Why Institutional Investors Are Turning To Blockchain Solutions For Investment Manager RFP's
Any institutional asset owner that’s gone through the Request for Proposal (RFP) process for hedge funds and private equity firms to apply for a mandate to manage their money knows just how long, complicated, and painful the process can be. From gathering requirements and drafting the proposal to communicating with and soliciting proposals from alternative investment firms, most people involved in the process are left coming away with the feeling that there has to be a better way.
RFPs are costly and time consuming for a variety of reasons. For those drafting RFPs, putting together a document that accurately reflects the scope of the project is a heavy task in and of itself. Much less sifting through responses that are formatted and presented often in dramatically different ways. Nevermind that actual process of fielding bids, reviewing pricing terms, and actually selecting the right vendor.
Well, things are about to change drastically (for the better) thanks to new technology applications designed to streamline the entire RFP process for everyone involved. The underlying architecture of popular cryptocurrencies like Bitcoin, known as the Blockchain, is now being applied in unique and practical ways to make RFPs faster, easier, and more secure.
The alternative investment world might not yet realise it yet, but it needs blockchain solutions for the RFP process.
1. Stronger Verification
One of the main issues of the RFP process is fund identity verification for compliance purposes. For those issuing RFPs, they may receive dozens, if not hundreds of responses. Taking the time to make sure each response is authentic, and from the correct manager, comes at the cost of actually reviewing the proposals in depth. This takes place on the blockchain through a function called “smart contracts,” whereby any response is validated on a public ledger, with each party using a unique, unduplicatable digital key. This not only takes away counterparty risk of identity fraud but provides an ironclad way of confirming fund manager details for compliance and regulatory purposes.
2. Streamlined Payments
A second critical feature of the blockchain’s smart contracts is in the area of payments. Up until now, the payment part of the RFP process for most has been antiquated and time-consuming. Multiple departments, such as accounting, legal, and administrative, have to be involved. Moreover, most funds and companies tend to rely on paper, PDF, and spreadsheet (PPS) processes to invoice and receive payment upon manager selection. With smart contracts, manager identity and payment terms are already in place, lowering the barriers and cost of payment transactions. Moreover, delivering payment upon completion is done with improved tracking and accounting, as all transactions are transparent and traceable on the blockchain’s public ledger.
3. Dynamic Bidding
So you’ve put out your RFP, and now have multiple managers who look like they can meet the requirements. But now comes the hard part: Pricing. Traditionally, the bidding aspect to the RFP process has been largely haphazard, with very little intelligence or dynamic pricing involved in the process. Tomorrow’s RFP bidding process that will take place on blockchain-based platforms will incorporate a more dynamic bidding model, much to the benefit of those issuing the RFPs. Think of a system that contains real-time pricing like eBay, but applied to individual contractors of vendors to “do the job” like the TaskRabbit app.
These features are close to being put into play in the real world, as the U.S. government’s main logistical agency is getting ready to implement the blockchain in its contract review process. In an effort to re-envision the RFP portion of its contract review process, the government is looking at how the blockchain could integrate with its new systems that are designed to streamline how vendors, particularly information technology firms, bid on government contracts. This new hybrid system would integrate with artificial technology to create a dynamic bidding model as vendors submit quotes so that the government gets the best deal possible and vendors have transparency into the process.
4. Shared & Secure Data
As anyone who’s put together an RFP knows, data and information contained in the request usually come from multiple different individuals, teams, and departments within an organization. Not to mention vendor responses, and the multiple parties that are involved with those externally. What this has created over the years is an environment of data silos, where one department doesn’t have very much transparency into critical information in other work teams. Through the blockchain, any changes or “transactions” involved in putting together an RFP are stored and easily accessible (and verifiable) on the internal blockchain associated with a specific RFP. Simply take a look at the public ledger, and dive into the information you need.
Some might think that storing RFP information, much of which is normally confidential or proprietary, on the blockchain poses a major data security risk. This couldn’t be further from the truth. That’s because, unlike traditional data warehousing which typically utilises just a few physical servers, blockchain data is decentralised and distributed across a large number of machines and servers. While the data is “public” to those involved with and granted access to the RFP process, the distributed nature actually makes it less vulnerable to hacks. With the blockchain, silos are eliminated and no proprietary data is put at risk throughout the entire RFP process.
An easier way for institutional asset owners and their prospective 3rd party money managers to create, bid on, and finalise RFPs is just around the corner thanks to the blockchain. Stronger identity verification, dynamic bidding, and enhanced security are just the features that we’re seeing right now on the horizon. With continued developments and bold initiatives like the U.S. government’s efforts, there’s a ton of promise that RFPs will no longer be something that keeps everyone up at night.
Gary Markham is CEO of aXpire, a New York, NY-based technology company which is building the world's first blockchain based spend management system.
© The Sortino Group Ltd
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency or other Reprographic Rights Organisation, without the written permission of the publisher. For more information about reprints from AlphaWeek, click here.