Read this article and learn about
- Why firms are now looking at their front office system strategy
- The business drivers for change
- The operational benefits of change
- The types of solutions that are being considered and why
Jeremy Hurwitz, Managing Director - Accenture
Dan Pitchenik, Managing Director & North America Capital Markets Lead – Accenture
In recent years, the asset management industry has seen an increase in the buy side’s appetite for reduced architecture complexity and system consolidation, which is resulting in fewer platforms or even the pursuit of a single fully integrated platform. For those who remember the monolithic mainframe world of the 1980s, it may seem at first glance as though the industry has come full circle. But this time is different. Today’s firms are facing a new regulatory environment, new technologies, and an entire new set of challenges and opportunities.
From black box to best-of-breed
Thirty years ago, many asset managers were operating in a mainframe IBM landscape dominated by a few large system players. Vendors like SunGard ran the firm’s hardware, operated its system and, in some cases, even handled back-end processing.
In the 1990s, the explosion of networks and desktop computing triggered a shift from highly centralized mainframes toward highly decentralized distributed PC computing power. As the pendulum swung, firms began abandoning consolidation in favor of highly customized best-of-breed solutions. Vendors became more nimble and numerous, developing and bringing new products to market faster than ever before.
Where there was once a handful of established service providers, there were now hundreds of innovators crowding the marketplace with platforms for trading, investment management, and accounting.
Y2K proved to be a defining moment in this journey. Widespread concern related to how systems would deal with dates later than Dec 31, 1999 prompted asset management firms to take a closer look at their systems. What they found were in many cases opaque platforms that offered little to no visibility. It was just the catalyst firms needed to ditch their consolidated legacy systems for the agility and flexibility of distributed computing. That’s when the best-of-breed approach really took hold, resulting in a proliferation of applications over the next decade. When new portfolio managers joined firms, they would usually bring their preferred risk and performance systems with them.
Then came the credit crisis of 2008, which exposed the significant risk inherent in this distributed approach to systems. Many firms began to take note of the fragmented nature of their architectures, the potential lack of data control, and their limited visibility into firm-wide operating and data costs. Terms such as “spaghetti diagram”, “hairball”, and “point-to-point system” were coined to describe the state of affairs: too many systems touching too much data with too little governance. In many ways, it was the beginning of the drive to reintegrate.
Terms such as “spaghetti diagram”, “hairball”, and “point-to-point system” were coined to describe the state of affairs: too many systems touching too much data with too little governance.Jeremy Hurwitz and Dan Pitchenik, Accenture
The drive to reintegrate
Post-crisis, four key drivers have been compelling the asset management industry to rethink the dominant distributed model and consider reducing architectural complexity:
- Mergers and acquisitions: In an attempt to extend their service offerings and expand into new asset classes, many large global firms as well as some medium-size players, have been acquiring regional entities. Often, they choose to onboard the acquired platform as-is instead of integrating it into their existing infrastructure. These consolidation efforts have revealed significant platform disintegration across firms, which poses a challenge for data visibility and transparency.
- Risk and compliance: An increased focus on risk and compliance—as a result of new regulatory rules, the credit crisis of 2008 and even the dot com bubble of the late 1990s—is forcing firms to tighten their platforms and reduce system complexity so they can improve transparency and better govern their data and associated risks. This means more controls on data access, use, distribution, and security. People want a single, high-quality source of data they can trust.
- Cost compression: The rise of passive investing and growing pressure on management fees means firms are increasingly looking for ways to reduce operational costs and improve operational efficiency. It’s no longer feasible or financially sustainable to manage and maintain many different applications and the data integration among them.
- Business scalability: As firms grow, the demand to handle more clients, accounts, trades, and systems is also increasing. Firms are looking for scalability at lower costs, which is driving investments by firms and vendors in workflow automation, robotics, artificial intelligence, and other new technologies. This need to squeeze more growth out of their platforms at lower costs is further driving firms to seek out opportunities for platform consolidations.
At the same time that asset management firms are simplifying and reintegrating their platforms, the vendor landscape is consolidating too. Companies like SS&C, Broadridge, and Fiserv are buying up smaller competitors, combining solutions, and eliminating unviable products.1 Others, such as BlackRock, Charles River, Misys, and Multifonds, are developing integrated platforms of their own.2 The result is a shrinking number of options for the asset management industry.