The cost of doing nothing – why underinvestment in IT poses a significant business risk

Klaus HolseBy Klaus Holse, CEO of SimCorp

In the aftermath of the financial crisis, global investment managers have been under increasing pressure to cut operational costs in order to ensure profitability and maintain competitive advantage. Typical cost-cutting measures include outsourcing, system consolidation and process/workflow automation. At this stage, the benefits of these cost-control measures have largely been realized. However, cost-cutting is not the panacea it is made out to be.

Any business that depends on IT operation platforms to help run the business knows that careful attention to technology is critical. In these businesses, a flexible and robust operational platform is key to efficiency and reliability, along with risk control, scalability and realisation of growth opportunities.

In the global investment management industry, the persistent question is whether to continue investing in adapting and upgrading legacy systems – or alternatively transition to a state-of-the-art IT platform that accommodates future growth and addresses the inevitable competitive and regulatory challenges going forward.

Running without moving
A recent survey conducted by Sim Corp Strategy Lab revealed 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. In other words, they are running to stand still. The survey showed that 56% of legacy system owners intend to increase IT budgets over the next two years simply to keep operating, whereas 60% of state-of-the-art system owners plan to maintain current spend levels or even decrease their IT operations spend. In addition, a recent study on buy-side IT spend by leading industry analyst Celent, reports that buy-side firms use less than 20% of their IT spend on new software and development – and over 80% is used simply to maintain and operate current applications.

These figures illustrate that investment management institutions running on legacy systems are compelled to increase their IT operations spend and not to modernize their current solution.They would rather try and keep up with their state-of-the-art system counterparts which over time will only become more difficult. The ever-increasing flow of new client demands, esoteric financial instruments and regulatory requirements will continue to add pressure on the industry. The challenges of today and tomorrow require a solution that can easily adapt to and comply with the requirements and provide timely and accurate reporting to the relevant authorities, clients and management. Following on the heels of the financial crisis, many investment managers are also now preparing for growth and need a platform that can scale and grow with them as their business develops.

If you choose not to decide, you still have made a choice
The costs of doing nothing are massive and consequential. Below are five reasons why IT investments are necessary, and why underinvestment poses a significant business risk:

1. Regulation is happening now
For several years, there has been a lot of talk about regulations such as Dodd-Frank, UCITS IV, Solvency II, IFRS 9 and more. At this stage, the talk has turned to action and various regulations are being implemented. Legacy systems are not able to adapt to the required pace of change and will impede your efforts to be in compliance.

2. In the long run, the increased cost burden driven by legacy systems is unsustainable
Evidence suggests that legacy owners must increase operating budgets simply to cope with the pace of change in the market. As limitations in flexibility, adaptability and scalability are exposed, the cost of maintaining legacy systems are set to soar.

3. Competitors who are better positioned to support new markets,optimise and automate workflows and offer additional asset classes are claiming market share
If you are running an outdated and unsupported legacy system, you will lose market share to those with systems that are flexible, adaptable and scalable.

4. Operational demands are increasing in terms of volume and complexity
If you are reliant on disconnected and comparatively slow manual processes, you are more vulnerable to the operational risk of human error than those running automated workflows.

5. Exploiting new business opportunities takes up-to-date and state-of-the-art platform support
If you spend all of your IT budget on maintenance and keeping afloat, your ability to capture new business is compromised.

Doing nothing is not an option
In a cutthroat market, investment managers need to apply scarce resources to help generate alpha and meet client demand. Tying up resources in manual workarounds and inefficient processes that state-of-the-art systems seamlessly automate as a matter of routine, is no longer an option. On the contrary, continuous investment in IT is important. The pace of change is bound to continue unabated and the industry will have to be prepared for further changes such as new regulation, the introduction of new financial instruments, entry into new markets and increasing transaction volumes.

In conclusion, having the right system in place is paramount; it will not only provide the foundation of the investment manager’s business, more importantly it will help create competitive advantage. The dangers of underinvestment are evident: it is unsustainable and may put firms at risk as the industry evolves and competitive pressures grow.

Legacy
System running on outdated or obscure technologies, as well as systems that are infrequently updated

State-of-the-art
Regularly updated system with a high degree of automated processes and running on cutting-edge technologies

About SimCorp
Since 1971, SimCorp has been providing investment and portfolio management software and services to the world’s leading investment managers, asset managers, fund managers, fund administrators, pension funds, insurance funds and wealth managers. SimCorp’s world-class software provides global financial organisations with the tools they need to mitigate risk, reduce cost and enable growth. SimCorp is a global company, regionally covering all of Europe, North America and Asia Pacific. Listed on the NASDAQ OMX Copenhagen, SimCorp is dedicated to supporting the global investment management industry, its clients and its investors. For more information about SimCorp’s products, please visit www.simcorp.com/product.

About SimCorpStrategyLab
SimCorp’s independent research institution, SimCorpStrategyLab, carries out extensive research in the investment management industry to identify and suggest ways to meet challenges within risk management, cost control and growth opportunities and to share best practices. The research program is carried out in close collaboration with internationally recognized academics and established industry experts. As a result, SimCorpStrategyLab is able to provide competent suggestions for best practices that are intended to minimize risk, find ways to achieve sustainable cost savings and enable growth.

 

 

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