Technology. The one that’s always consistent about it is that is it ever-changing.
Just ask Bill Murphy, Anduin’s newest Strategic Advisor. With over 25 years of experience in technology and the private markets, I decided to interview Murphy on how the role of the CTO has evolved over the years and learn about their impact in the private markets.
The CTO role is one of the largest and broadest roles in an organization. It has changed immensely in the last 20 years. The use of technology in every single industry is at the highest it's ever been, while also being the least it will ever be. As that continues, so will the acceleration of the importance of the CTO role.
The private markets have lagged as it relates to using technology, primarily because the scale of the challenges in the past hasn't been as great as for public markets. If you look back, the public markets started embracing digitization fully in the eighties and nineties. The market we think about today is all about technology. The New York Stock Exchange is a museum more than it is active, really a place to watch computers do their work.
The private markets are still a lot about relationships; however, it's the fastest-growing part of financial services. The influence of the private markets in the world is at an all-time high. With that comes scale along with operational and scale challenges.
Dealing with 1,000 investments is a lot different than dealing with 10.
Dealing with 10,000 investors is a lot different than dealing with 50.
Scale is why the CTO is gaining importance in the private markets over the last decade.
Over a decade ago, the CTO in private markets was the person who fixes BlackBerrys. Now there’s been a transformation where the CTO needs to be a real strategist to understand the business goals across every part of a complicated private markets firm, then select solutions that fit the needs of each use case while creating a cohesive infrastructure. The number one challenge that CTOs have is there's a lot of innovation across this ecosystem. If you really want true move-the-needle efficiency gains, you need to pull multiple solutions together and make them really sing as one.
CTOs and their firms are always looking for value. It’s easy to provide some value quickly by standing up a software or platform over here to solve a problem, like onboarding people more efficiently, then just exporting the results and using that. It's very seductive to say, let's get some quick wins because everybody wants them. Being agile like that creates a little bit of a monster that can cause sprawl and complexity. If you make a lot of agile decisions without a big strategy in mind, it doesn't really make the firm as effective as it should be.
What you need to start with is a foundational view focused on the pillars of your environment. Then figure out how is the data going to speak between each of those pillars in a way where everybody can get the most value. For example, your onboarding solution is most effective when it's tied directly to your ledger, your portal, your CRM system, and your data warehouse. Then everybody is operating on a single cohesive set of data throughout your organization, regardless of use case.
As the CTO, my number one focus is “how am I going to facilitate that exchange of data?” Then every time I pick a new solution or replace a current solution, as part of my evaluation I need to think “will it be able to plug in and operate with the other systems in my strategy in a way where I can maximize the value from any one of them and from them working together?”
Connective tissue is the most important part of the technology environment today.
Connective tissue is the most important part of the technology environment today. Especially with SaaS taking off, firms may have little to no physical machines, but that doesn't mean there’s nothing to manage. All the data moving between those solutions needs to be strategically managed in a way that feels very connected for users. With a good data strategy, whatever I do with the CRM system, shows up in my process management for my accountants, which shows up for my legal team, which shows up for my front-end investors, so that everybody is informed all the time.
Yes, it is different. When I joined Blackstone in 2011, I was psyched because technology was in need of a lot more attention, but not an overwhelming, unmanageable problem due to the relative simplicity of private markets at the time. First, you need to lay everything out and understand it. Then figure out how to simplify, extract the most value, and make everything talk to each other. For smaller firms, you're going at it with even less so you really have the ability to grow perfectly and set something up that you're really proud of and that can be easily managed. As the firm grows, the strategy can grow inside a more controllable text stack.
The good news is for the firms that have been around 20 to 30 years, it's still not inconceivable to get a handle on all that legacy technology and upgrade to something that you feel very good about.
As a CTO, it’s crucial to aspire to create something that’s nimble and gives the business optionality. The goal is to never slow anything down with operations and private markets. You want to enable creativity from your management team and your investors, then help measure the risk, manage operations, and support their growth through this journey. A large part of Blackstone's growth was in new strategies that we adopted over the period of time that I was there. I was really happy we could build the technology stack that enabled that growth without having to build all new systems every time we launched a new business or creative idea.
Who knows what the business is going to come up with tomorrow, but let's build the technology stack in a way that's more broad thinking and can benefit us down the road.
For example, Google’s MapReduce algorithm enables you to run processes across many machines and is decades old. You could argue that the way they thought about taking needs and spawning them across many machines was the biggest enabler of them being a trillion-dollar company, more than any of their specific products. As the CTO of private markets, you gotta think of how to create those enablers that can adapt to enable whatever product or business idea you want to distribute next.
There are two parts to every technology budget: 1. What do we need to run the firm today? 2. What are we investing in for the future?
The biggest mistake firms make is they believe that unless those future investments can be capitalized on their financial statement, then it's not about the future, but almost nothing can be capitalized now because everything is iterative.
Technology budgets are not just an expense line to run the firm.
They are mostly an investment line.
Technology budgets are not just an expense line to run the firm. They are mostly an investment line, which is incredibly important to be managed as such because every dollar you invest in a new technology solution that pays off, will pay off all across your firm.
For example, if you invest in a new onboarding solution, your legal fees related to onboarding are probably going to go down. The CEO and CFO may not see that, so it’s important to quantify the effects of technology, so it can influence budgeting in the right way. When you take into consideration the value created by this new solution is so much more if you quantify how it helped legal, fundraising, deal teams, etc., then you can defend how the technology budget should grow 300% rather than just 2% based on overall firm growth.
This comes back to my connective tissue point from earlier.
The right answer is to mostly buy.
It is difficult to compete with all the solutions being offered in the market, especially when you look at the economics of hiring a team and building a whole custom suite.
The key thing to think about here is the decision-making on which solution to buy. That connective tissue requirement should be a massive litmus test for any solution you're interested in buying. First, lay out your overall strategy, then figure out which solutions you can buy to fit in, but with the understanding that you are going to have to build some connectivity between the crevices of those solutions. It would be great if everything in the marketplace was built in like Legos where they can all just snap together, but no solution is perfect in terms of fitting together.
The CTO has to ensure enough time is dedicated to connect the solutions together. Oftentimes, everyone is in a rush to get that immediate value that they throw out the longer-term setup and wind up configuring something the wrong way, leading to real problems later on.
The CTO becomes the center that’s responsible for thinking about the shared needs of the whole firm so all the technology can operate together and provide better reporting and overall experiences.
Well, it’s sort of funny because success might be the number one inhibitor. As long as we're doing well, is there really a need to change or become more efficient?
Success might be the number one inhibitor. As long as we're doing well, is there really a need to change or become more efficient?
Fear and disruption are incredible motivators for change. It's like when you feel good, everything is great, but maybe you put on a little weight. You go to the doctor and their tests show this extra weight is causing a much higher likelihood of dying. Suddenly you go home and you get in shape. Right now, the private markets in general have been growing great and have outperformed the public markets. The cost of that is they have become a bit complacent and evolved a little less than they would have if it was an absolute crisis where everybody has to be as efficient as possible. Digitization would have also probably been a higher priority.
As the market is becoming tougher, private market firms may look to make their processes more efficient through technology in the digital space, but this may also happen with lower budgets. This idea is similar to fixing the roof while the sun is shining. Everyone wants to go out and enjoy the beautiful weather rather than put new shingles up. Then it starts raining and there's a leak in your living room, so you really need that new roof, but unfortunately, it's much harder to replace a roof while the rain is coming down. It’s always better to plan ahead and be prepared.
A huge thanks to Bill Murphy for his time and for sharing his thoughts on CTOs in the private markets!