Strategic drivers
Global buy-side firms are striving to lower the cost of ownership of their investment management solutions in a continuing low-margin environment. However, they are also facing a complex world of increasing data volumes, regulations, reporting demands, and multi-asset class complexity, which all put new demands on their operating models. This situation has spurred a growing demand for integrated front-to-back offerings, increasingly recognized to be the only solutions able to meet all these demands in a cost-efficient manner.
Large global investment managers expect their solution providers to support an increasingly complex and multi-asset portfolio lifecycle, with automated workflows, integration, and full data transparency across the front, middle, and back office. Moreover, they also expect these solutions to be operationally efficient, regularly upgraded with state-of-the-art functionality, and flexible enough to accommodate changes in customer preferences, new regulations, etc.
In a recent interview, Spencer Mindlin, Capital Markets Industry Analyst at Aite Group, said that: “Vendors realize that clients are looking to reduce their IT costs and risks. Clients are now drawn to global, multi-asset, front-to-back solutions with lower total cost of ownership.”1 As a result of this growing demand from existing and potential clients, some investment management software vendors and asset servicers are looking to stay competitive by filling technology gaps in their existing offerings. This can be done in two ways: By innovating and developing your own software and services or by strategic acquisitions of gap-filling technology from other companies.
On the back of the recent acquisitions, the latter looks to be the most popular way to go, and we should expect other software vendors and asset servicers pursuing the same strategy in their attempt to achieve full front-to-back offerings over the coming years. However, a number of challenges come with filling functionality gaps through acquisitions, e.g. the challenge of integrating an acquired product into your existing offering, often already being a mix of many solutions. Integration can be time consuming, delaying the time to market, and increased risk, due to data reconciliation between new and existing systems – all to the detriment of the buy-side clients relying on the offering acquired. As most recent acquisitions have been front-office-related, the data issue is especially important here, as reliable, real-time data is the foundation of a successful front office.
Commercial drivers
Some financial services providers are driven by more short-term tactical financial goals to support their growth. Some of these firms look for smaller players that have neglected to invest in their product, causing the company value to decrease. The more viable players in the market take this opportunity to acquire a company at a cost, which can easily be recovered by the cutbacks achieved through synergies and scale, in the consolidated entity.
What often happens is that the companies acquired are seen as cash cows, and therefore lose their independence once they are bought, affecting the people, Intellectual Property, existing clients, etc. To realize ROI quickly, shared services are mostly stripped out of the acquired business immediately. The new product is added to the roster of solutions that the existing sales people are required to sell, resulting in a corresponding reduction of sales staff in the acquired business line and an overall less-informed sales team.
Further down the road, as the acquired product sits within a stable of competing solutions, it will be rivaling for attention from management and product developers. As a result, the product risks losing out to the high performing offerings already owned by the company. Worst case, existing clients will suffer the consequences of a product sentenced to be retired sooner rather than later. In the Markets Media interview previously referenced, Mindlin also commented: “While there are opportunities to deliver gains to clients from integration and synergies, there is also the risk for clients to experience negative effects.” (For more recent industry commentary on the potential impact on buy-side clients, see the call-out box ‘Growing organically or through M&A – what’s the difference to the buy side’)
Common to the concern about the end-user impact of acquisitions expressed by many across the industry is the realization that there’s a big difference between developing a single system covering the all of the front-to-back investment management operations and using acquisitions to build a system comprised of multiple applications covering a front-to-back scope. And even if the intention really is to integrate it into one front-to-back system, this will be a paramount investment – an investment which is likely to prevent any vendor from developing other new functionality in the meantime – and a quest we remain to see a vendor succeed with.
Klaus Holse has held present position since September 2012. Before joining SimCorp Klaus Holse was with Microsoft since 2001, most recently as Area Vice President of Western Europe and Corporate Vice President at Microsoft Corporation where he was responsible for Microsoft’s business in 14 Western European countries. Other positions in Microsoft count Corporate Vice president, Sales and Operations for Microsoft Dynamics, as well as General Manager for Microsoft Germany. Before joining Microsoft Klaus Holse was 12 years with Oracle, with five years at the Corporate HQ in California and a position as Senior Vice President. Klaus Holse has also been the CEO of a smaller listed software company as well as CEO for a VC fund.
1. ‘More Trading-Tech Buyouts Ahead?’, MarketsMedia, August 1, 2018.