Interview with George Koch
The system, which we call THESIS, handles all investment functions simultaneously.
Most investment software systems in commercial use today are based on software advances of at least a decade ago; these patched-over programs are responsive to few individuals other than the programmers who developed them. Today, portfolio managers who attempt to use such cumbersome systems must often wait for months (while data processing departments scramble to meet requests) before they can address the changes in the marketplace that they observe on a daily basis.
Portfolio managers today are pushing their decision-making resources to the limit as the financial marketplace undergoes constant and dynamic change. Deregulation, fluctuating interest rates, new heavy trading volumes and more sophisticated portfolio strategies have increased the complexity of investment management and accounting. Never before has the need for streamlined, responsive, easy-to-use investment tools been so great; nor has the lack of tools ever been so glaringly obvious to portfolio managers in the aftermath of recent financial crises.
“There are winners and losers in the market every day,” says George Koch, founder of KOCH Systems Corporation. “Who they are depends in part on the weapons they choose. Technology has advanced so far — to English query and real-time position monitoring — that managers with old, clumsy systems are going to find themselves damaged by very tough competition in the market.”
KOCH Systems Corporation is the technological leader in providing comprehensive Investment accounting operations, trading, and management software to the financial industry. The Company provides its clients with the most sophisticated investment tools available, and helps them streamline operations and compete profitably in the fluctuating financial marketplace. KOCH provides the first commercial investment application (THESIS) to employ a state-of-the-art relational database management system. With THESIS, investment decision-makers use the English language — without the aid of a programmer — to instantly evaluate position information, assess profit/loss opportunities, determine risk exposure, monitor trade transaction and performance, and create immediate reports.
In this interview, conducted at KOCH Systems headquarters in San Francisco, George Koch tells how his company came to offer the first and only complete, “fourth-generation” software for financial managers.
With THESIS, you can ask each new question virtually as soon as you think of it. This means power.
What does KOCH Systems Corporation do?
We manufacture software for use by traders, operations, accounting and portfolio managers in large financial institutions. The system, which we call THESIS, handles all investment functions simultaneously. When a trade is executed, the relevant position information and portfolio management information changes immediately. The manager or trader looking into that portfolio will see the effect of the trade right away. Reporting is also real-time; it reflects any transactions which have taken place since the last time the report was run.
The product incorporates what are called “fourth-generation” software tools. It allows non—technical staff to create new reports — at will, and in a few minutes — rather than relying on programmers and waiting for six months or more. We sell the product to savings and loans, banks, money management firms, mutual funds, trust companies, corporations with large investment functions in their treasury departments — any company which manages half a billion dollars or more in its investment portfolios.
What are the benefits of using THESIS?
THESIS offers two primary benefits. First, it eliminates tremendous labor burden because it is a single-entry system. You put a transaction in once and the effects are seen in all aspects of the system — in accounting, portfolio management and trading. You don’t have to enter it three times- Second, THESIS provides opportunity; as a portfolio manager, you can ask questions which ‘were never asked before. You get the answers in seconds, not months. This is a self-fueling process. If you are not used to asking new questions — because you’ve been raised on the standard fare of canned reports it’s even hard to think up new questions. With THESIS, you have the chance to look at things in new ways. Your questions themselves get better, more insightful and clever, as times goes on.
Imagine if your thinking process had a six month to two year delay between thoughts — this is about where third-generation systems are. You can’t get anything new done. With THESIS, you can ask each new question virtually as soon as you think of it. This means Power.
How does this distinguish you from your competitors?
Nobody else does it. Virtually every other product on the market was developed between about 1968 and 1972 — it’s “third-generation” software, usually written in COBOL or FORTRAN. The systems are typically batch-oriented and rely on overnight reporting. They’re not real-time; you can’t get regular reports immediately and you usually can’t get ad-hoc reports at all.
What’s the difference between THESIS’ fourth-generation technology and the technology used by other financial management systems?
Aging systems tend to be unstable, by virtue of the many “patches” they’ve received over the years. And their programmers have real headaches; if you want to ask a question of the computer using third generation software technology, you have to tell the computer where the information is, how to get it, and how to format it. No user can do that. A programmer has to tell the computer the file, the sector location, the offset within the sector where the data is stored, the environment, the disk pack — an awful host of details which are machine-dependent.
There is enough intelligence built into our fourth-generation software that you don’t tell the computer anything except what you want to know. The computer can figure out where it is, how to get it, how to format it and how to give it back to you. We’ve moved much of the task that was previously given to programmers over to the computer. We’ve eliminated the delay of six months to two years.
There are other remarkable features in THESIS which were not possible with the previous generation of software. THESIS allows you to put in new instrument types yourself, without reprogramming, and the whole system adapts to that new instrument, while handling the accounting, reporting, and so on, automatically. As an example, customers are able to add stripped bonds to their systems in ten minutes, even if they’ve never traded them before.
How easy is THESIS to use?
With THESIS, you don’t have to talk to a programmer, You can either make the request yourself or ask someone on your staff, “How much volume has Johnson done with Goldman in the last month?” You can sit down at the terminal, ask your question in English, and get a report back instantaneously. If you don’t like the format, you can change it to the format you want.
You can give the report a name like “JOHNSON,” for instance, and from then on any time you want a current report you just say “start JOHNSON,” and the report will run again. Most important, it will always be current; it will contain up to the second information.
Do you develop new modules for THESIS in anticipation of, or in response to, new instruments?
Neither one. The system is designed such that most new instruments are added, with no reprogramming, by the users themselves. There is an internal model of securities in the system; the user simply details characteristics about the new security to the model. From then on all of the reporting and accounting programs will adapt automatically to that new instrument. And you do all of this in English.
The control of data entry into the system is of critical importance to assure that data is clean, legitimate and reasonable.
What have you done to prevent key-entry errors and unauthorized use of the system?
If you have a system which allows you to put in bad data, it’s “garbage in, GOSPEL out.” We tend to assume that because something is reported on paper, it is true. Because older systems may have poor error control, the things taken for gospel can result in enormous and costly errors. Therefore, the control of data entry into the system is of critical importance to assure that data is clean, legitimate and reasonable: and the only way to insure that is to have a system with built-in checks.
One of the advantages of having a system with some native intelligence is that it understands what you are trying to accomplish. In this case, the system is built around a model of securities. It is not specific to an individual issue — treasury bonds issued on a specific day, for example — but it knows something about all treasury bonds. Any time you try to enter a transaction for a treasury bond into the system, the model looks at what is being entered to determine whether the information being keyed-in makes sense. If it doesn’t, you can’t put it through.
Furthermore, every transaction going into the system is also time- and date-stamped with the name of the person who put it in. We can track attempts to breach the security of the system, or to fool it, because everything that goes in is permanently audit trailed.
Is there anything else like THESIS available on the market?
No. Our development resulted in what is today the most comprehensive and most advanced securities trading, accounting and management system in the world. The claim is immodest, but it’s true. It is also the first commercial application of any type using fourth-generation technology. Industry seers have been predicting the advent of this technology for years. Now it’s here.
One of the advantages of having a system with some native intelligence is that it understands what you are trying to accomplish.
Doesn’t being first involve some risk?
No, because the need is so great. Our market is driven by the demand of the securities marketplace upon the portfolio managers, operations, accounting and trading people in an organization,
Many financial institutions are really hurting with their current systems, which are no longer appropriate for their needs. Those systems were fine when they were developed, but they’ve grown old and unstable, and the financial marketplace has changed a great deal. Managers know this and they’re feeling the pain.
One of the reasons we’ve been so successful is that people who come in to see THESIS buy it. On first sight they know nobody else has anything even close, and they know that they need what THESIS can do in order to prevail in the market. How does the marketplace define the need for your system?
The market is getting tougher. It changes much more rapidly than it has in the past. There are new instruments appearing which weren’t previously allowed. The kinds of transactions are changing; there are many variable-rate instruments now and investors want to protect themselves against interest rate swings. Investors do a lot of interest rate hedging, which up until a few years ago was rarely discussed and seldom done. There’s a great deal of market volatility in price, in kinds of instruments, and in how those instruments are used.
At the time we began to develop our product, the existing systems already failed to meet the needs of the marketplace, and this is even more true Financial managers were using third-generation technology when they needed fourth-generation tools. They didn’t need a modified version of an old system — they needed a completely new technology. THESIS is a testament to the market need.
What is your marketing strategy?
It’s clear to me that ninety-five percent of new software companies coming into a marketplace with a strong new product have failed in one major respect; service and support. They have outsold their ability to support the product. While those sales look great on the balance sheet for the first couple of years, it has actually threatened the companies’ long-term survival.
We are religious about maintaining service and support. My marketing director has explicit instructions from me as to the number of systems he’s allowed to sell; he cannot go beyond that quota, even though the customer is there, unless additional support people have already been hired and trained. It’s important to us that we maintain the excellent reputation we’ve acquired. The only way to do that is for every single one of our customers to be really pleased with the product and with our service. If a client is in trouble at 2:00 a.m., we provide personal help. I challenge anybody to call another vendor at that hour and see if anyone even answers the phone.
How far is KOCH Systems ahead of its competition?
It’s clear to us that we have a window of opportunity of two to two and a half years. Our competitors have invested heavily in the systems which they developed years ago, and which have been patched and repatched over those years. Some of these systems are on spindly legs at this point, but a tremendous investment has been made in them, and in the installed customer base.
It’s frightening for these companies to admit, “We should throw this thing out and replace it with something brand new.” That will cost a lot of money, and will eliminate virtually all of the currently existing product. Although the customers may have been complaining, they have had nowhere else to mrn, and they’ve already made the investment.
It is fortunate that we made the investment and developed the software just when we did; we had a client that needed it and we saw the need ourselves. Our competitors haven’t made that investment and probably won’t until we’ve hurt them in the marketplace. Even with their best people working full-time with the best productivity tools, they can’t be out the door with real product for two years. The business is simply too complex.
What will KOCH Systems be doing in the meantime?
We certainly won’t be sitting still. Our current product development includes artificial intelligence and real-time portfolio analysis; neither one has been done before. By the year everyone else develops an equivalent of what we have now, we will have additional products and features which will put us further ahead. We will remain not just one step — but yards, miles, light years ahead.
What is your greatest challenge?
The greatest challenge is to find the very best people for our organization. I can only say that we’ve done extremely well in having hired the smartest and the best people available on the investments side to direct product growth, and on the technical side to turn ideas into products. We have an aggressive stock plan to make all employees owners. This attracts the sharpest people and focuses them all on the company’s success.
We’ve never seen a division between science and business. We’ve always used each to do more of the other.
Your corporate motto is “Old World Values, New World Skills.” Can you explain what that means?
I am a product of my upbringing. My family has a very strong work ethic and believes in old values: honesty, integrity, hard work and craftsmanship. I believe these are required of us, but also that they bring the greatest satisfaction and the most real success.
My brother Bob and I have worked for as long as I can remember — because we enjoyed working, and seeing the fruits of our labor. We started out with paper routes, cutting grass and shoveling snow, and grew to repairing radios and televisions, printing posters and manufacturing printed circuit boards.
We began all this even before we were teenagers. We advertised in national magazines, produced and distributed flyers on our products and services, had our own company stationery, wholesale accounts at distributors, and so on. One of our recurring nightmares was that one of our suppliers might show up at our parents’ house — also our business address — and discover that we were just little kids.
We invested our profits in science and electronics. We built an x-ray camera, designed primitive computers, and developed a physics and electronics laboratory in our basement. The smarter we got technically the more we worked toward turning our knowledge into profits. We’ve never seen a division between science and business. We’ve always used each to do more of the other.
My grandfather introduced us to the stock market in 1959. By high school I was a Wall Street Journal subscriber and an avid, if occasional, investor. I still own some of the stock I bought in the early ’60’s.
All of this is ancient history now, but it is reflected in the culture at KOCH Systems Corporation. The enthusiasm for technology continues, but even stronger is our commitment to traditional values. They provide the foundation for all that we do — for how we approach our development, our service, our support. We actually believe in hard work, craftsmanship and responsibility. Everyone who works here knows and understands this. We all maintain the standard.