A large part of maintaining a successful investment-management business on a global scale is having technology structured in the most efficient way possible. In the back office of global enterprises, where general-ledger recording and accounting take place, information is often processed in multiple countries, on disparate systems, and eventually sent to one central location for client reporting. While that might not seem excessively inefficient on the surface, stressful situations can bring the cracks in such a back-office structure to light.
Take, for example, the recent Enron debacle, in which that company's stock tumbled in a very short period of time. Portfolio managers around the world needed to immediately know how many Enron shares their organizations held and, in certain cases, managers had to query five or 10 systems, operating in locations around the world.
"When you are on different systems you suffer from having higher support requirements," says Blair Kanter, principal consultant in the Investment Management and Capital Markets Consulting Practice (IMCAP) at PricewaterhouseCoopers. "When you need to produce a report from that data it must come from several places, so you have an effort pulling all of that together."
Think how much more easily the information could have been culled, suggests Kanter, if that number was closer to three, or perhaps, one.
Paul Migliore, a partner in IMCAP at PricewaterhouseCoopers, says that having one global portfolio-accounting solution is not available today. In fact, he says that recently, a client, which had selected a single accounting system for worldwide use, decided to bring the plan to PWC for approval. Rather than receiving the consultant's imprimatur, however, the firm was told there was no chance the selected system would support its global-accounting needs.
The main challenge to finding a global solution for such worldwide securities-accounting needs is that almost every country has unique regulatory and tax-reporting requirements.
"Australia is tax sensitive and complex," says Migliore, "which is different from the U.S. In Europe, the issue is client confidentiality. No vendor can support all global requirements yet. The first step is to regionalize the world." By regionalizing the world, he suggests that firms try and pare down to one system for the Americas, one for Europe and one for the Pacific Rim.
But first, Migliore recommends that firms look to unify disparate systems within one country. In the United States, for example, he says that some large investment-management firms are using different accounting applications for the different areas of their business.
"Some firms have different systems for mutual-fund accounting, institutional accounting, private-wealth accounting, hedge-fund accounting and trust accounting," Migliore says.
Standardizing on one application for a multitude of needs is difficult, however, because most vendors offer different solutions for each of the above accounting areas. Some, though, are moving to develop a global offering.
"Eagle (Investment Systems) has done a good job of going after all the different products in the U.S.," he says. "They are also making a name for themselves in Europe, but I don't think they have done anything in the Pacific Rim."
Also mentioned as a top vendor by Migliore is SunGard, which offers a different system for almost anything a financial institution could possibly need. But that presents a different problem for a potential buyer.
"SunGard has the size and the money but what is their strategic direction? They have so many products but what is their focus? If it's not investment accounting, do you really want to climb into bed with them?" asks Migliore.
Jim Mazarakis, managing director of the private-banking and investment-management group at JPMorgan Chase, who also heads the U.S. applications-delivery group, has chosen SunGard's Xamin product for portfolio measurement and attribution because it is "truly currency neutral," another important consideration when looking into globally-functional applications. A truly currency-neutral system, he says, means everything does not need to be converted back to one base currency at the end of the day.
Mazarakis says that JPMorgan Flemming, an asset-management organization which handles over $600 billion in 36 countries, is currently upgrading from an older SunGard product, Superf4.
"Xamin has been rolled out in Europe and is bring rolled out in the U.S. for our institutional and private clients," he says.
Xamin is based on a multi-tier client server architecture for scalability. The database server, application server and client workstation interact using messaging technology which enables several application servers to run simultaneously, each awaiting a user request. For processing volumes, additional application servers can spread the workload.
A key feature of any advanced, cross-border portfolio-measurement system, says Mazarakis, is its ability to differentiate between, and exclusively measure, the security portion of an international trade from its foreign-exchange component.
Kanter says it's important to ask, "How (a portfolio-attribution system) bifurcates realized gains and losses between a securities component and an FX component?"
Mazarakis says his organization runs the Xamin software out of New York, where it is accessed by international locations. Employing that structure allows the company to save some cash, as SunGard charges according to the number of servers running Xamin. "When you are paying for the license by server you want to have it run in as few places as possible," he says.
JPMorgan Flemming, along with firm's private bank, was one of SunGard's first Xamin clients and thus had some ability to tailor the product to suit its needs.
However, being first with a vendor is usually a double-edged sword, says Mazarakis. As a positive, firms that act as Guinea pigs might receive price breaks and more hands-on attention to their needs, while getting the latest technology available on the market. But being on the cutting edge could means cutting out the reliability and deep functionality that come with an established product.
To establish a more cohesive global network, the first thing most experts recommend is to standardize the databases and platforms that the accounting and performance applications run on. "When you standardize database technology, there's less of an issue in trying to consolidate the application technology," says Migliore.
When trying to make the transition from many to few, often the greatest challenge lies not in the realm of technology but politics. In order for systems to consolidate, a portfolio manager in France may be required to give up an application they are comfortable with and move to one being adopted company-wide. A large buy-in from mangers is helpful in any global implementation.
Cost can also be a roadblock, as vendor pricing often reaches the upper limits of affordability, even for the largest firms. One PWC client, says Migliore, was informed that its implementation of a portfolio-accounting system would be $50 million.
For reasons like that, many are now turning to outsourcing. Outsourcing, offered by large custodians such as State Street, appears to be the solution of the future for many investment-management firms looking to free themselves from back-office technology work and focus on managing money. According to many in the industry, as the large custodian banks develop their outsourcing services and begin to market more aggressively, firms will increasingly embrace their offerings.
For products like performance measurement and portfolio accounting, establishing a vendor relationship is akin to a marriage: be sure about the relationship before the wedding, because breaking up is hard to do. Mazarakis says making a choice isn't easy because, "The best vendor three years ago is not the best vendor today. This is an application you don't want to change too often because of the extensive amount of work you have to do with your internal applications."
Migliore concurs, saying that firms should chose a vendor that will continually add functionality to the product. "You have to look at where they are going to be in five years because wherever they are, that's where you're going to be."