A quarter of global investment management firms rely on outdated technology
23 September 2013
Category: News, Asia, Global
By Asia Asset Management
SimCorp StrategyLab, a private research institution sponsored by SimCorp, has released a new study titled, “Legacy Systems: The inconvenient truth and the cost of doing nothing”. Based on interviews with over 500 buy-side institutions across the globe and research from more than 100 industry sources, the paper highlights the serious consequences of relying on legacy systems.
The report states that one in four buy-side firms worldwide run core business operations on legacy systems. Given that the top 2,000 firms collectively manage upwards of US$80 trillion in assets, more than the 2012 global gross domestic product (GDP), trillions of dollars are at the mercy of outdated technology.
According to Ingo Walter, president of SimCorp StrategyLab and professor at the Stern School of Business, New York University: “The financial crisis of 2008 was attributed in large part to opaque instruments, toxic mortgages and the breakdown in corporate governance. However, there has been a lack of insight into the role that technology systems played in accounting for why executives were not able to access the most basic information on the state of their businesses in order to take corrective action. Neither has there been an analysis as to why some firms were better able than others to understand their counterparty exposure and mitigate the losses resulting from the collapse of Lehman Brothers and Bear Sterns.”
"In Asia, as the region strives to develop as a financial hub, knowing that one out of four investment managers operating on legacy systems is a critical cause for concern. Outdated technology presents a risk to financial institutions in lowering efficiency and transparency in business processes. Legacy systems are often unable to forecast and track financial information accurately on a real-time basis resulting in executive management reacting too late and too slowly," says Peter Hill, managing director for SimCorp Asia.
He adds: “As a thriving financial hub, it is surprising to note that even firms in Hong Kong are no exception. This means that there is a 25% chance that your fund manager is using a legacy system to manage your funds. Fund managers cannot remain on systems that are infrequently updated and unable to adapt to new business processes. As the finance industry increasingly recognises the importance of technology in strengthening their business processes, firms must utilise world class software in order to offer the best expertise and services to their customers."
Among the industry sources cited in the 40-page study is the MF Global trustee’s report presented by Louis J Freeh, former director of the US Federal Bureau of Investigation. The Freeh report alludes to system deficiencies leading to MF Global’s “inability to forecast and track financial information accurately on a real-time basis resulting in executive management reacting too late and too slowly to the growing liquidity pressures placed on the company by the Euro RTMs and new trading desks”.
A CEB TowerGroup report cited in the paper explains: “Replacing legacy systems will soon become a fundamental requirement for FSIs seeking to retain or regain marketplace leadership”*.
The SimCorp StrategyLab study defines ‘legacy’ systems as those that:
Have difficulty providing a real-time consolidated overview of positions and holdings and;
Often run on outdated, poorly documented or obscure technologies and;
Are infrequently updated and;
Have difficulty in automating or adapting to business processes.
More than 100 primary research sources were consulted in the construct of this SimCorp StrategyLab meta-study. Sources include: Ovum, Aite Group, CEB TowerGroup, Celent, Ernst & Young, Deloitte Consulting and Harvard Business Review.
*Source: “Sourcing, Resourcing, or Outsourcing: Globalizing Operations in Financial Services by 2015,” CEB TowerGroup, July 2011.