"I pity the fool." While Mr. T never applied this saying toward financial technology, the words have never been more appropriate than when looking at managing the securities industry IT infrastructure. While investment banks continue to grow, well lets say expand, their technology infrastructure has expanded as well, until it has become, in many circumstances, a lead weight around the foot of the organization.
The absolute largest problem with investment-banking technology today is not reference data, STP, integration, or the integration of new technology, it's the weight of its own legacy infrastructure.
While years ago architectures were simple, firms operated in one or two geographies and focused on a handful of products; now infrastructures must encompass multiple geographies, products, client segments, delivery channels, and in may cases, internal but separate organizations.
The equity business, for example, which is simpler than fixed income, is not just U.S. listed and OTC institutional and retail anymore, but now must include Canada, Europe (which is not all homogenous), Asia Pacific (non-homogenous as well), Japan, and more.
Firms must also connect to at least seven U.S. execution venues, as well as 15 to 20 non-U.S. marketplaces, and link via FIX to hundreds of clients which include not only traditional buy-side firms but hedge funds and semi-professional individual investors. They must not only provide traditional high-touch trading services but also direct access, analytical trading, and portfolio-modeling capabilities as well.
This technology can not all be acquired via shrink-wrapped solutions from your local Comp USA outlet. It has taken years, investments of billions, and teams of thousands to acquire, integrate, and implement firms' technology footprints.
So how did firms let this infrastructure get out of control?
Well, it's easy. It just happens. Firms pressure technologists to support new businesses quickly, while profit opportunities are great and competitors few. During the innovation period, vendor solutions are rare, so firms develop proprietary solutions, which in most cases have been easier and faster to develop from scratch rather than adapting existing technologies to manage new products or emerging geographies.
Once applications are developed, however, competitive pressures require firms to redeploy those technology assets to the next critical initiative, not redesign those products as vendor-based solutions become available or business models mature.
So how does one begin to rationalize this ... this ... this massive infrastructure?
It starts with a strong commitment from management. Rationalizing complex architectures is not accomplished without upsetting the status quo. Users working with sunset technologies need to be convinced it's for the best, costs will decrease, and important functionality will not be lost. Business owners must understand the transition, the timetable and the benefit. This will be all but impossible without business leadership and a strong commitment from the top.
Once green-lit, the rationalization process begins with a strong IT architectural and business plan. The IT plan focuses on application topography, connectivity, product support, delivery channels, and how well the existing technology fits into the future technology architecture. The business plan focuses on a user's business perspective, investigating the level of business support, functionality, competitive positioning, maintenance cost, and the importance of the technology to overall business goals.
Together these plans portray where a firm needs to centralize, where it is competitively behind, the cost/benefit of centralization and the cost of doing nothing. The plan should detail who the firm is chasing, what it will take to catch up and excel, and the cost/benefit of inside and outside alternatives, such as vendor-based solutions and outsourcing.
The prioritization process begins once this information is gathered, alternatives developed, and ROI models created. Only then, once planned, cost/benefited, and prioritized, should rationalization, or for that matter any large technology project, be initiated.
---Larry Tabb is founder and CEO of Westborough, Mass.-based The Tabb Group, a financial-markets strategic-advisory firm.
Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio