Technology and Vendor lock-in: problem or not?

For many years this was a concept that I was not that phased about. Roughly 7 years ago I remember a client deciding on two technology vendors to supply them with trading system software. One of their primary reasons was that they did not want to be exposed to a single vendor. I started looking around at what various lock-ins people had: operating systems, databases, hardware, software and outsourcing suppliers.

So is this a problem and something to be avoided?

For many out there the changing of their technology or systems isn't anywhere near their radar. For these I would say even if they were exposed to some or other lock-in it is of no immediate consequence. I typed vendor lock-in into a popular search engine and and saw the topic had it's own entry in Wikipedia. This note is not an in-depth analysis on the topic but to offer high level commentary that will hopefully invoke thought and debate on the topic.

I offer technology related consulting and services to hedge funds and from this I recently started thinking more on the topic of lock-in. To me lock-in exists where there is a desire for change with an inability to do so due to uncontrollable factors. The reasons stopping change could be many: cost, time, ability and limited alternatives.

I will touch on platform lock-in (you can define what platform means to you), I will also look at the hedge fund world. More recently in my experience this is where I have seen real examples of lock-in through witnessing many funds evolve from start-ups to large complex businesses and also funds that have had to go through extreme and sudden change. In my opinion one of the largest contributing factors is the strong desire for hedge fund managers to outsource none core activities e.g. IT.

Firms from time to time find themselves in a position where they decide to bring IT back in-house or would like to switch vendors. They find themselves tied to long term contracts or find that business continuity risk due to cost and the complexity of switching. They feel trapped.

I would love to hear your thoughts to further this debate. Will utility/cloud have a computing offer solutions, more choice because of Software as a Service (SaaS), would this situation never risen had the fund managers access to technology advice from someone who understood their strategy and their business objectives?

One thing I would offer up here is that the landscape for hedge funds and businesses in general has changed a lot over the past two years. Traditional solutions and approaches are to restrictive, we are in a period of rapid change and long term uncertainty. Whatever we choose and whatever direction we take, our watchwords moving forward must be adaptable, flexible and scalable.

Hedge funds face altered landscape

I read this article by Dan Hubscher in the Hedge Fund Review, about how hedge fund managers have had to adapt their business strategies. This has a direct impact on the level and sophistication requirements of their IT systems.

"If more plug and play technology were made available, especially on a hosted basis, more quant managers would turn to this method of technology, allowing them to concentrate on what they do best."

This sentence is what got me thinking. Technology over the past few years has got more moduler and these modules have got easier to integrate into a larger solutions. This has cause a feedback loop resulting in even more options at a faster rate driven by companies such as Google and Facebook, technologies around Open Source, Web 2.0 and Cloud Computing. There is a greater resurgance of innovation at present and smaller players have the ability to influence on a much larger scale.

The same is also true for Hedge Funds and their use of technology. What was previously considered too big, complex and expensive for smaller funds is now in easy reach.

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