How to Calculate the TCO of Your Investment Management Solution

TCO (Total Cost of Ownership) is the method for evaluating the direct and indirect costs of a product to quantify its real value. TCO helps with strategic decision-making by providing better economic predictability before making an investment or purchase. 

The concept of TCO originated in the early 19th century, when engineers tried to assess the effectiveness of their cannons through an analysis of their service life and repair requirements.

Since then, TCO has been used by companies to understand production costs more accurately to determine whether or not the acquisition of a new tool makes sense for their business. In this article we will focus on the importance of calculating TCO as an investment manager, and how to do it. 

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The importance of knowing the TCO for an investment management solution

Before you buy a house, you don’t just view houses in relation to their price. You look at a variety of factors, such as location, energy efficiency, structural soundness, maintenance costs, and whether it meets your family’s future needs.

When looking for an investment management solution, the same methodology applies. To get the most out of your technology purchase, look beyond the price and core features for the hidden costs that add up over the lifecycle of the solution.

Rising costs and investor demands have led to a greater focus on how resources are allocated within investment firms and finding the optimal balance between cost and value has become more important than ever. When it comes to an investment management tool, calculating the TCO is crucial to determining its long-term value and feasibility.

There is a lack of transparency from some investment management solution providers

When evaluating different investment technology providers, there is a general lack of transparency regarding costs, which can be frustrating and confusing for an investment manager.

Much of this confusion stems from the fact that the price quoted on a vendor’s proposal is almost never the TCO of the solution. Regretting an investment management solution is not uncommon for investment management companies that are hit with unexpected costs that push them over their budget expectations.

The devil is in the details

The source of the price gap between a solution’s proposal and its total cost of ownership comes from hidden costs, which are not disclosed upfront, and can have a significant impact on the total cost over time.

However, there may also be ‘hidden values’ that provide compounded benefits over time without any unpleasant cost surprises.

Hidden costs and hidden values need to be considered to accurately compare vendors and understand which solution offers the best value.

How to calculate the TCO of your investment management solution

We have developed a simple way of calculating the TCO of an investment management solution to help you discover both the true total value and the true total cost.

Basic requirements – hidden costs + hidden values = TCO 

Basic business requirements

Core business requirements are the capabilities you expect from any investment management software provider. They should be the minimum set of features that vendors offer to meet your most basic business needs. Any potential candidate who cannot meet these requirements should be ruled out early in the selection process.

The core functional requirements for investment management technology solutions may include the following:

• Data Management
• Portfolio Management
• Order Management
• Risk & Performance Management
• Pre- & Post-trade compliance checks
• Order Reconciliation
• Fees & Retrocessions Management
• NAV Control
• Accounting
• Cash Management
• Reporting
• Connectivity and openness
• Flexibility and scalability

Hidden costs

Hidden costs are not initially indicated in a supplier’s price proposal but accumulate throughout the lifetime of the solution in your organisation.

Examples of hidden costs include:

• Maintenance and upgrade costs
• New release costs
• Market data costs
• Support and hotline costs
• IT infrastructure costs
• License fees
• Customisation or integration costs
• Cost of changing the system if it does not meet your needs

Hidden values

The ‘hidden values’ of a solution add value either upfront or as your business grows but are often overlooked when assessing the total cost of ownership of investment management software.

Examples of hidden values include:

• R&D commitments for continuous product improvement
• A service model that is broad enough and scalable enough to meet the needs of your staff
• The breadth of services available to you as you grow, including managed and strategic services
• A platform approach that leverages technology and best process practices to deliver maximum value
• Outsourced Trading Desk (OTD) integration
• Access to third-party applications and solutions
• Industry experience and reputation

The TCO of an investment management solution

By assessing the TCO of a solution, rather than simply comparing upfront costs, you can more accurately compare vendors and determine which solution will deliver the most value to your business over the long term.

Clearwater | Flexible solutions and personal service that delivers long-term value

Clearwater Analytics (NYSE: CWAN), a global, industry-leading SaaS solution, automates the entire investment lifecycle. With a single instance, multi-tenant architecture, Clearwater offers award-winning investment portfolio planning, performance reporting, data aggregation, reconciliation, accounting, compliance, risk, and order management. Each day, leading insurers, asset managers, corporations, and governments use Clearwater’s trusted data to drive efficient, scalable investing on more than $6.4 trillion in assets spanning traditional and alternative asset types.

To learn more about the long-term value of Clearwater Analytics, talk to an expert today.