There are other reasons for this proliferation of systems. Some firms may not have kept up with system upgrades and instead, purchased new systems to gain the functionality they could have had simply by upgrading their existing platforms. Others chose to purchase new systems instead of extending the functionality of existing applications through custom development.
In today’s tough financial market with compressed margins, challenges finding alpha, and increased regulation, firms can struggle to meet performance targets for their funds as well as profitability levels for their management companies. There are two ways asset managers can improve performance and profitability—by increasing operational efficiency which leads to reduced expenses and through the ability to go to market quicker with new strategies, products, or platforms. However, with an infrastructure that is limiting in terms of agility and costly to manage, firms must now look for a better way. For many, the answer lies in platform consolidation.
Platform Consolidation: What is it?
Platform consolidation is defined as reducing the number of systems a firm has and consolidating the workload that is spread out across many applications to a few. However, for buy-side firms, the exercise is anything but simple. For them, platform consolidation is not just a reduction in the number of systems supporting a particular product, business unit or process area, nor does it entail examining application architecture diagrams with an eye towards arbitrarily reducing the number of boxes.
Strategic platform consolidation is an optimization exercise centered at the nexus of business strategy, organizational makeup, business process and technology infrastructure. In other words, firms must look at numerous elements before they can determine what, if any, systems can and should be consolidated.
The Four Steps to Platform Consolidation
When considering platform consolidation, firms need to look at more than just the systems themselves. They need to understand the business—where it is headed and the processes in place today—identify all the systems being used to support those processes, and then look for ways to combine functionality and realign process for increased efficiency.
1. Process Review
Identifying all the current processes is an important first step in any platform consolidation exercise, because ultimately, the processes drive the need for technology. Often, processes are followed without question because “it’s always been done that way.” But in light of today’s need for operational efficiency, taking a close look at each core process can highlight opportunities to streamline or update ways of working that have been in place for years. Recent legislation requiring new steps, such as Form PF reporting and Major Swap Participant registration, is also forcing firms to change or add new processes into the mix.
2. Inventory Review
Buy-side firms have a variety of systems that support front, middle and back-office processes. Firms that are considering platform consolidation should take a full inventory of all their critical systems, including portfolio management, trading, execution, settlement and clearing, accounting, compliance and data management. They should determine the current version for each and if there are any outstanding upgrades. Often, upgrades have added functionality that could mitigate the need for an additional system, providing a very clear-cut opportunity for consolidation.
Once the process review and technical inventory are complete, it’s time to analyze and look for logical ways to meet process requirements and then identify the right technology and solutions to support them. For some firms, it could mean keeping things as they are. But, most firms will find ways to optimize operations and consolidate applications. And many will take the opportunity to bring on newer single platforms that can handle multiple functions and have a flexible integration capability that allows them to adjust for capabilities moving forward.
After a thorough analysis, it’s time to put a plan in place. The plan should contain two key elements:
Roadmap—The roadmap should detail the changes in process and architecture that need to be made, which functions/systems are being consolidated and how those changes affect other areas.
Playbook—The playbook should identify how the firm will address change in the future based on these new processes/architecture. It should detail how a new asset class, for example, will be accommodated and include a review of existing systems to see if any of them can take on the new asset class. The goal of the playbook is to create a process that, first and foremost, tries to manage change using existing resources in order to maintain a highly efficient operation. Noted below are some of the most important challenges an asset manager must address when building out a consolidated platform.
The Data Base
Data is foundational to nearly all capital markets and asset management business functions. Data management issues are not necessarily solved in the execution of strategic platform consolidation. In many cases, centralized data management may be a consequence of the platform consolidation exercise. In other cases, it may be the catalyst and driver that enables quick wins and accelerates the realization of business value throughout the platform consolidation journey. In alternate scenarios, the business drivers or uniqueness of the product or process may dictate that data centralization may not be practical. The key to a successful platform consolidation strategy is dovetailing the appropriate data management approach for each given business driver and desired business goals.
Limitations and Where to Draw the Line
Trying to push too hard for convergence to a single platform can reduce efficiencies and create an environment that requires too many off-system solutions for the business. The goal is to create a platform with enough flexibility to accommodate 70-90% of the solution and allow for easy extension for the remainder.
Across capital markets-related business, firms have begun to attack the similarity in trading and settlement processes across asset classes or geographies through back-office consolidation. However, it is worth noting that separate and distinct front-end systems, customer service groups and other client touch points may remain to cater to the unique needs of hedge funds vs. family offices, sovereign wealth funds vs. institutional asset managers, corporates vs. pensions, etc.
Flexibility is the Key to Managing Change
A shift is occurring in capital markets firms from a post-crisis stance of only maintenance and business-critical enhancements toward a willingness to embark on more transformative approaches for developing new platforms and capabilities. This is being done with an eye towards balancing a focus on cost and efficiency with the need to support longer term revenue growth. For many firms, platform consolidation offers a way to optimize current processes and maximize and extend the value of existing platforms. Consolidating in a way that allows for greater flexibility will ultimately enable a firm to react more quickly to business and industry changes, which, in today’s fast-paced markets, is a necessity.