I recently had the fortune of hosting both Alpha FMC and Swiss Life Asset Managers during last month’s International User Community Meeting in a session on system consolidation. The aim of the session, for those who were unable to join, was to:
- Discuss the enterprise landscape today and why there’s movement toward consolidation
- Offer some business perspective on the pros/cons and what planning measures can be taken to support the business case and budget
- Supply client consolidation examples, both insourced and outsourced
System consolidation empowers firms to be innovative and act with agility by removing the technological limitations faced by so many firms today. If people came to my session to be convinced that consolidation was the way to go, they were missing the point. In fact, the overwhelming majority in the room agreed (at 94%) that system consolidation is the way to go. To draw an analogy, most would pick a solid, well thought out, pre-packaged, complete with directions, foundations and build-on-parts-included Lego set over a house of cards any day.
The session focused more on what in the market has brought about this common mind set, what should be done to measure the level of success, and how other firms have rolled it out (aka the varying models, or Lego kits, that are available).
The enterprise landscape: Why so many firms are buying lego sets
Alpha FMC’s Greg Faragher-Thomas began his presentation acknowledging the movement toward consolidation and that firms are going with an enterprise solution (i.e. a Lego set) to achieve technology simplification. He also pointed out the evolution of available enterprise solutions, where they are now offering more open platforms, referencing our movement to the cloud that SimCorp Head of Global Product Management, Marc Schröter, presented during his product roadmap session. Greg then went on to discuss some of the drivers behind these movements, including:
- The importance of centralized, quality data
- Growth in complex investments
- Ease of deployment and mobility
- Operational efficiency & complexity
- Increased regulation demands
According to Greg, “Open, yet consolidated, platforms are the way of the future and best allow investment managers to commoditize the functions they feel are lower value add, while still customizing those they feel must be to achieve the desired market differentiation.” Overall, the voting audience chose quant analytics as the most important one to maintain as a customized solution. Of course, my curiosity got the better of me and I had to ask what types of functions fell into the “other” category, but no one was willing to “show their cards” so to speak.
Calling all business owners: Legos sets should cost more than a deck of cards
My portion of the presentation entailed reviewing the pros and cons of consolidation, and reviewing some of the business considerations when moving down this path. The extensive list of pros far outweighed what has surfaced in the past as cons. Since the polls clearly showed agreement on this, and since this session was not about trying to convince those that don’t need convincing on the pros, let’s focus on dissecting the cons for a brief moment and why, in my humble opinion, they don’t carry a lot of credence:
- Vendor risk (all eggs in one basket)
- Cost/budget for (potentially) multi-year transformation
- “Big bang” upgrade risk
- One size doesn’t fit all (best-of-breed is better)
Vendor risk is really all about whether you can trust the technology partner you work with. There are clear ways to measure their ability to come through, including but not limited to the level of integrity with which they operate, their reputation in the market, their ability to deliver what and when expected and their overall sustainability as a business. There’s also one other key point that begs consideration here, and that is if we’re going to assess vendor risk, we must also assess the level of risk assumed by using multiple vendors (i.e. integrations, source data, latency and reconciliation issues, etc.) as a point of comparison. Risks are present regardless, so the question is which presents the least risk.
Regarding the cost/budget concern, firms that have chosen a best of breed model to support their business should add the total cost of ownership, inclusive of upgrades, integrations, and implementations together (i.e. the cost and labor of buying and building with many decks of cards that continuously collapse and must be rebuilt over and over because the right supporting foundation isn’t there) to have fair judgment over the proposed cost of a consolidation project. Consolidation can be planned over multiple phases to spread costs and accommodate budgetary needs. Estimating and documenting anticipated efficiency gains further ensures the business case is there. In one of the case studies we cited from our website, the overall cost to income ratio for Challenger Ltd., a AUD 65 billion AUM Pension Manager, was reduced from 49% to 37% over 5 years.
To touch on the third bullet above, the numerous unsynchronized upgrades that must be dealt with when using multiple vendors/solutions may indeed be considered less risky by some than a “Big bang” approach. There is no rule, however, that says all components must upgrade across the organization all at once, just as they don’t have to be implemented all at once.
Lastly, when considering a move to a consolidated platform, the functionality must certainly meet requirements, though in a recent study put out by Adox Research it wasn’t top of mind for the 100 investment management firms surveyed. Vendor support and reputation and ease of user adoption were what mattered most to these participants. With this in mind, the remainder of this portion of the session focused on suggesting firms back up a bit before jumping into RFI/RFP mode and apply some common sense best practices toward building the foundational components required for a solid business case and ROI.
Swiss Life Asset Management: Lego sets come in multiple kits
SimCorp offer varying degrees of consolidation on the platform, where some of our clients continue to outsource their back office while others apply a full front to back model for ultimate optimization. Swiss Life Asset Managers, with CHF 210 billion AUM, is one of those front to back cases. They are a true success story and we were fortunate enough to be joined by Fiorina Stutz, Head of Business Analysis to discuss their transformation. They now use SimCorp Dimension for approximately 85% of their business which has done wonders for them from an operational efficiency standpoint.
Mind you, Swiss Life Group is one of Europe's leading comprehensive life and pensions and financial solutions providers with a global market presence in over nine countries. They diligently plugged away at a multi-phased, global roll out between 2006 and 2010. “It took a lot of strong resources and dedication, but we finished this project on time and on budget” says Fiorina. She didn’t recall an exact count on the numerous systems they were able to decommission, but confirmed that there were many that they were able to condense down to one. The dramatically simplified reconciliation process and timing was another key benefit she touched upon.
Her candid commentary was of high interest to our audience, where she also shared some of the considerations encountered during the process, like the regulatory differences from one country to the next on pre-trade compliance. She mentioned that while there weren’t any product deficiencies, they were unable to implement pre-trade compliance in some countries due to regulatory constraints. They were, however, able to institute post-trade compliances in all locations.
Setting expectations: Legoland wasn’t built in a day
If conference participants came to my session expecting to leave with some sort of epiphany, they were likely disappointed. The only epiphany is the movement toward consolidation itself. Once the road to efficiency and business transformation is chosen (the visionaries favorite part), there’s no specific right or wrong way to get there (i.e. There are hundreds of Lego sets, all different yet conceptually similar, to choose from). Requirements, prioritization and timing is firm-specific. Sure, offering examples, guiding principles and prior business cases allow for ideas in approach and direction, but the biggest take away is that there aren’t any shortcuts on digging through the details and putting the effort in on laying out the success criteria specific to the individual firm. This will of course require time, resources and discipline.
Embarking on a large-scale consolidation project is never an attractive undertaking, but the existing state of technological infrastructures and escalating market drivers are dictating the necessity. The outcomes have been documented. For those firms that buckle down and persevere, there will be little arguing the benefits achieved from this one- time initiative, both from a cost/efficiency and market differentiation standpoint. Control over the data translates to control over investment decisions.