Evolving fund technology can streamline and simplify every step of the investment process. But BlackBerry networks, CRM software and front office tracking systems don't maintain themselves ? they require dedicated people for maintenance, expansion and testing.
As technology plays a more central role at the private equity firm, IT professionals have a more critical role in the back office of every firm. Therefore, building an IT team has become a major challenge for firms large and small, and it is a challenge that often falls to the CFO or COO.
Managers face several sets of decisions when building their firm's IT team. The first of these is deciding what functions to keep in-house and what to outsource. The last decade has seen an overwhelming trend toward the latter, says Shawn Banerji of headhunter Russell Reynolds Associates. Banerji works in the Information Officers and the Business and Professorial Services Practices within the firm's technology division.
In the 1980s and 1990s financial services firms almost exclusively used in-house tech professionals. But in the run-up to the dreaded ?Y2K? event, when firms in every sector needed to remediate all of their code, they found there weren't enough programmers in the US who knew old languages like COBAL. Firms had to go overseas, largely to India, and this movement has only accelerated since.
For private equity, outsourcing has leveled the playing field somewhat. Small firms historically have not wanted to spend a lot of money on developing a large, complex IT function, Banerji says. For these firms, using third party vendors allows them more flexibility in terms of head count, staff and initial capital outlay, because they don't have to invest in all the hardware and associated integration necessary to set up in-house IT capabilities.
?The beauty of it is this gives them the same tools, the same arrows in the proverbial quiver, that historically only a large firm might have been able to afford,? he says.
But recently outsourcing has become a function of quality as well as cost. Large firms as well as small ones are turning to third party vendors simply because these vendors are best in class for the services they provide, and the firms themselves would be unable to reach the same level of sophistication or efficiency independently.
On the other hand, some firms still find that their needs are so unique and complex that they can only be met with custom-designed solutions, Banerji says. And certain responsibilities are better handled by a professional who is solely dedicated to your firm, and understands the culture of your firm and the nature of the industry.
In practice most firms use a combination of in-house professionals and third party partners. What to look for in each category depends on how their roles are defined, which differs considerably from firm to firm.
Firms tend to hire third parties for jobs that require IT personnel with a highly specific skill set, or that would have prohibitively high start-up costs if the firm decided to build them internally from scratch. When a firm makes the decision to work with a third party, they are looking for vendors who are proven market leaders, Banerji says. Firms are also giving increasing preference to vendors who have an understanding of the private equity industry.
?There's a symbiosis in this ecosystem,? Banerji says. ?The front office can't really operate without an effective back office and vice versa, so what we're seeing now is that vendors have to understand the work flow, the governance and compliance mechanisms. They need to be really seamless in terms of how they work with their partners.?
Although firms are often driven to find a third party provider because of prohibitive startup costs for a project, the ?give us your mess for less? mindset is rapidly fading. Most outsourcing horror stories stem from a situation where a firm hired a vendor at the lowest possible price ? a point where the vendor can't afford to staff the project properly. Barnerji calls this a ?race to the bottom.?
Meanwhile, firms are looking for in-house professionals for more innovative functions like application development, and to lesser degree for infrastructure development and system architecture. Typically firms look for people with experience in financial services firms, but this is not usually a requirement. More important is the ability to understand the needs of a ?high-value, transaction processing, mission-critical environment,? Banerji says.
When searching for a chief information officer, firms look for professionals whose business backgrounds are just as strong as their technology backgrounds. These people tend to have a broader oversight role, making sure that the systems and technology in place serve the firm's business needs.
The Riverside Company
Benefitting from an outside perspective
Global mid-market buyout firm The Riverside Company has two high level in-house professionals who manage the firm's IT functions, and also has a longstanding partnership with a Cleveland-based vendor, Dynamic Data. Director of Organizational Development Peggy Roberts oversees IT operations from a management perspective, alongside her other responsibilities.
Under her, Andrew Krejsa, a business intelligence analyst, is solely dedicated to IT. He deals with strategic issues such as choosing software packages, which Roberts says involve knowledge capital that she prefers to keep internal. He also manages the firm's internal databases, working on data extraction for financial modeling and other ad-hoc initiatives. Krejsa has a background in software development and project management ? he came to Riverside from fi- nance and tax software company Intuit, where he had worked with some other financial services clients before Riverside. Although he had no background in private equity, he had worked with some real estate investment firms, and so he understood the basics of Riverside's business, Roberts says.
?We were really focused on someone who could bridge the gap between the technology and the business needs of our firm,? Roberts says. ?I needed someone who was really skilled at running a process, choosing between different software providers, and then helping our team define requirements and go through the project management and implementation process.?
For any needs related to the actual infrastructure or equipment, Riverside goes to Dynamic Data, whom the firm has worked with for nearly eight years. The vendor has US offices in Cleveland, Ohio and New York. One professional at each office is on-call for Riverside full time, handling issues such as desktop support, hardware and software maintenance and server configuration.
When Riverside began working with Dynamic Data, the firm was looking for a vendor that was reliable and responsive, and had experience with other middle market financial services clients. Riverside was also looking for someone that could scale with Riverside's business.
Dynamic Data fulfilled the first set of requirements admirably, Roberts says. The vendor was able to suggest infrastructure solutions appropriate for the size and nature of Riverside's business, and is available at all hours of the day.
?They are extremely responsive,? Roberts says. ?They have the same 24-7 mentality that we do, and they're very conscious of our needs as far as connectivity and productivity on the road.?
As for the second requirement, Dynamic Data has brought on additional staff to service Riverside's satellite locations, particularly in Asia. Although Riverside has relationships with vendors on the ground abroad for emergency situations, Dynamic Data regularly sends its staff to Riverside's overseas offices.
Riverside's partnership with Dynamic Data is not only cost-effective and efficient, but it keeps Riverside plugged into innovations in the market, Roberts says.
?We spend a lot of money on IT, and could certainly afford to bring in some internal resources,? she says. ?But there's a real benefit to these guys having exposure to other things going on in the market beyond what they're doing for Riverside.?
American Capital Strategies
Keeping it in the family
US listed firm American Capital Strategies runs a significantly larger in-house IT team, and outsources only a few functions. Led by Jeannette Cummins, the team of around 40 is divided into three groups. The infrastructure team handles the firm's data center and network, and all of the related technical operations. The applications team deals with application delivery and maintenance for both proprietary and off-the-shelf packages. Finally, the help desk deals with hardware problems ? printers, laptops, desktops, monitors and the like ? as well as basic problem resolution for things like email and web browsers.
The applications team is the largest, employing around 20 people. American Capital has developed several proprietary programs, the largest of which is a securities accounting system. The help desk is staffed with another dozen employees, and the infrastructure team employs five.
When hiring for any of these groups, American Capital prefers but does not require that employees have a financial services background, and looks for people who've worked with the particular technologies the firm uses. But the most important qualities American Capital looks for are good judgment and flexibility, Cummins says.
?In larger organizations there might be ten people assigned to a job that we have one person doing,? Cummins says. ?So you need to be able to be flexible, and to be able to take on additional responsibilities as the firm grows.?
American Capital has a number of headhunters it works with to identify new hires for the IT team, but also relies heavily on referrals from existing employees. Salaries for these professionals can range anywhere from $55,000 for someone starting out on the help desk up to $300,000 for a senior level employee.
Cummins says she hopes to grow the staff across the board by 10 percent in the next 12 months. At the same time though, she says American Capital began an initiative around two months ago to begin outsourcing more functions. The decision is not motivated by a desire to cut down on internal resources devoted to IT, but rather to supplement the internal team's skill sets for more complex projects.
?We find that if we have an outsourced arrangement, we can ask for different skill sets over the life of the project, or as our business needs change,? Cummins says.