Buying, and Building
You can partner with, buy, or build AI capabilities. Which one leads to establishing competitive advantage for your firm? Clearly, buying a solution implies that you are not the only one who has access to that one or more set of solution algorithms and data sets. This does not mean you should not consider buying certain solutions. However, for critical areas in your firm, it will be important to build (best alternative) and partner (second best) to create a custom capability set that is held only by your firm.
Of course, when it comes to data, you will need to buy it from various sources. But even for that, consider what data sensors and data collection mechanisms can be architected internally to save money and improve data quality.
COMPETITIVE ADVANTAGE
Based upon the above discussion, we are now able to suggest how to architect competitive advantage for our firms. As we digest the above discussion, we can zero in on four core determinants of competitive advantage. These four determinants are the underlying engines that drive value for us and our clients. These are the technological constructs that we need to get right. Based on these four determinants, we architect various business processes and achieve work tasks. The following are the four determinants:
Design constructs: Design constructs are based on your firm's competitive and market positioning and strategy. Design constructs emerge from the deployment of capabilities that collectively define a firm's business model and orchestrate how the firm will structure itself.
Extent and quality of intelligence: The extent and quality of intelligence comes from the core intelligence-centric methodologies. It can be viewed as using the best algorithms for a particular problem set (and the available data; see below), with both effective and efficient training, which results in achieving training goals in a timely manner and with higher precision and recall. Since intelligence manifests at both the artifact level and the networked level connection of artifacts, the extent and quality of intelligence is relevant at both levels.
Sequence of intelligence and action: The sequence of intelligence and action means that such sequence chains are well defined, optimally placed, stacked for maximum efficiency, and flawlessly integrated. It implies that intelligent software and non-intelligent software (or electric or mechanical systems) function in an integrated, harmonious, synchronized, and efficient manner such that machines accomplish work tasks successfully and optimally.
Data: Data refers to a firm's ability to have quality data that it can feed to its learning algorithms. Both the quantity and quality of data are important. In addition, the span of data—that means the reality that data covers—is also significant. To clarify the span of data, think about a piece of relevant reality for which you do not have data. Without that data you have no understanding of the reality. As you learn more about the reality, you model the reality with a meaningful representation in terms of variables and features. This multidimensional view of the reality is what the span of data refers to.
BUSINESS CAPABILITIES
Now we shift our attention to business factors. In this we use the above factors to architect our business to create a viable and well-performing investment management firm with (see Figure 2.1):
Alpha-generating capability: It refers to the ability to develop and execute investment strategies that result in creating a strong alpha. The obvious challenge here is uniqueness. If your investment strategy is easily decipherable or discoverable by others, the advantage gap will close quickly. However, if we decompose the steps needed to create a strong alpha in the AI era, we will realize that the ability to discover or replicate our strategy will greatly depend on competitors' ability to have the same data, apply similar algorithms, perform similar evaluations, and receive similar results. Results in this case imply persistent alpha generation through various existing and newly discovered strategies.Design ConstructsExtent and Quality of IntelligenceSequence of Intelligence and ActionDataAlpha-generating capability✓✓✓✓Responsiveness and awareness✓✓✓✓Client orientation✓✓✓✓Cost✓✓✓✓Human talent–centric✓✓✓✓Innovation✓✓✓✓Advice✓✓✓✓Client knowledge✓✓✓✓Regulatory standards compliance✓✓✓✓Risk management✓✓✓✓Corporate social responsibility✓✓✓✓Auditing, assurance, and governance✓✓✓✓FIGURE 2.1 The Strategic Capability Building
Responsiveness and awareness: We want to build a firm that is more aware and responsive. Aware implies being cognizant of what is transpiring in the environment (for example, markets, industries, sectors, economies, and assets), knowledgeable about clients, and mindful about what is happening inside the firm. Inside the firm implies knowing about our own structures, styles, biases, psychology, interests, social and cultural cues, and other similar information.
Client orientation: A client-oriented firm equips and enables clients with information, knowledge, and services that empower the clients (retail or institutional). Enabling that empowerment means the firm adds value for clients that goes above and beyond delivering alpha.
Cost: The firm keeps its costs low. This means it can compete based on cost. When combined with other aspects as discussed in this section, a low-cost operator can be the price leader and also create good margins.
Human talent–centric: The AI era should not be misconstrued as the end of human talent era. If anything, AI will make possible more engaged, more empowered, and happier human employees. If managed right, AI can help improve the culture, create new and improved social dynamics, discourage destructive politics, and build a more positive work environment.
Innovation: Innovation in terms of discovering assets, portfolios, alpha strategies, products, services, and client enablement is a powerful advantage.
Advice: For firms where service design is primarily based on advice, the quality and timeliness of advice can be tremendously valuable. Advice can be offered via machine only or a machine-human combination.
Client knowledge: A winning firm possesses deep information about clients and uses that to help clients in the best possible way.
Regulatory standards compliance: A successful firm meets the regulatory and compliance requirements.
Risk Management: A responsible firm ensures multidimensional risk management.
Corporate Social Responsibility: This means that the firm actively searches for issues that are material for its stakeholders and develops responsible responses to those issues. The firm fulfills its social responsibility and ethical obligations.
Audit, assurance, and governance: In addition to market-centric risk management, the firm must develop superior capabilities in auditing, assurance, and governance areas.
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