However, the recent track record of such endeavours has not been good. This article looks at broad trends and suggests some factors that might be considered to ensure success in the future.
Trends Driving Systems Replacement and Outsourcing
In the UK, several private banks and wealth managers are looking at replacing or outsourcing all or part of their systems. Key reasons driving this are:
1 The last few years have seen client volumes expand significantly, largely due to market growth, which has brought with it the need for more scaleable solutions.
2 Legacy systems are the bulk of current systems and with a patchwork of automated and manual solutions, they are costly to maintain and in need of replacing as they are coming to the end of their lifecycle.
3 The increasing complexity of the asset management processes and broadening instrument classes. Derivatives are one example. With this increased complexity comes the need to improve key controls. In one recent asset management key control process review, we identified over ten control hot spots ranging from reconciliations to corporate actions, which needed attention and could have benefited from increased automation.
4 Increasing client requirements for more information, better reporting and ability to access the Internet for data and research to support their decision making
The track record of selecting and implementing systems in the private banking and wealth management industry has been average to poor. Several systems have been significantly delayed in implementation or in some instances abandoned altogether.
The complexity and high functionality required by a typical private bank and wealth management business has been part of the problem. Functionality can encompass client relationship management support, banking, asset management, trust and tax. It may also involve a business model which encompasses both domestic and cross border operations. All of this adds up to complex choices and trade offs for business and IT managers.
Complexity is further reinforced by the large number of systems providers (over thirty in the UK), all offering multiple solutions with varying levels of functionality depending on their different heritages, for example whether they come from a banking, asset management or accounting fund management background.
For those who are part of a bigger financial services group, they need to consider whether they can utilise a group solution for all or part of their systems replacement. There are other options to consider such as whether to:
- Utilise other technology platforms such as a fund supermarket or a wrap type platform?
- Outsource from a specialist private bank and wealth manager business process outsource supplier?
Outsourcing is less mature than other UK financial service sectors such as institutional fund management, but is now developing rapidly and has become a more viable option to consider alongside the traditional systems replacement or hosting route.
Given the complexity and increased number of options to consider, the challenge is to identify, select and implement a systems replacement approach that delivers a cost effective business advantage.
The stakes for getting this right are high: typically a large player is looking at costs of around 20 million pounds with 24-36 months implementation time.
A Picture of Success
Through discussions with the industry, it is clear that despite these challenges, several players have already or are currently successfully implementing IT replacement and/or outsourcing arrangements. They exhibit three characteristics which help assure their success:
1 They adopt a business, as opposed to an IT led approach;
2 They take a strategic approach to their systems investment strategy; and
3 They employ a fast track structured and sequenced approach across the systems/sourcing lifecycle.
By starting with a business rather than systems driven approach, successful players typically start by defining the scope of functionality required by processes across the business value chain, taking care to involve the entire business.
They then build on this by taking an overall strategic view of their approach to systems, looking at options and choosing the one approach which best suits their needs predominately selected from the following combinations:
- Adopting a strategic supplier approach by using an integrated wealth management platform supplier;
- Adopting a core applications focus, typically around focused front office and back office applications;
- Choosing an outsource arrangement typically around the the middle and back office;
- Adopting a best of breed approach for example client relationship, portfolio management, order management, accounting and reporting etc; and
- Developing a hybrid approach combining in house development together with selected applications.
Typically, they take a view depending on their current state in terms of assets under management, volumes and transactions; their desired future state; their ability to invest; and the speed of change required from the former to the latter.
For example, a smaller private bank and wealth manager might adopt an integrated wealth management (front to back office) platform, possibly trading off some functionality for an overall more cost effective solution.
Other private banks and wealth managers may choose to outsource the middle and back office as a strategic decision, focusing the institution on only those systems which support their provision of high value added activities to clients. These are typically in the front office i.e. research and asset allocation. With a business driven, strategic approach to their systems investment in place, the successful players then underpin this with a structured and sequenced five step fast track approach to systems selection/sourcing.
Typically, this covers:
1 The initial identification of potential suppliers and subsequent screening to produce a shortlist of potential suppliers;
2 Supplier selection and target design of a new operating and systems model to a sufficient level of detail to inform the risk and regulatory requirements, help prove the business case and enable a more detailed assessment of the ideal final preferred supplier;
3 Determining a heads of agreement in principle with the preferred supplier;
4 Undertaking contract negotiations and design of the contracts which covers the important aspects of due diligence, agreement of schedules and contract detail; and
5 Finally, addressing the implementation and transition phases encompassing the detailed planning and execution of the business and systems transition including areas such as user acceptance testing, planning for roll out and post go live considerations.
Several trends are now driving systems replacement in the UK private banking and wealth management industry. Although the track record to date has been poor, companies that have been successful in replacing systems and/or outsourcing have three characteristics in common. They have: adopted a business driven approach; taken a strategic approach to their systems investments; and adopted a sequenced and structured fast track approach to sourcing.
For companies that have been disappointed with their IT investments in the past, the implications are clear; senior executives must realign their business and IT organisations to deliver in this way.
Those who succeed will find that technology can be a key strategic enabler rather than a major expense item and a heavy consumer of scarce business and IT people resources.