Marc J Firenze, CTO, Eagle Investment Systems
Asset managers are looking harder at their business than at any time since the financial crisis took hold some five years ago. There are a host of reasons for this added scrutiny, but before firms make the leap to change something, they want to be sure they won’t be landing in a position that leaves them re-thinking an altogether new solution five—or even two years—down the road. With the pace of change in technology, the decision on what to keep and what to outsource can have a tremendous impact on IT departments and their underlying platforms.
“Many are turning to outsourcing in greater numbers as an alternative model for managing their middle-and back-office systems in particular”
A number of factors are driving asset managers to reconsider their existing platform in the first place. Limitations of existing legacy systems are becoming more acutely exposed as these shortcomings can prevent the business from launching new products, investing in new asset classes, or entering new markets. Handling the growing amount of data that requires processing also serves to stretch the capabilities investment firms may enjoy at home.
Another driver is the rapid growth in their business; either through acquisition or through changes in business models and strategies. Many firms, for instance, have changed dramatically with new geographies. Compounding the challenge, new regulatory commitments have changed what information must be held and reported with a corollary being that their legacy systems are now being used to perform functions they were never designed for.
A shift is also taking place in how firms are running their operations. They are focusing on their core competencies to improve performance, while looking to gain operational efficiencies and reduce costs around IT infrastructure. This shift is occurring to meet the demands of an increasingly demanding and price-conscious client base.
As a result, many are turning to outsourcing in greater numbers as an alternative model for managing their middle-and back-office systems in particular.
Outsourcing originated as a cost-saving measure; a solution for firms that sought to minimize the administrative costs associated with investment management. Over time, however, the drivers have come to encompass a much wider—and more fundamental—set of issues and challenges.
Outsourcing enables firms to divest themselves from areas of their business that are not competitive differentiators and instead focus on their core business of investing. Outsourcing also helps reduce overhead and, when done right, has the potential to improve performance.
Perhaps the greatest benefit, when it comes to finding robust solutions to complex issues, outsourcing allows firms to leverage the expertise and scale off specialist financial technology firms. This is particularly important in an era of evolving compliance standards and marked by an accelerated pace of obsolescence as new advances ever more rapidly lapse yesterday’s technology solution.
Outsourcing, as a result, is gathering momentum and is likely to grow in popularity into 2015 and beyond. Indeed, many see it as the future standard model for the industry. This isn’t solely the result of the changing needs of the industry outlined above, but also represents an evolution in the solutions available and how outsourcing as a concept is held by the industry. It is no longer a black-and-white choice of internal or external systems, but is a matter of degrees on a spectrum of choices.
A number of intermediate steps exist along the technology continuum. Hosted solutions, for many is the first step. Our hosted solution, Eagle ACCESSSM, is far and away our most popular deployment method for new customers. Existing clients with on-premise solutions have also been increasingly migrating to our hosted solution over the past 12 months.
Building on this trend, the number of clients moving from a hosted solution toward a co-sourced solution—in which specific back- and middle-office functions are outsourced— continues to grow. This enables firms to achieve the operational efficiencies they’re looking for but within an arrangement that suits their specific needs. This co-sourced model also allows clients to become more comfortable with the idea of outsourcing particular aspects of their technology. We anticipate that, as their requirements change, these investment managers will seek to move even further along this continuum to a fully outsourced model.
As well as flexibility, the most successful outsourcing partners will need to demonstrate stability. Firms will need to know their vendor will be around 10 years from now.
If outsourcing is to reach its full potential and investment firms are to fully realize its benefits, solutions will need to be fully adaptable and molded to the asset manager’s unique needs, structures and culture. For this reason, it is incumbent on the financial technology vendors to deliver this flexibility and communicate this to the industry.
Outsourcing requires some give and take on both sides, but with a shared view of a long-term time horizon. It’s not enough for fintech companies to say: “This is the future of asset management. Embrace it.” Technology providers, particularly those serving the complex and evolving needs of financial institutions, must support clients with solutions for today and well into the future.