and not just us. Inevitably, there have been instances where we have screwed up or been slow to respond but, in general, we have been able to develop market-leading functionality and market-leading service with our more collaborative model.
Organisations claiming to be great at everything make me suspicious. Sure, some get it right. At least for a while. Transact has built a great end-to-end business and consistently delivers great service but there are few others in the platform or life sector that can make a similar claim.
We will stick with outsourcing commodity, manufacturing-type elements. If it’s good enough for Apple, it’s most certainly good enough for Nucleus.
David Ferguson, managing director, Nucleus