Refining the legacy
28 May 2013
While CIOs despair at the thought of such upheaval, refreshing legacy systems can be vital to a bank with a problematic data setup, as SLT discovers
Image: Shutterstock
Like many technology buzzwords—‘the cloud’ being one that immediately springs to mind—a legacy system is a phrase that is used a lot to describe a number of things tech-related.
Adrian Morris, head of MX Consulting and a specialist in securities finance, says that his company would define a legacy system—whether proprietary or vendor—as an old method, technology, computer system, or application.
“For many, legacy systems are those that have been inherited in the past when businesses have merged. Not all are bad, many do the job very satisfactorily but it is well known that many institutions have found their application estate becoming ever more complicated to manage as the number of legacy systems have multiplied over the years.”
There are two main approaches to the refreshing or re-platforming of legacy systems. The first is to replace the solution entirely; akin to cutting the rot out of a tree.
“Replacement should always be considered as one option when a platform needs a refresh,” comments Dipak Patel, a partner at Delta Capita, a technology consultancy firm for commercial and investment banks. “A business case will determine whether it is realistic or not, and it depends on the scope of the required change. We have a proven approach for software or solution replacement, usually starting with a review of the business operating model, so as to ensure requirements are in line with current business drivers.”
If re-platforming the solution is too expensive or difficult, then a functional refresh and technical re-platforming is another option. Patel says: “A refresh or re-platforming is an option when there are specific functional or technical issues that can be addressed with a limited-scope change to the solution, eg, from moving to a mainframe-based system to Windows-based system.”
“Delta Capita manages programmes and projects in this space. Our technical project and programme managers lead engagements using various technologies and vendor packages. We also have very senior business analysts and architects who can get involved especially in the earlier stages of a project, to analyse and design solutions, and to help guide the implementations.”
But the main obstacle prior to any re-platforming or refreshing is the jump that executives must make in first deciding to change a technology platform that may have been in place for decades. Chief information officers at banks tend to switch around different firms every couple of years, and can therefore be unwilling to take on such a large project that doesn’t have the fastest of results. Also, though the value of deals in Q1 2013 declined 38 percent from $12.2 billion in Q1 2012, with fewer large transactions, general widespread merger and acquisition activity in the last year has meant that some banks have scores of different legacy systems.
Klaus Holse is the CEO of SimCorp, a provider of investment management software solutions. He says that, among other reasons, a fear of change is the biggest hurdle to jump. “Many institutions have been relying on the same platform for years. Their staff are trained in using it, they know the workarounds and perhaps the system is connected into many other systems, thus complicating the overview and reducing the inclination to change.”
“As the investment management IT system is at the heart of their business processes, it may be a daunting thought to replace the core, believing it puts their business at risk. However, on the contrary, we believe that doing nothing will in fact put the business at a greater risk.”
For a variety of reasons, a legacy system may continue to be used, sometimes well past its vendor-supported lifetime, resulting in support and maintenance challenges, comments Morris. “It may be that the system still provides for the users’ needs, even though newer technology or more efficient methods of performing a task are now available. However, the decision to keep an old system may be influenced by economic reasons such as return on investment challenges or vendor lock-in, the inherent challenges of change management, or a variety of other reasons other than functionality.”
“One of the biggest issues we come across in almost every securities lending project is the problematic setup of data to accommodate trades that legacy front- and back-office systems cannot properly handle. This can lead to a lot of complexity when new systems are incorporated into the mix; they often end up being tailored in some way to suit the historical data formatting requirements of the legacy system,” he adds.
If the stars align, and managers decide that their current systems are not up to scratch—there still remains the question of whether to build in-house or to go in search of off-the-shelf systems.
“Interest is increasing in commercial packages, even if some banks decide to continue with in-house/bespoke solutions,” says Patel. “Banks and brokers are facing a more frugal reality, which demands low key investment. Off-the-shelf solutions are generally a lower investment proposition than in-house builds as the implementation and overall run costs are not as high as with bespoke solutions. So what tends to happen is that clients are compromising on functionality, leading to users changing the way they work in order to fit in with a package solution. We see this outlook continuing over the short-to-medium term as business drivers are set on gaining operational efficiencies but at a low cost.”
Whether to go in-house or shop around depends on what the client requirement is, says Morris. “Many choose vendor systems to try and limit their risk and reduce capital expenditure, although badly run implementations can often lead to unexpectedly high costs. Our experience in implementing securities lending vendor systems has enabled us to help clients overcome problems that they face.”
“Over the years MX Consulting has completed large- and small-scale proprietary builds for clients where vendors do not offer the appropriate solution. We have built operational platforms, collateral and cash management solutions, order management and most recently a regulatory compliance system, so there is certainly a market for bespoke securities lending development of this kind.”
“Increasingly, we see a clear tendency that financial institutions are looking for off-the-shelf, standard systems,” says Holse. “They require a platform they can confidently rely on, and allow them to focus on their core business, which typically does not include IT system development and maintenance. Ideally, firms are looking for highly automated systems with ‘one version of their truth’ where data is concerned.”
Still, he comments, investment managers who choose a best-of-breed, patchwork strategy—meaning they use different systems in different parts of the organisation—will still have to spend time on building interfaces and connecting many different systems.
“Building your own systems means that you do not share the cost of changes with anybody. In a standard system, regulatory changes are done once by the vendor and shared with all users which is significantly more cost effective.”
Following on from this, Holse argues that since IT development and maintenance is not their core business, the quality of a firm’s proprietary system cannot necessarily meet the same demands as a system that is built by someone with deep industry knowledge and invests solely in system development.
“The challenge for those with homemade systems is the ever-increasing flow of new demands, financial instruments and regulatory requirements. These require a solution that can easily adapt and comply with the requirements and provide reporting to the relevant authorities, clients and management. Following on the heels of the financial crisis, we are also experiencing that many investment managers are now preparing for growth and need a platform that can scale and grow with them as their business develops.”
With all of the technological changes in the industry, an argument can be made that it is easier for a new operation to offer a high quality service to customers, rather than an established business, which has to change many of its legacy systems and practices.
“[The old adage], ‘build it and they will come’, does not necessarily work,” argues Patel. “So entirely new businesses may have a good/modern solution/platform for services, but that is no guarantee of success. Greenfield implementations are easier for those who have no historical baggage, but the existing business practices and platforms embody a significant level of organisational learning that still needs to be provided by a new platform.”
Integration, he adds, is a tricky part of new or replacement platforms, when a large number of existing systems require interfaces to a new platform. “If those interfaces exist in a legacy platform, a partial replacement may be very difficult. A large-scale change that could render many of the interfaces unnecessary (by consolidating many existing applications into few, providing native integration within and between modules in a suite) is a daunting task.”
Here’s the specifics
Whether industry standards are influencing system design, and if they are universal enough, remains a vital question in technology systems.
“It is well documented that having well defined and adopted industry standards leads to increased business agility and improved integration, both of which have a direct impact on the bottom line,” says Patel. “For example, the standardisation of messaging plays an important role due to the complexity of communications needed to effectively operate in the market.”
Taking this messaging example further to focus on the securities lending industry, Patel comments that it is clear that the industry does not have a common set of standards in order to integrate systems. As a result, there are many disparate services available in the market with no common data interface.
“If we were to look at the cash equity market, it has a widely adopted and mature FIX protocol which allows for easier and faster integration between disparate systems. When our industry agrees on a set of industry wide standards, there will ultimately be an overall improvement in system design and integration.”
Another challenge to the industry is static data—particularly in corporate actions.
“Static data is a challenge almost everywhere,” says Patel. “Few banks or brokers have managed to build a comprehensive but flexible static data management system. While a ‘master copy’ of key data may be maintained in a centrally managed data solution, integrating it with numerous legacy systems is a large investment.”
He adds that corporate actions in particular have been an area of concern for his clients. With nearly a million corporate actions every year, the industry is said to suffer losses of approximately $1 billion due to inefficiencies in the processing chain.
“The events can arrive in varied formats, with issuers using different terms to describe the same events. These messages pass through several intermediaries, including agents and custodians, before reaching the investor. A lack of industry standards for formatting these messages means that at various stages, data may be communicated in differing formats and technologies, even such as fax, thus adding to their processing time.”
“This makes the information flow risky and error-prone, opening companies to the possibility of huge losses and reputational damage. Furthermore, processing of these announcements can be costly with the added in-house data validation coupled with inefficient processing in legacy systems.”
Sell versus buy
The buy side’s attitude to investing in IT compared to that of the sell side has historically been markedly different.
“We have spent many years working with asset management companies and it was certainly true in the more distant past that the buy side had not invested in their securities lending businesses to the same extent as the sell side,” says Morris.
But he argues that in the last 10 years or so, the attitude became much more proactive as the executive boards of asset managers began to realise that a good securities lending desk could be very profitable, offsetting to some degree their diminishing fund charges.
SimCorp deals entirely with the players on the buy side of the financial industry. Kolse comments that a recent survey conducted by SimCorp StrategyLab confirmed that buy-side institutions operating on a legacy system need to invest more compared to those with a modern, state-of-the-art solution, simply to keep up with the pace of change in the market.
“They are not investing to modernise their solution, but solely to keep up. We have also seen in a recent poll conducted among 70 executives from 50 buy-side firms in North America that technology investments or upgrades within the next two years are planned for new or updated derivatives systems in order to comply with the regulatory changes in the OTC derivatives processing space. Similarly, many plan to invest in building an investment book of record to centralise position keeping across all assets. The need to invest in IT is necessary to keep up with the ever-changing industry.”
Though it can be a bitter pill to swallow, the consequence of regulatory concern on IT system investment is big, and may mean considerable changes for securities lending systems in the future.
“As we all are aware, regulators perse are for now the main drivers of change,” states Morris. “In the shorter term, the scale of investment in securities lending will be governed by the impact of these new regulations—there is no choice. In the longer term the impact of regulations on profitability will decide how much money is invested into securities lending businesses. Allocations of budget within financial services is now sharply focused on whether businesses can meet ROI criteria.”
“Although it is the case that the overall return from securities lending has reduced, most businesses are still making good profits, reinvestment into any businesses that makes a good return is always important to maintain competitive advantage,” he adds. “Businesses in the main are focusing on collateral, triparty and regulatory reporting and these are areas where we have been able to help our clients.”
“We believe that investing in IT is important for any investment manager,” says Kolse. “The pace of change will continue unabated and we will have to be prepared for further changes: in regulation, the introduction of new financial instruments, entry into new markets and increasing transaction volumes.
“Having the right system in place is thus paramount; it will not only provide the foundation of the investment manager’s business, more importantly it will create a competitive advantage.”
“The dangers of underinvestment are evident; according to a recent study on buy-side IT spend by leading industry analyst Celent, buy-side firms use less than 20 percent of their IT spend on new software and development—and over 80 percent is used simply to maintain and operate current applications. In conclusion, underinvestment is unsustainable and may put firms at risk as the industry evolves and competitive pressures grow.”
Adrian Morris, head of MX Consulting and a specialist in securities finance, says that his company would define a legacy system—whether proprietary or vendor—as an old method, technology, computer system, or application.
“For many, legacy systems are those that have been inherited in the past when businesses have merged. Not all are bad, many do the job very satisfactorily but it is well known that many institutions have found their application estate becoming ever more complicated to manage as the number of legacy systems have multiplied over the years.”
There are two main approaches to the refreshing or re-platforming of legacy systems. The first is to replace the solution entirely; akin to cutting the rot out of a tree.
“Replacement should always be considered as one option when a platform needs a refresh,” comments Dipak Patel, a partner at Delta Capita, a technology consultancy firm for commercial and investment banks. “A business case will determine whether it is realistic or not, and it depends on the scope of the required change. We have a proven approach for software or solution replacement, usually starting with a review of the business operating model, so as to ensure requirements are in line with current business drivers.”
If re-platforming the solution is too expensive or difficult, then a functional refresh and technical re-platforming is another option. Patel says: “A refresh or re-platforming is an option when there are specific functional or technical issues that can be addressed with a limited-scope change to the solution, eg, from moving to a mainframe-based system to Windows-based system.”
“Delta Capita manages programmes and projects in this space. Our technical project and programme managers lead engagements using various technologies and vendor packages. We also have very senior business analysts and architects who can get involved especially in the earlier stages of a project, to analyse and design solutions, and to help guide the implementations.”
But the main obstacle prior to any re-platforming or refreshing is the jump that executives must make in first deciding to change a technology platform that may have been in place for decades. Chief information officers at banks tend to switch around different firms every couple of years, and can therefore be unwilling to take on such a large project that doesn’t have the fastest of results. Also, though the value of deals in Q1 2013 declined 38 percent from $12.2 billion in Q1 2012, with fewer large transactions, general widespread merger and acquisition activity in the last year has meant that some banks have scores of different legacy systems.
Klaus Holse is the CEO of SimCorp, a provider of investment management software solutions. He says that, among other reasons, a fear of change is the biggest hurdle to jump. “Many institutions have been relying on the same platform for years. Their staff are trained in using it, they know the workarounds and perhaps the system is connected into many other systems, thus complicating the overview and reducing the inclination to change.”
“As the investment management IT system is at the heart of their business processes, it may be a daunting thought to replace the core, believing it puts their business at risk. However, on the contrary, we believe that doing nothing will in fact put the business at a greater risk.”
For a variety of reasons, a legacy system may continue to be used, sometimes well past its vendor-supported lifetime, resulting in support and maintenance challenges, comments Morris. “It may be that the system still provides for the users’ needs, even though newer technology or more efficient methods of performing a task are now available. However, the decision to keep an old system may be influenced by economic reasons such as return on investment challenges or vendor lock-in, the inherent challenges of change management, or a variety of other reasons other than functionality.”
“One of the biggest issues we come across in almost every securities lending project is the problematic setup of data to accommodate trades that legacy front- and back-office systems cannot properly handle. This can lead to a lot of complexity when new systems are incorporated into the mix; they often end up being tailored in some way to suit the historical data formatting requirements of the legacy system,” he adds.
If the stars align, and managers decide that their current systems are not up to scratch—there still remains the question of whether to build in-house or to go in search of off-the-shelf systems.
“Interest is increasing in commercial packages, even if some banks decide to continue with in-house/bespoke solutions,” says Patel. “Banks and brokers are facing a more frugal reality, which demands low key investment. Off-the-shelf solutions are generally a lower investment proposition than in-house builds as the implementation and overall run costs are not as high as with bespoke solutions. So what tends to happen is that clients are compromising on functionality, leading to users changing the way they work in order to fit in with a package solution. We see this outlook continuing over the short-to-medium term as business drivers are set on gaining operational efficiencies but at a low cost.”
Whether to go in-house or shop around depends on what the client requirement is, says Morris. “Many choose vendor systems to try and limit their risk and reduce capital expenditure, although badly run implementations can often lead to unexpectedly high costs. Our experience in implementing securities lending vendor systems has enabled us to help clients overcome problems that they face.”
“Over the years MX Consulting has completed large- and small-scale proprietary builds for clients where vendors do not offer the appropriate solution. We have built operational platforms, collateral and cash management solutions, order management and most recently a regulatory compliance system, so there is certainly a market for bespoke securities lending development of this kind.”
“Increasingly, we see a clear tendency that financial institutions are looking for off-the-shelf, standard systems,” says Holse. “They require a platform they can confidently rely on, and allow them to focus on their core business, which typically does not include IT system development and maintenance. Ideally, firms are looking for highly automated systems with ‘one version of their truth’ where data is concerned.”
Still, he comments, investment managers who choose a best-of-breed, patchwork strategy—meaning they use different systems in different parts of the organisation—will still have to spend time on building interfaces and connecting many different systems.
“Building your own systems means that you do not share the cost of changes with anybody. In a standard system, regulatory changes are done once by the vendor and shared with all users which is significantly more cost effective.”
Following on from this, Holse argues that since IT development and maintenance is not their core business, the quality of a firm’s proprietary system cannot necessarily meet the same demands as a system that is built by someone with deep industry knowledge and invests solely in system development.
“The challenge for those with homemade systems is the ever-increasing flow of new demands, financial instruments and regulatory requirements. These require a solution that can easily adapt and comply with the requirements and provide reporting to the relevant authorities, clients and management. Following on the heels of the financial crisis, we are also experiencing that many investment managers are now preparing for growth and need a platform that can scale and grow with them as their business develops.”
With all of the technological changes in the industry, an argument can be made that it is easier for a new operation to offer a high quality service to customers, rather than an established business, which has to change many of its legacy systems and practices.
“[The old adage], ‘build it and they will come’, does not necessarily work,” argues Patel. “So entirely new businesses may have a good/modern solution/platform for services, but that is no guarantee of success. Greenfield implementations are easier for those who have no historical baggage, but the existing business practices and platforms embody a significant level of organisational learning that still needs to be provided by a new platform.”
Integration, he adds, is a tricky part of new or replacement platforms, when a large number of existing systems require interfaces to a new platform. “If those interfaces exist in a legacy platform, a partial replacement may be very difficult. A large-scale change that could render many of the interfaces unnecessary (by consolidating many existing applications into few, providing native integration within and between modules in a suite) is a daunting task.”
Here’s the specifics
Whether industry standards are influencing system design, and if they are universal enough, remains a vital question in technology systems.
“It is well documented that having well defined and adopted industry standards leads to increased business agility and improved integration, both of which have a direct impact on the bottom line,” says Patel. “For example, the standardisation of messaging plays an important role due to the complexity of communications needed to effectively operate in the market.”
Taking this messaging example further to focus on the securities lending industry, Patel comments that it is clear that the industry does not have a common set of standards in order to integrate systems. As a result, there are many disparate services available in the market with no common data interface.
“If we were to look at the cash equity market, it has a widely adopted and mature FIX protocol which allows for easier and faster integration between disparate systems. When our industry agrees on a set of industry wide standards, there will ultimately be an overall improvement in system design and integration.”
Another challenge to the industry is static data—particularly in corporate actions.
“Static data is a challenge almost everywhere,” says Patel. “Few banks or brokers have managed to build a comprehensive but flexible static data management system. While a ‘master copy’ of key data may be maintained in a centrally managed data solution, integrating it with numerous legacy systems is a large investment.”
He adds that corporate actions in particular have been an area of concern for his clients. With nearly a million corporate actions every year, the industry is said to suffer losses of approximately $1 billion due to inefficiencies in the processing chain.
“The events can arrive in varied formats, with issuers using different terms to describe the same events. These messages pass through several intermediaries, including agents and custodians, before reaching the investor. A lack of industry standards for formatting these messages means that at various stages, data may be communicated in differing formats and technologies, even such as fax, thus adding to their processing time.”
“This makes the information flow risky and error-prone, opening companies to the possibility of huge losses and reputational damage. Furthermore, processing of these announcements can be costly with the added in-house data validation coupled with inefficient processing in legacy systems.”
Sell versus buy
The buy side’s attitude to investing in IT compared to that of the sell side has historically been markedly different.
“We have spent many years working with asset management companies and it was certainly true in the more distant past that the buy side had not invested in their securities lending businesses to the same extent as the sell side,” says Morris.
But he argues that in the last 10 years or so, the attitude became much more proactive as the executive boards of asset managers began to realise that a good securities lending desk could be very profitable, offsetting to some degree their diminishing fund charges.
SimCorp deals entirely with the players on the buy side of the financial industry. Kolse comments that a recent survey conducted by SimCorp StrategyLab confirmed that buy-side institutions operating on a legacy system need to invest more compared to those with a modern, state-of-the-art solution, simply to keep up with the pace of change in the market.
“They are not investing to modernise their solution, but solely to keep up. We have also seen in a recent poll conducted among 70 executives from 50 buy-side firms in North America that technology investments or upgrades within the next two years are planned for new or updated derivatives systems in order to comply with the regulatory changes in the OTC derivatives processing space. Similarly, many plan to invest in building an investment book of record to centralise position keeping across all assets. The need to invest in IT is necessary to keep up with the ever-changing industry.”
Though it can be a bitter pill to swallow, the consequence of regulatory concern on IT system investment is big, and may mean considerable changes for securities lending systems in the future.
“As we all are aware, regulators perse are for now the main drivers of change,” states Morris. “In the shorter term, the scale of investment in securities lending will be governed by the impact of these new regulations—there is no choice. In the longer term the impact of regulations on profitability will decide how much money is invested into securities lending businesses. Allocations of budget within financial services is now sharply focused on whether businesses can meet ROI criteria.”
“Although it is the case that the overall return from securities lending has reduced, most businesses are still making good profits, reinvestment into any businesses that makes a good return is always important to maintain competitive advantage,” he adds. “Businesses in the main are focusing on collateral, triparty and regulatory reporting and these are areas where we have been able to help our clients.”
“We believe that investing in IT is important for any investment manager,” says Kolse. “The pace of change will continue unabated and we will have to be prepared for further changes: in regulation, the introduction of new financial instruments, entry into new markets and increasing transaction volumes.
“Having the right system in place is thus paramount; it will not only provide the foundation of the investment manager’s business, more importantly it will create a competitive advantage.”
“The dangers of underinvestment are evident; according to a recent study on buy-side IT spend by leading industry analyst Celent, buy-side firms use less than 20 percent of their IT spend on new software and development—and over 80 percent is used simply to maintain and operate current applications. In conclusion, underinvestment is unsustainable and may put firms at risk as the industry evolves and competitive pressures grow.”
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