Outsourcing any non-core function is the norm in small businesses, with IT being one of the most frequent areas to focus on. The reason being that is would be very costly and time-consuming to do everything in-house due to the small scale of the organisation.
This is particularly true with traditional financial firms such as fund managers, wealth managers, private equity or insurance. However, they do present an added dimension in that they are very information-intensive businesses and subject to tight regulations. They need the latest technology delivered to the highest standards without operational risk. If these companies do focus on their IT internally it’s normally only the areas which are bespoke and unique such as software development and data.
These firms, therefore, look to work with a managed service provider (MSP) to outsource as much of their IT as possible, but as the business grows, the question that often gets asked…
….. Do I need a Chief Technology Officer (CTO)?
Here we provide 6 considerations to help clients respond to this challenge and help reach their growth potential.
Firstly, what is a CTO?
A CTO is typically a senior executive responsible for the technology strategy and technical operations of an organisation. This will also often include other areas such as innovation, data management, cybersecurity, vendor management, resource allocation and general leadership. Within an investment management firm, the purpose of a CTO is to ensure the technology is aligned with the organisation’s investment strategy and compliance regime and support the overall business objectives.
What are the main factors to consider when deciding if you need a CTO?
1. Is your organisation increasing in size and complexity?
This is an obvious starting point. In the modern world, businesses can be founded without the need for any external IT support. The growth in cloud services means firms can gain access to cloud services (like Microsoft 365) with no set-up costs or risks. The challenge, however, comes as an organisation grows and they start to hire staff who in turn need IT advice and support, they look to become regulated which demands a clearly documented technology architecture and security controls, and more general IT complexity which can become a distraction from the primary business purpose. Using an MSP is an effective solution, but if the organisation becomes large or has a complex technology infrastructure, outsourcing your IT may not be enough. In this case, you may still need a CTO to provide technical leadership and vision, drive innovation, and ensure your technology strategy aligns with your overall business strategy.
2. What is the role and extent of technology across the business?
IT is now not just a critical part of every business but is fundamental to how business is conducted, in particular with digital channels. The role of technology within the business and how it is positioned at a senior agenda clearly mandates the level of internal leadership needed, and in turn the need for a CTO. The driving factor is normally the amount of bespoke or differentiated technology which a business is planning to use within its own business model and services offered to clients. A high level of bespoke or “secret sauce” being developed will often need the specialist skills of a CTO, however, if a firm is not doing anything dramatically different from other firms, and there is also a good number of “off the shelf” solutions serving that market, then the need for a CTO will be reduced.
3. Is the MSP an industry specialist?
MSPs often go to market, not just as providers of an IT service which enables their clients to focus on their core business, but also as a “partner” which can provide ongoing advice and help you align IT with your specific business goals. Many firms, therefore, offer a level of “virtual CTO” either implicitly as part of their core service or in addition to the services provided. In practice, however, this is hard to achieve if the MSP is not an expert in your industry and type of business. Many MSPs are generalists and therefore don’t have the focus to understand the required level of detail that a CTO would. Of course, there are other consultancies or specific CTO firms out there that just offer this.
4. Do you have the right combination of IT skills and leadership in the business?
Regardless of whether your IT is outsourced, someone internally needs to be accountable for it. For example, in a small fund management firm with less than 50 users, this can typically be a Head of Operations, COO or CFO. They are also often supported by a person who is very strong at using technology such as data analytics or has developed some end-user applications without being an IT professional.
Whilst the core IT service is outsourced, the need to align the requirements of the business to the right technology strategy and associated vendors is down to these leaders, and the ability to avoid needing a CTO is often driven by the skill and ability of these nominated IT owners. They don’t need to be IT experts, but should understand all the core concepts, have a genuine interest in technology, understand the landscape of third-party providers and are committed to formalising their IT strategy. This is a significant factor in the timing around when a business ultimately needs to start looking for a CTO.
In our experience, firms can reach quite a significant size with quite demanding technology needs, but with the right internal “accountable” person combined with the right MSP, the CTO role is not a priority.
5. What do your clients expect?
This factor can often be overlooked by many financial services firms. It’s important to appreciate what clients expect. If for example, they are a reasonable size investment firm, their clients may expect that given the size of funds under management they should have people in all key positions, and technology is included with that. This can in turn not just keep the client comfortable but also attract more investment. Increasingly, the CTO is also responsible for cyber security in a small firm, and how it is managed is a point of focus and interest for clients.
6. Do your peers have a CTO?
An important exercise is to look at the most similar firms operating within your space. For example, when looking across our own financial services client base, specifically at smaller boutique asset management firms (<30 users), we estimate that less than 10% have a CTO. In contrast to this, 40% of similar-sized hedge funds in our client portfolio do have a CTO role. This is in direct response to the IT complexity and an increasing amount of trading and technology in a hedge fund to create their alpha returns (e.g. systematic quants) when compared to a traditional asset manager.
So do you need a CTO?
Ultimately, the decision on whether to recruit a CTO will depend on the specific needs of your business and the strategic role that technology plays within it. If you’re not 100% sure whether you need a CTO, you may consider working with an IT consultant who can help you assess your needs and make an informed decision.
Do you think you need a CTO? Or are you interested in seeing how similar organisations to yourself can get access to outsourced IT which includes financial services specific technical advice and support? Lanware would be happy to conduct a free assessment.