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Priority No. 1: Build Customer Base

The gross domestic product of the United States increased at an annual rate of 1.8% in the first quarter of 2011, according to the "second" estimate released by the Bureau of Economic Analysis. That is down from an annual growth rate of 3.1% in the fourth quarter.

Yet that does not appear to be dissuading the top business, technology and operations executives at mutual fund companies.

In a survey conducted this month by Princeton, N.J., research firm Lodestar, Money Management Executive found that 16% of executives who set down their expectations said their firms would increase their technology spending by 5% or more this year, compared to last. Another 26% expected increases of 1% to 4%. And 15% said they expected no change in the amount of spending their firms would make on technology for either operations or use by employees.

But uncertainty does reign. The biggest response: 38% said they could not predict whether spending would go up or down.

The uncertainty extended most dramatically to areas where fund firms might seek to rein in costs, in hardware, software and systems spending.

With 116 of the total 120 respondents describing the five areas they most expected costs to be cut, fully 45%, or 52 executives, said they did not know.

And the next biggest response?

That there simply would not be cost-cutting, even with the economy in a phase of constrained growth.

In fact, 42, or 36% of the respondents, said their organizations would not cut technology-related costs.

Instead, fund firms appear most inclined to put their bucks at this point into technologies that will serve existing customers better or attract new ones. The point: Spend to increase revenue. Build business.



Out of the top five spending priorities that surfaced in the survey, three dealt directly with improving relations with customers.

The top priority: Investing in customer relationship management software, with 43 respondents, or 36% of the field, naming that as a top priority.

Also getting widespread investment: Sales management software (32 respondents, 27%) and website services for customers (also 32 respondents, 27%).

Most interested in improving customer relationships were smaller fund firms. Half of firms managing under $500 million of assets made this a top priority, while 53% of firms managing between $501 million and $5 billion of assets did.

By contrast, less than a third of firms managing $6 billion to $300 billion of assets list customer management software as a priority.

But really big firms also had building customer relationships in mind: 57% of firms managing more than $300 million made it a priority.

Not attracting much attention is reporting risk-return summaries in the interactive programming format being required by the Securities and Exchange Commission.

Only 3% of respondents put reporting in the eXtensible Business Reporting Language (XBRL) as a priority. This year, the SEC began requiring mutual funds to provide the risk-return summaries they typically show for one-year, three-year and five-year performance in XBRL format.

Also getting rated low on the priorities was cost-basis reporting systems. Only 11% of respondents of any size of investment management firm made that a priority. (See, "Cost-Basis Reporting Getting Ready for Prime Time," in print or online, May 23, 2011)

This, even though complicated, new Internal Revenue Service rules on reporting the original cost of shares in funds and other financial securities take effect for mutual funds at the outset of 2012.

Taking cost-basis reporting most seriously at mid-year 2011 were the biggest firms: those managing assets of $501 billion or more. Twenty-three percent of executives at such firms considered investing in cost-basis reporting a top priority.

Rating higher, across the board: The more prosaic practice of upgrading operating systems, considered a priority by 22% of respondents.

Ranking only slightly higher: Risk management systems, at 23%.

And compliance software, in the wake of the enactment almost a year ago of the Dodd-Frank Wall Street Reform Act?

Investing in regulatory-related software was a top priority of 17% of respondents.



Not knowing where costs might be cut was the response of 52, or 45%, of respondents.

But neither that nor the second-highest response, that 36% of respondents do not plan to cut technology-related costs at all, represents an expense-restraint strategy of any type.

Of those fund executives who did have cost-cutting plans, the priorities were spread wide.

Six percent planned to cut costs involved in replacing existing systems. The same ranking was accorded market data processing.

But because of the relatively small sample size, that is virtually indistinguishable from plans by other executives to cut spending on asset valuation services, corporate actions processing and settlement services.

And even though 22% of respondents had said they were making operating system upgrades a priority, 4% said they were cutting spending on that.

More telling were the mechanisms that the management, operations and technology executives said they would use to control costs.

The top source of savings is the continuing movement to outsource as many processes as feasible to third parties, such as managed service providers.