Risk Management Spending on the Rise

Spending on risk management solutions continues to be on the rise as buy-side institutions are increasing their risk coverage and are moving toward new functionality in vendor supplied solutions. Recent research conducted by The TowerGroup and InvesTech Consulting Group shows that risk spending will increase over the next five years as buy-side firms seek out an increasing number of risk systems.

"Risk management has been a key issue or initiative for a lot of the big institutional investors on the buy-side," says Bruce Vollert, principal and co-founder of InvesTech. He explains that the market for risk management is going to continue to expand, with the buy-side accounting for an increasing number of sales.

The TowerGroup report estimates that enterprise risk management spending will experience a 16% overall growth rate during the next five years. "The growth is going to be pretty fast overall, with an increasing proportion of that directed toward vendor supplied solutions," says Richard Roby, director of research at The TowerGroup. Volatile market conditions and abnormal market behavior in 1998, particularly in Southeast Asia and when the Russian ruble collapsed, have opened the door for greater accuracy and functionality in risk analysis, Roby explains.

Vollert notes that vendors are catering more to the needs of the buy side with new functionality for management and analysis of broader asset classes. "For buy-side institution, it comes down to their risk return trade-off, and as the portfolios become more complex, there are a variety of factors they have to monitor to really get a handle on risk," says Vollert.

Roby agrees, adding that the increased reliance on vendor solutions also derives from the responsibility placed on institution's shoulders to ensure Y2k compliance. If the systems are vendor-supplied, the institutions would have "potentially removed a lot of headache," dealing with Y2k compliance, says Roby.

The focus of these systems is shifting from stand-alone market risk analysis to integrated solutions addressing credit, liquidity and operational risk as well. "What's driving the vendors now and will be driving them over the next few years is the need to be able to quantify and integrate credit risk and market risk," notes Roby. "You can't measure market risk in a vacuum any more, you have to be able to get a handle on what your exposure would be when markets exhibit extraordinary behavior."

In terms of dollars amounts allocated to enterprise risk spending through 2005, the TowerGroup estimates an increase from $1,460 million to $3,555 million. Of the total IT budget amounts, spending on external vendor solutions is estimated to rise from $620 million in 1999 to $2,365 million in 2005.