Given the great difficulty of replacing legacy technology, the answer to transforming business operations could be something less disruptive, such as desktop integration and APIs. Lynn Strongin Dodds reports.
Legacy systems are not a new problem in asset management circles, but the way firms deal with them has changed over time. Instead of struggling to refurbish old tech, many have accepted their existence and are looking for web-based solutions that can help bridge the gaps, as well as enhance the functionality of existing applications.
“What has happened over the years on both the buy and sell side is that firms have been putting band-aids on their technology stacks which can be as old as 15 to 20 years, to patch them up and keep them going,” says Reena Raichura, director, head of product solutions at Glue42, a financial desktop integration specialist. “The problem is that systems such as portfolio management systems, OMSs (order management systems), EMSs (execution management systems) remain fragmented, and data remains siloed, and this is no longer fit for the digital world.”
One of the biggest challenges has been the dominance of mainframes – the workhorse of the financial services industry that was typically only built for specific and often customised reasons. It has proved difficult to wean financial services organisations off them. In fact, a recent study by DTCC and Celent found that as many as 60% of buy and sell-side firms are still reliant on a mainframe, according to Thomas McHugh, CEO, Finbourne Technology.
This is not unique to banks and asset managers. Another survey has found that 67 of the top Fortune 500 companies are also dependent on mainframes.
“The problem is that systems such as portfolio management systems remain fragmented, and data remains siloed, and this is no longer fit for the digital world.”
The other reason for the continued use of mainframes is human nature and resistance to change. In other words, people do not like to rock the boat. As Geoff Hodge, president and chairman of Milestone Group, an asset management software solutions provider, points out, “the mantra of don’t fix it if it isn’t broken is alive and well. It limits genuine innovation by replacing the motive to be better with a motive to not change unless you are forced to.”
Kevin Faulkner, EY’s wealth and asset manager director, agrees that “change fatigue” is a major stumbling block. “This can delay moving off legacy systems,” he adds. “There are cost pressures for expensive technological transformation, especially in the current climate, and there are challenges around finding and retaining the talent to run large-scale transformation programmes.”
This helps explain why market participants view the digital journey as a marathon and not the sprint that end-users would like to see. Although there is not a one-size-fits-all solution, there is a general consensus that interoperability – mixing the old and new tech in one ecosystem – is the way forward. Unsurprisingly, it will take time, but the benefits are numerous and well-documented. They range from increased flexibility to scalability and ability to address environmental challenges and other ESG – environment, social and governance - topics and to embrace digital assets that could enhance fund distribution.
“Interoperability between systems within investment management is relatively low when compared to other industries, and the lowest common denominator tends to reign,” says Faulkner. “For example, the simple spreadsheet is still very much in use within the sector for the distribution of data between organisations. However, progress is being made.”
Gradual and non-disruptive
To accelerate the process, many believe a change of mindset is needed. “I think people look at legacy systems in the wrong way,” says Glue42’s Raichura. “Digital transformation is a journey and needs to be incremental. It is not a rip-and-replace type of change; it is an evolution, and if you are using legacy systems, you can improve business efficiency, effectiveness and outcomes rapidly using desktop integration.” Glue42, Raichura says, offers workflow solutions to stitch up disparate systems such as an OMS or EMS with a portfolio management system or access to real-time data for ESG, digital assets and pre and post-trade. “This can be delivered in a matter of days.”
Raichura is the inventor of Straight-Through Workflows (STW) – a term and vision used to describe the goal of desktop interoperability. In simple terms, STW is about allowing data to flow electronically and seamlessly from one application to others on desktop computers, regardless of the underlying application technologies.
“It is also a momentous shift in design thinking for the desktop,” she adds. “It’s about blurring the boundaries of applications and looking at the desktop holistically by analysing end-to-end business processes, workflows and user journeys first before designing an underlying solution.”
“The mantra of don’t fix it if it isn’t broken is alive and well. it limits genuine innovation by replacing the motive to be better with a motive to not change unless you are forced to.”
Finbourne’s financial data stack product is also a reflection of this more gradual approach. Leveraging old and new technology via software as a service (SaaS) technology and open application programming interfaces (APIs), the firm’s solution is also intended to turn batched data into a ‘golden source’ in order to deliver a complete data strategy. “We understand the industry isn’t operating on a blank slate, and while our approach challenges the modern constructs, it doesn’t disrupt,” says McHugh.
McHugh believes this approach is “empathetic to the industry’s low-risk appetite and it is sympathetic to system estates – integrating with existing solutions across the investment chain, to make sense of the technology investment made to date, rather than add to the complexity”.
Some fintechs like OpenFIn, on the other hand, are focusing on enhancing the legacy technology itself because, after all, this technology looks set to be around for many years to come. Adam Toms, OpenFin’s global COO and CEO in Europe, says: “There are not that many firms who can do a complete overhaul. What we see is that they are operating in a hybrid world of old and new technology. The question is how a legacy system can be evolved that cuts the cost of maintaining it and be more efficient.”
Toms notes that OpenFin, which has a range of APIs to make the experience of using desktop computers more interactive across applications, also has embedded controls that allow modern web components to work inside a legacy app and enhance its functionality.
“This is a much more modular approach to modernising legacy applications,” he says. “Instead of having to rebuild an entire app, you incrementally move towards a modern web app architecture. This can give apps a significant performance and functionality uplift that can be updated independently of the legacy app. Our technology helps solve data issues, app connectivity and versioning control. It enables apps to talk to each other in a seamless way without disruption.”
Operating at a faster pace
The current volatile environment has only underscored the need for asset managers to keep pace with change. In the past year, they have had to grapple with geopolitical tensions, higher inflation and interest rates, as well as a revolving door in UK politics that has lately affected markets further afield than the UK, with even US president Joe Biden commenting on UK prime minister Liz Truss’s economic policy. These factors have triggered significant selloffs in stocks, bonds and currencies. Risk means investment options have narrowed.
“With profit margins under pressure, a tighter fee squeeze and the threat of drawdowns, efficiency is firmly in the spotlight,” says McHugh. “Harnessing trusted and timely investment data across positions, portfolio, risk and exposure is now proving more critical than ever. However, the cost of operating at a faster pace of change is now becoming challenging to sustain.”
There is no doubt that operating legacy systems are an expensive proposition. Estimates are that around 80% of technology budgets at buy-side firms are devoted to simply maintaining, repairing and updating the legacy tech. Breaking it down, McHugh notes that firms are spending far too much time, in some cases 50% or more of their day, on manual reconciliation, locating data at source or attempting to figure out positions and exposure from siloed data.
“There are not many firms who can afford to do a complete overhaul. what we see is that they are operating in a hybrid world of old and new technology.”
As EY’s Faulkner puts it: “What is modern today is legacy tomorrow. All industries are committed to evolving their technology to keep pace and to ensure a competitive edge, but those that move first will have the edge, and could streamline costs and simplify processes.”
A recent study by Oracle revealed that large financial institutions could lose up to $1.5 billion in revenue if they do not leverage new technologies fast enough. By contrast, those with advanced, cutting-edge solutions reported revenue growth of more than 8%.
The most successful firms, though, will not only embrace the latest thinking but also have a detailed game plan to move the organisation forward.
“The real trick is what the transition needs to look like to take advantage of new technologies in the right way while continuing to run the business and not take unnecessary risks,” says Milestone Group’s Hodge. “It’s a big topic, but we see the industry looking at technology through a number of lenses, from being focused on units of functionality, to integrated solutions, to platform, to production management, to greenfield or strategic transformation.”
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