By Mark Hepsworth, CEO, Asset Control
Many financial institutions are facing a perfect storm of pressure on revenues and increasing costs driven by regulatory mandates and the need for overdue investment in infrastructure. At the same time, they are funding projects to improve their competitive differentiation and support revenue growth. Against this backdrop many firms are adopting managed services to reduce costs, facilitate faster change and enable them to do more with less. Typically, many financial institutions’ IT teams have been either frozen or reduced.
Managed services shift the operational onus to vendors and allows internal IT to complete projects faster. As well as utilising vendor resources for day to day operations, or change projects, typically a vendor must work through less complexity and bureaucracy when rolling out new projects. Institutions often must work through multiple sign offs with many stakeholders that a managed services vendor does not have to deal with. The other benefit often stated about with managed services is that it allows management to spend more time thinking about strategic projects as they are not caught in the minutiae of running day to day operations and simply must manage the relationship with the vendor.
Other managed services drivers include addressing business requirements for broader and richer data, cost-effectively addressing regulatory change and enhancing data management infrastructure that is often overdue new investment.
Increasing data volumes alone is a major reason for financial institutions to move to the cloud and managed services. Typically, business users are demanding more data sources and greater volumes of real-time and historical data. Add to this the trend for increased usage of algorithms and machine learning applications and data volumes are increasing exponentially. Many firms are also using many new sources of alternative data which provides opportunities for firms to use data to obtain additional colour around valuation or risk capabilities.
The same data can provide additional input into investment decisions. This could be key in investment management processes for portfolio managers or in trading operations for banks. In short, there is more raw material to work with and this presents an opportunity to firms but also a challenge in terms of how they capitalise on it.
The other major driver of change is regulation. Risk management, financial reporting and valuation have always been data-intensive as they are the ultimate data aggregation functions in a firm. The trend to demand longer data histories, more contextual information on quality and provenance, and the need to explain specific data points as well as increased detail from portfolio level going down to trade-level information exacerbate the regulatory challenge.
The process by which organisations source and curate their data is also coming under ever-greater scrutiny. That means financial services firms need to have data lineage capabilities. They need to show to regulators how they came to a certain price, for example, what sort of business logic was applied and what quality checks were passed.
In summary, the advance of regulation puts more demands on the process by which data is sourced, integrated and curated and prepared.
Addressing the Challenge
In dealing with this data management landscape, many organisations feel they have a ‘millstone around their neck’. There is simply too much information for firms, weighed down by their own complex legacy systems, to deal with efficiently at once. That makes it is difficult for them to change risk and finance processes that involve bringing multiple data streams together, and equally difficult for them to collate multiple sources to come to a complete picture that can be used in an investment management process.
Firms are often insufficiently agile to manage this process in-house. Running their systems infrastructures is costly and making changes to their architecture more so. They are further hampered by a lack of in-house skills. Specialist providers with detailed knowledge of financial data products, formats and standards can bring best practices in data sourcing, aggregation and mastering.
Firms face urgent challenges given the pace of regulation and the emergence of new, encroaching fintech competitors. So, what’s the answer? Today, we are seeing more financial services firms opting to tap into the services of outsourced or third-party solutions providers. Many smaller firms have moved wholesale to a managed services approach, while larger businesses might opt for a more phased approach. They might choose to start with pricing reference data, for example and then migrate other areas of their data management over time.
Managed services are now available that provide packaged integration with data providers, configurable mastering or aggregation and a menu of access options ranging from user interfaces, reports in the formats and frequencies required by a firm’s applications and APIs for ad-hoc consumption e.g. data scientists. Transparent views on the status of data collection and preparation processes, performance against SLAs and reporting against preconfigured quality metrics can substantially improve operations and reduce cycle time.
For financial services firms the benefits of moving to these services can be immense. By outsourcing to an external solutions provider, they can lower the cost of change and make it more predictable. When firms select a managed services provider, they effectively push the implementation risk out to that provider. Then if the business has done its procurement homework and found the right provider, it will have reduced the cost of change and made it more predictable. Data change is a given, as, businesses very frequently onboard new data sources, connect new applications and generally must feed increasingly data intensive business processes.
Managed services work because the provider of the application will typically know their own applications best and will be best suited to configure the application for optimal use by the client. Moreover, in a managed service, any upgrades are done by the provider ensuring the client always has the latest version and internal upgrades are a thing of the past.
The rewards for outsourcing in this area are so compelling that over the coming years, we are certain to see a growing number opting for the managed data services approach.