Focusing on Customer ExperienceThe head of global execution services trading and technology for a tier one global bank told us, "We wanted to focus on the important touch points -- the functionality that touched the customer. So we elected to build the user interface in-house where we could control the customer's experience and avoid educating vendors to the benefit of our competitors. But we had limited resources and knew there were a couple vendors that could deliver exchange connectivity much more efficiently than our internal team. This was the part the customers don't see. So we outsourced that part."
Today, sell-sides have viable, well-tested choices for connectivity, including experienced vendors that specialise in exchange connectivity. It also allows them to take advantage of economies of scale.
The decision to buy instead of build is driven primarily by six considerations:
- Wider choice of execution venues
- Ability to leverage the vendor's experience with other clients
- Ability to free up in-house resources to better service clients
- Potential efficiency gains in cost and operational overhead
- The vendor's ability to bring more specialised technical expertise than the firm's internal resources
- Whether choosing a particular system will enable them to differentiate themselves on the street
There are big disadvantages to trying to build and maintain non-core or commoditized functionality in-house. For one, it drives up maintenance costs.
Using Commercial Systems for Lower TCOThere is also substantial evidence that internally built systems have a substantially higher total cost of ownership (TCO) than commercial solutions. In research on feed handlers conducted by Aite Group in mid-2012, they found that "There is no math that supports internal development over purchasing a commercial feed handler solution…. By outsourcing feed handlers, businesses can save US$500,000 to US$1.5 million annually." Aite Group found that "Even firms with as few as five engineers pay more to support their internal feed handlers than a commercial solution would cost them."
According to Aite Group research, a typical global sell-side firm spends approximately 75% of IT funds on maintenance.
If 75% of IT resources are focused on maintaining a patchwork of internally built systems, then those resources can't focus on developing products and services that will help with competitive differentiation and attract more clients. This can also affect talent retention, as skilled technologists often gravitate to projects where they can build something new.
Establishing Competitive DifferentiationSeveral of the sell-sides we interviewed are actively looking for ways to focus their internal IT staff on projects that will enhance the customer experience, improve customer "stickiness," provide differentiation, and increase profitability. To do this, they're training some of their top resources to be business analysts and vendor managers – enabling them to effectively outsource and manage those areas that don't offer competitive differentiation. Then they can focus their internal IT talent on interesting and revenue-centric projects.
In summary, simplifying the gateway infrastructure and using vendor-supplied and vendor-maintained systems can allow a sell-side's IT team to focus on innovation. Differentiate based on service, market reach, and capital efficiency instead of spending time "painting the Brooklyn Bridge."
About The Author:Gerry Turner, Executive Director, Object Trading
Gerry is an Executive Director for Object Trading and has been at Object Trading since 2008. Based in the UK, Gerry is responsible for the European and North American functions of Sales and Business Development. As a Board member, Gerry brings his expertise of sell-side technology and technical planning process to the business. Prior to Object Trading, Gerry spent most of his career in Sell-Side Investment Banks working on Trading Floor Infrastructure before moving to Electronic Trading in the mid 90's and then on to Front Office e-commerce management.