Optimizing tech investments in financial services: Insights from a VC-turned-Deputy CTO (Part 1)

At Sage’s recent Transform customer conference, I had the great privilege of sitting down for a fireside chat with Nick Sinai, Senior Advisor at Insight Partners. With his unique background as a current private equity advisor, experienced venture capitalist, former Deputy CTO of the White House and soon-to-be book author, Nick offers a distinct perspective on how technology impacts the daily lives of financial services practitioners.

In Part 1 of this two-part blog series based upon our conversation, Nick discusses tech-driven digital transformation in financial services according to what worked — and didn’t work — in the many technology transformations in which he’s been involved.

Here’s what he had to say.

A big part of digital transformation is embracing the power of tech-enabled processes. Are there signs someone can watch for that signal an existing process or workflow is ripe for a tech-driven transition?

NICK: I want to be careful about being prescriptive because it really does depend on the particular company and what they’re trying to get done. The great thing is, we’re living in a world where great, cloud-based software is available to automate all kinds of things, not just accounting. So you have to understand the context of the problem — what’s the real problem that’s driving the change, what are people trying to do — then from there you can bring in technology and data to solve the problem.

For us at Insight Partners, it’s about architecting for growth and hypergrowth. It’s about trying to think several quarters or years ahead. For instance, you may only have a few customers today, but you’re eventually going to have dozens and many hundreds of customers, so you better think about your customer relationship management (CRM), you better think about compensation management, you better think about how you’re going to manage proposals, you better think about how you’re going to get all the way to the close process with your accounting system. What worked when you were only getting a couple of customers per quarter isn’t going to scale when you’re suddenly getting 50 customers per quarter.

Where do you think the financial services industry as a whole stands right now as far as embracing the power of tech-enabled processes?

NICK: We’re still in the early innings. In many cases, we’ve simply taken paper-based processes and brought them online.

But we can reimagine these processes. We can figure out new ways to do things. There’s an opportunity to think about how we collaborate, how we start to predict what’s going to happen inside an enterprise. Then it’s not just about putting that paper-based process online anymore. It’s about what we’re really trying to get done and what are the problems we’re trying to address.

Are there any red flags that signal a legacy financial process or system is overdue for that kind of tech-driven transition?

NICK: I realize we all have imperfect information, and we’re all captive of our own, limited experiences. But I see it from the top. It’s pretty clear, if a CEO or CFO at a fast-growing startup company is taking a while to get an answer to a Board member, it’s not because they’re busy or on vacation. It’s because they’re using outdated systems and don’t have the data at their fingertips.

Once a financial services firm or finance department is ready to embrace a tech-driven transition, what are the primary challenges with which you see them struggle when evaluating new technologies?

NICK: It’s an interesting problem when a line-of-business especially is responsible for bringing better software into the fold. When you think about any function in a business, the people in that function are good at that function — people in Finance are good at finance or accounting, for example.

But they’re not necessarily good at articulating their requirements, writing their user stories, thinking about and prioritizing their needs, doing market research on vendors. All those things that are really important to know when evaluating a new technology. So you could be a really great accountant or controller, but it doesn’t mean you’re going to be good at doing the market research for and buying next-generation software.

Until recently, the IT department and CIO made most software procurement decisions. So is that tech-driven transition issue exacerbated by the fact that now the business lines themselves are charged with identifying and procuring their own new solutions — or they take it into their own hands when they need to address process inefficiencies through a tech solution?

NICK: I think that’s part of it. Not everyone has a big, centralized IT function — it depends on the size of your firm. You may just have a single person being the CIO, or you could use an outsourced firm. But in larger firms, yeah, you did have more of a centralized IT function before.

It’s an interesting tension. Sometimes it’s derogatorily called “shadow IT.” But it’s not shadow IT — it’s the guts of what we’re all trying to get done, whatever our business function is. Yes, you’re going to have IT and security putting guardrails around security and identity, but the software has to work for the people who are using it. Those are the people who are trying to innovate, they’re trying to get home at the end of the day, they understand their process the best. That’s why I’m a big believer in software — especially analytics — really being owned by the business lines because that’s where stuff gets done.

In that scenario, is the new role of the CIO or IT team really to make sure all these discrete, line-of-business investments can play well together, in the same sandbox?

NICK: I would hope so. We don’t typically buy software in a vacuum. But again, it depends on the size of the firm. One of the advantages to having a CIO, or even a Chief Data Officer or an enterprise architect, is for someone to say, “Hey, it’s great you want to buy this, but let’s make sure it has an open API, let’s make sure it integrates with our other applications. We have a set of existing systems and processes, so are we going to swivel from one to another, or are we going to find ways for the data to flow? Can we pull the data out and do useful analytics?”

All those kinds of questions. It helps if you have centralized support, but not everyone has that. I think that’s also why it’s important to invest in more open platforms, ones that have more open APIs that are easier for people to use.

So, from what you’ve seen, at what point do growing companies need to implement a more structured and operationalized approach to their back-end systems — specifically, when do they need to move on from the QuickBooks- or Excel-driven financial reporting approach they might be using?

NICK: Our companies are often going global, to Europe or Asia. They may be entering the government. As a result of this expansion, there are often multiple entities in play. In these scenarios, Excel and QuickBooks aren’t set up to answer the kinds of questions that need to be answered. So they have to catch up. You can see that when you ask the CEO or CFO questions, and they don’t have that agility or speed of answer.

As a CEO or CFO, what you really want to be able to do is answer those questions from your Board of Directors immediately and present Board members with detailed data, so they can ask even better questions. When companies are doing well and in hypergrowth mode, we don’t necessarily want to wait until the next Board meeting to make a particular decision about stepping on — or pausing — the gas.

What are some of the common mistakes you’ve seen companies make when it comes to implementing technology?

NICK: The biggest mistake is not really understanding the user need. It’s something we thought a lot about in the White House — what’s the actual user need?

For example, we would sit with actual homeless veterans and watch them try to fill out this nifty new website that’s going to help them get better benefits or healthcare — at least in theory. So, understanding user needs is just so important. If you’re not attuned to what the users need, then all the purchasing and executive-level decisions don’t matter as much and can make implementations a lot harder.

In our book, we talk about how the U.K. government requires its government ministers to try every new digital service they launch. The ministers have to find out firsthand, for example, what it’s like to apply online for a particular welfare benefit or obtain a particular license.

Is solving that implementation problem as simple as involving end users in the procurement process? Giving them a seat at the table and making sure you have their buy-in?

NICK: I think that’s part of it, doing the research to understand what their stated needs are. But human beings aren’t that great at articulating their needs all the time, so it’s also about their behavior.

I think the other important piece to solving the implementation problem is letting actual users try to use software before it’s purchased. I teach a field class at the Harvard Kennedy School of Government where students work with real clients. When we were working with a large U.S. city government, city leaders wanted to invest in software to automate an Excel-based process around the Freedom of Information Act that wasn’t working for them at the local level. When a citizen would request a public record — if it were a record that could be released — one ombudsperson would run around to many dozens of city agencies trying to retrieve it.

As my students were working with the City on procuring software that could automate this process, they discovered the City had not required as part of its RFP that the software be demoed to the actual end users. As a result, my students wrote a new RFP process for this particular City requiring solution providers to now demo proposed software with actual users — and allow those users to try the software themselves — before a purchasing decision is made. I think that same kind of thinking can be applied to every software investment, but especially in mid-market financial services.

Want to hear more? Check back next week for the second of our two-part blog series with Nick Sinai.