How to protect your family office from disruption

Family offices have an opportunity to assess their current technology capabilities and leverage their response to the current crisis.

Even in the best of times, family office technology presents a broad array of challenges for organizations seeking to keep pace in a rapidly changing digital world. Today, organizations worldwide are experiencing an unprecedented period of complete personal and business disruption. This presents new challenges, but it also provides a unique opportunity for family offices to leverage their response to the current crisis to prepare for a more digital future.

In the past several weeks, we have had many conversations with family office leaders and clients as they have reached out for support in assessing strategies to respond to disruption. Based on these conversations, and on our long-term experience, we believe a large percentage of family offices are not yet ready to tackle a virtual working world.

For a few organizations, the current crisis was just a ‘live-fire’ test of well-designed business continuity plans and infrastructures. Many offices, however, are still emerging from the era of Excel spreadsheets stored on desktops. Only a small percentage have deployed more sophisticated systems focused on automating workflow processes, providing remote approvals or integrating disparate functions. 

Paul McKibbin

Americas EY Private Family Office Advisory Services Managing Director

No matter where they stand on this spectrum, all family offices have an opportunity to assess their current technology capabilities and take steps to "disruption-proof” their infrastructure – be it to prepare for advanced digital tools like artificial intelligence (AI) or to support a new remote working normal.

Looking ahead, family office executives need to be honest with themselves about how their organization stacks up against five basic weaknesses that we see time and again in the industry:

• Lack of bench strength: Most family office staff are stretched thin. Personnel generally do not have the free time that could be used to focus on strategic initiatives. As a result, few offices have an adequate internal bench to tackle a major technology project, even if they try to compensate by hiring an outside consultant. 

Technology deployments require time, money and, most importantly, people. Family offices that succeed with implementations identify an internal resource to project manage and be involved throughout the entire process. The last thing you want mid-implementation is to realize you need to hire additional staff. Do the planning beforehand to avoid hiccups later. 

Catherine Fankhauser

US EY Private Family Office Advisory Services Senior Manager

• Systems unfit for purpose: Family offices often find themselves working with systems that do not support their daily tasks. These systems may have been adopted from the family’s operating company or were purchased without understanding the platform’s true functionality. In other cases, the activities of the office have radically changed (e.g., transition from a concierge-focused office to an investment-focused office), but the systems were never updated to align to the new mission. In many instances, these systems fail to generate the data needed to support clear, timely decision-making – except with extreme manual intervention. Office executives should seek to understand the operating requirements for each of their business processes and assess whether they’re being addressed by systems that are matched to the task, or by human ingenuity.
• Ad hoc is the new normal: As new systems and outputs are adopted, it’s a good time to evaluate the operations that surround and impact the technology stack. For example, are current tasks mission-critical, or are they being performed to satisfy a long-forgotten request by a family member or executive? A family member may have asked the office to track, for example, specific purchases during a calendar year. Since then, the office staff has continued to track those transactions on the chance they might get asked again. Or worse, a staff may have inherited a task – or the procedures to complete a task – from a predecessor and have no knowledge of the purpose driving the activity. A clarifying exercise could be to bring all stakeholders together (via videoconference) to walk through specific processes, capturing steps as bullets on a page. If the task still makes sense, you will find ways to optimize the process, but you may also be surprised to learn how irrelevant seemingly essential tasks have become.
• Underutilized systems: Because family offices tend to grow up over time, systems are often implemented by the wrong persons, including (1) junior-level persons who lack strategic perspective, (2) functional subject-matter experts who lack technology system expertise or (3) third-party IT support. As a result, they are often implemented incorrectly or don’t utilize the full range of available features. What presents as a need for a new system could simply be a need to reimplement the current systems.
• Satisfied with status quo: If family offices delay deploying new technologies or performing system upgrades, they may eventually find themselves too far behind the curve to catch up with the coming digital revolution. What should have been a gradual or incremental adjustment is suddenly an enterprise-wide disruption. It’s not always a question of what’s different today, but of how seemingly similar systems might diverge three to five years down the road. Further, delaying the purchase of new software until there’s more going on in the office (such as a larger allocation to a specific asset class) negates the current capacity and shifts the implementation to a time when catch-up may be impossible.

A digital environment

As family offices have shifted toward a remote working environment, their reliance on the internet has grown exponentially, exposing both vulnerabilities and opportunities. In the current crisis, decisions around digital environment are being accelerated for offices that once viewed digital disruption as still on the horizon.

Take the following steps when thinking about your technology needs:

1. Formalize remote infrastructure: It’s not atypical for family offices to reserve their virtual infrastructure for key executives. Now, all personnel are working remotely on not-yet-secured mobile and home devices. Spinning up a virtual private network – that also extends to family members – is the first step to ensuring that your secure environment doesn’t stop at your office’s doors. Then, develop an incident response plan that includes reputation risks.
2. Consider cloud-based applications: The family office technology market has been rapidly moving toward the cloud for the past couple of years. With software as a service license models becoming the norm, portfolio management, document management and general ledger systems are no longer being developed for on-premise installations. This presents several opportunities for the family office. Cloud-based applications offer protection in business continuity situations and provide anonymity against potential cyber events. Additionally, not only can offices recognize cost savings by not investing in physical servers, but cloud hosting provides protection against the risk of losing equipment to fire or other natural disasters.
3. Focus on cybersecurity: Business disruptions subject all family offices, even those with sophisticated systems, to greater cybersecurity threats. Offices stand empty, and personnel are distracted because of dealing with their own personal situations. Threat actors take advantage of these factors to augment their activity. Impersonations of legitimate news sources, distribution of fake news, reputational smear campaigns, data theft and ransomware are just some of the dangers. Executives can begin by monitoring the social media footprint of office personnel and the family, taking an inventory of private data (extended to key vendors) and adding additional layers of control over high-dollar/high-risk processes like non-routine cash requests or capital calls. (Click here to access a bulletin from our Cyber Threat team on cybersecurity risks related to the COVID-19 Pandemic.)
4. Leverage the capabilities of others: Even though advanced digital technology may appear to be beyond a family office’s immediate grasp, a family office can begin to take incremental steps by leveraging the capabilities of third parties. Partnering with a vendor who has already made the investment of time and capital lowers the cost of entry for the family office. For example, the office could team with a professional services firm to license programs that use AI to search through content and databases to perform knowledge management tasks.

If they haven’t already, family leaders, trustees and family office executives should begin asking questions to find out what the office is doing to keep pace with the current disruption. Ultimately, every family office will need to prepare for a digital future – doing so now takes advantage of a unique consensus among stakeholders that steps need to be taken to preserve a safe and effective working environment. By taking action now to address the current disruption, family offices will reap the additional benefit of getting their houses in order to meet the digital revolution head on. 

Summary

Looking ahead, family office executives need to be honest with themselves about how their organization stacks up against five basic weaknesses that we see time and again in the industry. There are also steps they can take to assess their technology needs.

Read more at EY.com here: https://www.ey.com/en_us/tax/how-to-protect-your-family-office-from-disruption