23 September 2017
Peter Hill

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Peter Hill - SimCorp

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Why consolidation makes sense

13 October 2016  |  3505 views  |  0

Does anybody still remember life before the smart phone? I certainly do. The weight of my briefcase carrying a wide range of devices (e.g. Palm Pilot, mobile phone, laptop, mp3), in addition to a printed (!) Lotus Notes calendar and a book is hard to forget.

How much easier would our lives be if these tools could be consolidated into one or two handy items? Steve Jobs was the one to see an opportunity here with the first generation iPhone which changed the world forever in 2007. I have to admit, I didn’t buy into the idea at first. I ended up accepting the compelling arguments put forward by my friends who managed to convince me that my life would be vastly improved if I bought one of these alien devices! Like most of us, I now use a smart phone for both personal and professional purposes, in addition to an iPad. All these devices are seamlessly integrated and operate on the same technology platform providing me and my family with the information we need anywhere and at any time.

Unfortunately, however, in the institutional markets, the integration of technology, particularly in trade processing, isn’t happening at quite the same speed. Currently, instead of operating on one system, investment managers may be using 10 or more disparate systems that naturally come with intrinsic inefficiencies and, therefore, risks. Which begs the question, why expose yourself to vendor risk through maintaining multiple systems when it makes sense to consolidate? While we are seeing increasing numbers of firms realise the benefits of this approach, what is the convincing argument to tip the scales? So here are three good reasons to consolidate.

1) Achieving front office transparency, as it relates to valuation and analytics. Being able to demonstrate solid investment performance in a particular strategy is no longer good enough. Investment managers can differentiate through additional proof points, such as transparency and credible operational infrastructure to scale and extend offerings.

2) Simplification of a firm’s operating model. It further supports the increasing demand for transparency and helps firms overcome issues that emerge when portfolio managers and traders spend too much time questioning start of day position and cash figures, instead of focusing on their core activities – making investment decisions.

3) Improving investment managers’ control over their investment strategies. For example, if an investment management firm operates on four different platforms, should it decide to start trading a new instrument, it would need to coordinate with all four software vendors before the new instrument could actually be added. And with multiple systems involved in trading, accounting, analytics and reporting, if any one of those systems doesn’t properly support a new instrument type the investment manager must rely on labour intensive, risky, manual workarounds.

In fact, over the past few years we have seen many investment management firms starting to recognise the need to consolidate their disparate systems. A large institutional investment manager I have recently spoken with shared an impressive success story. A few years ago they initiated a multi-phased operations and technology transformation programme. Having recognised the need to greatly simplify their operating model, they reduced the number of systems and service providers they employ. This led to significantly improved STP rates and a more efficient reconciliation process. In addition to that, the firm started providing more timely and accurate information to their investment professionals. And they reduced their annual operating costs.

Almost on a daily basis I get to speak with asset managers who are not realising the benefits to be gained from an integrated system strategy. It reminds me of the days before I realised how transformational the iPhone was! However, often there are some barriers holding them back from making the move. That will be the topic of my next blog – stay tuned.

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