Software Upgrade CyclesDuring the operational due diligence process, investors often come across a number of technologyrelated issues that touch either tangentially or directly, a number of different segments of a fundmanagers operations. For example, most funds typically employ some sort of order managementsystem, commonly referred to as an OMS, which facilitates the entry, processing and generalorganization of fund trades. An OMS is a piece of software and therefore, falls within the realm of afunds larger information technology architecture. Technology which is involved in other areas of thefirms operations is not simply limited to software concerns - hardware also typically plays a role aswell. To take a basic example, consider the fact that most portfolio managers execute or log at leasta portion of their trades electronically. These electronic executions typically take place via a desktopcomputer of some sort. This piece of hardware also falls within the arena of the funds informationtechnology infrastructure. In addition to understanding the role technology plays in each respectivearea of the firms operations, during the operational due diligence process, investors should conducta review of the information technology function itself within a firm. Investors who may not be asfamiliar with information technology may run the risk of being overwhelmed by system names andtechnological jargon in this area.Another point of consideration, which may make fund information technology analysis a challengingarea is the speed at which information technology evolves. The rate of this change is an area whichalso presents a number of challenges for fund managers information technology departments aswell. Many funds rely on third-party software applications to perform various functions within theirorganizations. When a fund manager purchases these third-party applications they are typicallypurchasing the most recent release version of the application. In order to keep applications freshand add different, system upgrades third-party vendors often go through series of ongoing softwareupgrades. These upgrades are typically not automatically pushed out to users of the systems (i.e. -fund managers) but instead the fund manager has to actively install such an upgrade. This makessense because if it is a major upgrade the third-party vendor does not want to force a disruption on afund manager. The versions of software used by fund managers, is an area which runs the risk ofbeing overlooked during the operational due diligence process. This process becomes even morecomplex because fund managers typically do not utilize just one software application within theirorganizations. No, rather fund managers may use dozens of different third-party softwareapplications. Investors may feel inquiring about software versioning across all of these multipleapplications is either too cumbersome or they may feel unsure what to do with this information.Furthermore, some fund managers themselves may either not have this software version informationreadily available or simply not want to share this information with investors.In these cases, there are a number of strategies and techniques that can be employed during theoperational due diligence process by which an investor can come to a compromise with a fundmanager, in terms of information required and burden on the manager. A key caveat to the previousstatement is that just because a fund manager eventually may object to a certain request and aninvestor then accepts less information then they originally asked for, does not mean that an investorshould draw this conclusion on their own. That is to say, an investor should ask for softwareversioning information from a manager and if the manager objects that is where the negotiation andcompromise may begin. In some instances, an investor may also choose to draw a line in the sandand state that this is a "dealbreaker" issue such that if the manager does not provide thisinformation, the investor will walk away.
But returning to the issues of fund manager software versions, beyond the actual data itself (i.e. -what version of a particular software application a fund manager is utilizing), an investor can oftengarner valuable meta data about the nature and quality of a fund managers operations by inquiringas to software versions employed. Perhaps it is best to illustrate this point by example.Let us consider two fund managers: A and B. Fund manager A began using a fund accountingsystem, which we will call System1 in June 2008. When fund manager A purchased the system, themost recent version available was version 2.0. Fund manager B also utilizes System1. B beganutilizing the system in September 2010. At that time, System1 was on version 2.5. Fast forward totoday. The most recent version of System1 is version 4.0. This version contains many upgradeswhich were not available in the older versions. Today fund manager A utilizes version 3.5 of thesystem, while fund manager B utilizes version 4.0. A logical conclusion may be that fund manager Ais behind the times and perhaps not on top of latest operational developments as fund manager B.These conclusions may not necessarily be correct. For example, perhaps version 4.0 was recentlyreleased and fund manager A just completed an expensive upgrade from to version 3.9 last year.Fund manager A may be waiting for version 4.1 to come out before completing the next upgrade.Similarly, perhaps fund manager B never conducted any other previous upgrades in between version2.5 and the current version 4.0. An argument could perhaps be made that fund manager B had pooroperational planning during this period as compared to fund manager A because some of the interimsystem upgrades (i.e.- between version 2.5 and 4.0) during this period may have helped fundmanager B.When an investor begins to delve into the issues and circumstances concerning system versions andupgrades, often times they can begin to get a sense of the larger operational planning going onwithin the organization. Additionally, as outlined above, an investor can often develop a dialogue witha manager about why certain upgrades may or may not have been conducted at certain timeperiods. During the operational due diligence process, such discussions can often provide usefulperspective in evaluating software versions rather than simply conducting an exclusively quantitativecomparison among managers of software versions.When evaluating the versions of software employed by a fund manager some considerations include: How many versions behind the most recent version are they? Is this version delay limited to only one software application or multiple applications? Why has the fund not decided to upgrade to the most recent version? Will the fund be able to complete the upgrades themselves or will they need to work with a third-party consultant? If the upgrade will involve more than clicking a few buttons or downloading a new upgraded version of the software, how has the fund planned to handle any software disruptions? Has the fund taken appropriate steps to ensure data loss will not occur during any system migrations? If any changes were required to be made to users or access points for the new upgraded system, has the fund checked to ensure any unauthorized security holes have been properly closed?Investors that inquire about such seemingly minor issues like what versions of software are beingused by a fund manager, may be surprised about how this information can yield valuable insight intothe larger operational quality of a fund manager.Originally posted in the February 2012 edition of Corgentum Consultings Operational DueDiligence Insights.
For More firstname.lastname@example.orgInformation Corgentum.com | Blog | Twitter Feed Tel. 201-360-2430About Corgentum Consulting:Corgentum Consulting is a specialist consulting firm which performs operational due diligencereviews of fund managers. The firm works with investors including fund of funds, pensions,endowments, banks ultra-high net-worth individuals, and family offices to conduct the industrysmost comprehensive operational due diligence reviews. Corgentums work covers all fund strategiesglobally including hedge funds, private equity, real estate funds, and traditional funds. The firms solefocus on operational due diligence, veteran experience, innovative original research andfundamental bottom up approach to due diligence allows Corgentum to ensure that the firms clientsavoid unnecessary operational risks. Corgentum is headquartered at 26 Journal Square, Suite 1005in Jersey City, New Jersey, 07306. Phone 201-360-2430. For more information visit,www.Corgentum.com or follow us on Twitter @Corgentum.