This year’s IT budgets demonstrate a renewed commitment to straight-through processing (STP) and enterprise data management (EDM) systems, according to a recent report from consultancy Aite Group. Third-party vendors offering hosted solutions should also benefit from uncertain market conditions where budgets may be tightened.
The buy-side is demanding technology beyond the front office from their service providers, including better risk notifications and reporting from along the value chain, which will require better communication between broker and custodian systems and integrated data management, according to the report, 2008 Capital Market IT Spending: Sanding the edges in a rough risk environment.
“I think it’s an STP drive, but it’s more kind of an irritant drive,” says Adam Honoré, senior analyst at Aite Group and author of the report. “If you look at where some of these projects are being driven, it’s out of buy-side requests. The buy-side wants to see their failed trades right away, they want to be able to do reconciliations, they want effective reporting.”
Sixty-two per cent of respondents to Aite Group’s survey said they had definite plans to implement some form of enterprise reporting. Some had specifically given funding to upgrade their client reporting interfaces and to standardise fails reports (a major source of buy-side concern) according to the Asset Managers Forum guidelines.
Past overspends
To facilitate these projects, core technology enhancements, such as integrated EDM, will need to be put in place. EDM has long been a goal of financial institutions looking to cut costs and iron out errors in transmission between business units. Historically, however, such business-wide projects have required large capital expenditure and the mobilisation of resources, and have often ended in huge overspend.
But Mr Honoré says that the industry has learned. “People have got much smarter about how they implement [EDM],” he says. “People have learned from those epic failures, and now a lot of times these [projects] will originate in a business unit. Sometimes it’s the risk unit, sometimes it’s the trading unit, but it tends to fall under the purview of an individual business unit. Once they have it down in the unit, then they figure out how to cascade that. That’s when you see integration pushing up fast on the priority list.”
Sixty-nine per cent of respondents told Aite Group they were planning to implement EDM solutions in 2008, but the report acknowledges that the figure is “skewed”. All of the negative respondents already claimed to have established robust data infrastructure.
Non-scaleable model
In a falling market, it might be tempting for service providers to plug their gaps in the short term by loading up on staff to increase their capacity for manual processing. “Unfortunately that’s not a scaleable model,” says Mr Honoré. It is, however, a mindset still prevalent in companies with entrenched practices and resistance to change, he says, though most businesses are now convinced of the benefits of automation.
The emergence and greater acceptance of third-party hosted solutions, where the software development and the hardware ‘heavy-lifting’ is outsourced to an independent vendor, has increased both service providers’ and the buy-side’s willingness to embark on new projects, even while facing uncertain market conditions. “Whereas two years ago, 60 per cent of development that occurred was internal,” Mr Honoré says. “It’s down about 5 per cent and most of that gain has gone towards the hosted environment.”
True software as a service (SAAS) models could also prove to be “exciting”, the report says. SAAS takes the hosted solution model and enables it to be better integrated into user systems. Other integrated technologies seem to be set for a revival this year, the report says, with service-oriented architecture (SOA) reaching maturity and standards being developed. The Financial products Markup Language (FpML) organisation’s launch of a working group of investment managers and custodians to work on furthering the reach of the existing standard is a key stage in the technology’s evolution, the report notes.
“Following years of desk-level implementations, financial services firms are reaching critical mass with siloed applications and now have to spend to save in this area,” the report concludes. “Retiring redundant systems reduces maintenance costs and improves centralised governance capabilities.”
With recent events bringing into focus the need for operational and credit risk, such initiatives should be easy enough to sell to those holding the purse strings.
The other good news in Mr Honoré’s analysis is that the buy-side’s relationship with the sell-side regarding technology provision is maturing and will improve, according to the report – “provided the buy-side is willing to actually leverage the improvements they request in a self-help manner”.
