Hatstand breakfast briefing: TCO
Global financial IT consultancy Hatstand recently hosted two breakfast briefings with leading banks, discussing the pressing problem of total cost of ownership (TCO).
The events looked specifically at how to reduce TCO in three key areas of a bank’s operations; Trading Systems, Data Management and Connectivity. Along with Risk, Compliance and Regulation, these make up Hatstand’s four key pillars.
Attendees at the briefing came from Tier 1 banks, including Barclays, Credit Suisse, JPMorgan Chase, Morgan Stanley, RBS, Deutsche Bank, Bank Of America Merrill Lynch and Commerzbank.
Financial IT vendors like Bloomberg, Deutsche-Boerse, Thomson Reuters, Activ Financial, Fidessa, Interactive Data and Ropnoy were also represented.
Trading Systems - Frank Pottle, Associate Director of Risk, Compliance and Regulation
Firstly, Frank Pottle discussed the impact of the legacy tail on a bank’s trading systems, with particular reference to the new regulatory landscape and how to simplify systems to lower costs.
He looked at the causes of the legacy tail, which can include funding constraints, mergers and acquisitions and deadlines for regulatory compliance. Another important potential cost relates to “invisibles”, such as knowledge capital and the effect on systems and applications when someone leaves.
“Legacy tail is something that occurs in every application flow, in every institution. What we have is the need for constant improvement, constant change, to meet the demands of the business or of the regulators,” he said.
Understanding the legacy tail means organisations can reduce TCO and complexity, improving flexibility and regulatory compliance.
Moreover, prudent technology risk management is no longer an option as regulators are placing increasing strict controls on banks.
He cited two examples of where the legacy tail has negatively impacted a business before discussing Hatstand’s 4D methodology for remediating the application landscape.
Data Management - Elsa de Cruz, Principal Consultant
Elsa de Cruz, Principal Consultant at Hatstand, covered the important topic of data management and how in this area the TCO goes well beyond the money banks pay to vendors.
While 20 years ago there was a very definite split in cost allocation between fixed income and equities, the focus now needs to be on having full cost transparency.
She described how reference data has been the “poor relation” of market data, but this is changing. Critically, it’s about identifying the applications and who uses them to create transparency of cost.
“Historically this [reference data] was a bucket and everyone took a slice of it.” There can be hundreds of applications with only a couple of users each. These applications were seen as critical until people realised the spend per user was identified.
However, merely stripping out applications is not necessarily the right approach as it’s important to consider what “risks are we putting the bank at by cutting, cutting, cutting”.
This is why transparency is so important - cost transparency enables cost ownership. “As soon as you know all the components that make up your cost, you can make some actual decisions about how to support the business going forward,” said Elsa.
Connectivity - Aaron Stowell, Hatstand Project Manager
Connectivity can be broken into three main areas - market connectivity, client connectivity and counterparty connectivity.
When it comes to costs, the main contributors are specialised development and support resources, software licences and server and network infrastructure.
While there have been improvements in recent years, Aaron noted how we still see duplication of technical solutions such as gateway technologies and integration approaches.
As with other areas of operations, there are legacy tail problems in the connectivity space and the discussion revolved around ownership of costs, transparency and functional requirements.
In addition, he spoke about the need to focus on profitable clients, balancing cost against risk and the requirement for technology teams to secure buy-in from senior managers about the importance of changing the way things operate.