The case for system consolidation

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.

The benefits of consolidation

By consolidating applications and integrating data services, firms could increase data visibility and transparency, reduce system complexity and risk, increase operational efficiency, and reduce costs.

Fewer systems means fewer software upgrades, simpler data integration, less manual intervention, and better data transparency—all of which have the potential to lower operational costs and risks. System consolidation may also translate into lower data acquisition costs thanks to fewer platforms, fewer users, and fewer requests for data from data providers. Finally, an integrated front-middle office, middle-back office, or front-to-back office could improve a firm’s response time when it comes to regulatory compliance, or bringing new investments and products to market.

A case of déjà vu, but different

In some ways, it feels like the asset management industry has been here before. Large vendors are offering firms a single integrated platform that could decrease their technological footprint, reduce system complexity, decrease risk, and lower operational costs.

Two things make this latest move toward system consolidation different from the mainframe era of the 1980s:

• The technology: Today’s consolidated solutions are more agile, offering vendor-supported configuration flexibility previously available only through custom code. Firms can have their data hosted on site or in the cloud, managed in house or by a service provider. Instead of a green-screen interface, they have an opportunity to tailor the client user experience. So, while the freedom of choice and flexibility offered by a decentralized, best-of-breed approach is being reduced, it’s not being eliminated entirely. Technological advancements have made it possible to still have highly customizable front-end user experiences—even as the back end moves to more centralized control.
• The opportunity: As firms look to refocus on core competencies and spend less time on basic functions, the elimination of legacy application debt - whether through system consolidation or outsourcing - presents an opportunity to move toward the next generation of technology, including robotics process automation, artificial intelligence, and predictive analytics.

  How to choose wisely

  In this era of consolidation and cost compression, vendor choice becomes critically important. Firms are making bigger bets on fewer service providers—so while there might be lower risk on the technology stack, there could be higher risk on the vendor side. If your vendor stumbles, your firm could suffer the consequences.

  Before making the leap, consider these four key questions:

• Are you willing to trade agility for security? Consolidating with a single integrated vendor could mean choosing stability over speed. Structure and control could restrict the pace at which service providers—and their clients—can evolve and advance. If your firm wants to stay on the leading edge of technology, then give careful consolidation to your vendor’s ability to innovate and stay ahead of the market. 
• Is your chosen platform truly integrated? Not all vendor platforms might be truly integrated. In some cases vendors might have acquired and linked different platforms together with varying degrees of straight through processing or core integration. Depending on your needs, this may or may not matter. If it matters, check under the hood to make sure you’re being sold true integration.
• Are you confident in your vendor? Vendor due diligence is essential. Research your service provider’s strategy and architecture design. Understand what their vision and growth plans are for the future. Are they investing in research and design? Are they at risk of being acquired by a consolidator? Proactively monitor and mitigate vendor risk by establishing a relationship instead of a traditional client-vendor arrangement.
• Are you prepared for disruption? The idea that single vendors can control the market for an extended period of time is a relic of the past. One only has to look to Airbnb in the hotel industry or Uber in the transportation industry to understand that disruption is a given in today´s markets.

History shows that the cycles between centralized versus decentralized, and best-of-breed versus integrated, are likely to continue to ebb and flow. As soon as the pendulum swings too far in one direction, there is likely to be an industry or business driver demanding a reverse reaction. We do know that growth spurs innovation and innovation requires agility, so over-consolidation could run the risk of limiting business speed and agility in reacting to change.

System consolidation is more than an IT exercise. It requires a well-conceived business strategy, operating model changes, and ongoing metrics tracking over time to confirm results are not only achieved, but maintained. There’s a business case to be made for consolidation; many asset management firms have chosen to make the move for greater governance and control. But leap too soon - and consolidation could come at a price.

About the authors

Dan Pitchenik is a Managing Director at Accenture and leads the company’s North America Capital Markets practice. He advises leading investment banks and investment management firms on their most important initiatives, working across revenue producing divisions, operations and technology. For many years, Dan has led transformational initiatives within the industry including operating model restructuring, post-merger integration, IT strategies, risk management and product-based growth strategies.

Jeremy Hurwitz is a Managing Director at Accenture and previously InvestTech Systems Consulting's CEO and Founder. Jeremy has over 25 years of experience in asset management and investment technology working with institutional investment organizations. He has extensive knowledge across a wide range of investment business models, technology platforms and architecture services. In the past 15 years, Jeremy has become a thought leader in Enterprise Data Management (EDM) and has led many global strategic EDM transformation programs, including the implementation and optimization of the leading EDM vendors’ platforms and services.