Building resiliency in today's financial climate
02 December 2013
Category: News, Asia, Global
By Peter Hill*
The Asian financial crisis, questioned the manner in which investment management industries drove growth and attracted new investors while relying on ancient technology systems.
Lessons from history
To better understand the divergence from the old to the new, and how this is a significant progression in legacy systems, let’s take a look at what history can teach us.
The industrial revolution is the perfect example for illustrating how old methodologies, technologies and set structures have eventually become obsolete. This particular era saw a profound change in social structures; from the farming feudal system of agriculture to new technology of machinery, these improvements have aided the process of efficient and effective production over time.
Just as the industrial revolution changed the social and economical landscape, new software has replaced the out of date legacy systems. If farmers of today were to utilise farming methodologies from the pre-industrial era, such as cows to plough the fields, society itself would collapse.
How then does this apply to legacy systems? Well, legacy systems are no longer as effective and efficient as they were ten years ago. The structure and technology of business has changed in a dramatic way, just as a machine replaced the cow, then too has the new software and technology become necessary to facilitate the evolution of financial software.
Reasons to resist change
Financial institutions have had their reasons for holding off revolutionising their investment systems. Prior to the financial crisis, when profits were in abundance, there was little incentive to jump off the burning platform. Instead less costly alternatives such as feature enhancements were adopted in legacy systems further adding complexity to their environments.
For any business, knowing the critical value of maintaining systems versus investing in state-of-the-art technology for future growth is imperative. These dual objectives are even more important in the investment management industry where performance and cost are integrally tied to IT, particularly in light of increasing regulatory pressures.
Proof is in the pudding
In the Monetary Fund Global meltdown, failing systems were a major factor in the demise of a reputable firm. Shockingly, many leading financial services firms are still heavily reliant on decades-old legacy systems.
SimCorp studies show that 56% of buy-side executives are not confident in the accuracy of their current record-keeping systems. Some 30% say they cannot calculate exposure in real time and 40% make critical decisions based on poor quality data.
Yet another survey found that almost 35% of respondents have no immediate plans to make technology improvements in the back-office.
These results reflect that legacy systems are becoming obsolete and a revolution is necessary in the financial industry. To deal with uncertain markets and stiff regulatory requirements, investment firms require a system that is efficient and effective to adapt to this change.
Just as the industrial revolution was based on new technologies to facilitate production, economic systems too require technology to facilitate change to remain relevant. Firms that evaluate and transform their systems are the ones who will stay ahead of the curve.
Reasons for change
The inherent characteristics of legacy systems can be detrimental to a capital market firm’s performance. Legacy systems are built on antiquated programming languages, software and/or hardware that are typically no longer supported by the respective vendors. Even if a vendor happens to have the particular software, they would charge an exorbitant price.
System inadequacies result in an entanglement of spreadsheets and other manual processing. A disparate system landscape offers no single investment book of record. Minimal vendor commitment, lengthy intervals between new releases and low R&D spend are all common. There is a lack of instrument coverage, consistency and granularity. The lack of a consolidated overview leads to multiple versions of the truth, which can be confusing and frustrating.
Often these are back-office systems, but the consequences for the entire firm are far-reaching.
A major consequence of being on a legacy platform is the inability to calculate, in real-time, what is owned, what it is worth and comprehensive asset exposure. It can take too long to enter new markets, launch new products and onboard clients. It is difficult to obtain accurate reports on the state of your business, and too much time is spent figuring out how to comply with new regulations.
Unwanted everyday realities include overly burdensome manual processes and workarounds, trade settlement issues, the inability to accurately forecast cash and collateral, and ultimately, failed projects. Without an automated, up-to-date IT platform, investment firms face numerous risks.
Breaking away from tradition to make a difference
There is no better time to break away from tradition. Research and studies show that legacy technology, in any industry, is more inclined to do more destruction than good. With the amount of investment knowledge doubling every four years, firms should not be relying on technology that was made to conquer financial complexities of the past.
Taking on a modernised IT system is an exercise in risk mitigation, but also in growth. State-of-the-art technology can deliver accurate reporting to investors, properly manage risk across an enterprise and position a firm for scalability and growth.
In today’s connected world, technology is a powerful enabler to drive change. Whether it involves adopting an investment book of record, embracing regulatory reform or accepting that portfolio accounting matters, a proactive, forward-thinking approach will benefit investment firms for years to come.
Transforming the foundation on which a service functions can be a daunting task for some but its return on investment is worth it in the long term. Facing change head-on and modernising financial systems is a game changer against competition.
The financial industry today is similar to a battlefield; the best thinkers, most prepared contenders and those who are willing to take a chance on change will be the last man standing.
*Peter Hill is managing director for SimCorp Asia