Sponsored by >> Whitepaper Best practices for optimizing reference data management June 2012 An industry view on improving efficiency and reducing costs with reference data management outsourcing models Sell Side
Contents Executive summary... p 3 The data management reality... p 3 The million-dollar question... p 5 Outsourcing today and in the future... p 6 Up in the cloud... p 7 A focus on data... p 9 Making the move... p 10 Conclusion... p 12 About Hexaware Technologies... p 13 This document is property of Incisive Media. Reproduction and distribution of this publication in any form without prior written permission is forbidden. 2 WatersTechnology I whitepaper l sponsored by Hexaware Technologies
Executive summary How much does it cost an organization to manage reference data in a market with ever-changing demands on risk and regulation? That is the question for financial institutions in 2012. With a turbulent economic environment, firms are under pressure to improve efficiencies, cut costs and comply with new regulatory requirements. To meet these changing demands, firms increasingly need to assess alternative operating models, reviewing opportunities for outsourcing reference data management or adopting new technology. An exclusive WatersTechnology survey of senior data management decision-makers in international financial institutions reveals that the majority of firms need to reduce reference data management operational budgets in the coming years by at least 5% of their current spend, and close to one in six of these firms plan to reduce it by more than 20%. The challenge is to do more with less, which means firms will be looking at optimizing existing operating models. For some, it may be about outsourcing a component of data management operations or moving to a hosted software solution, while for others it is more relevant to assess the benefits of a complete lift-out. In general, the focus is on creating a robust and flexible data management framework that helps firms meet regulatory and business requirements now and in the future. The data management reality In recent years, the market has seen a growing awareness of the importance of reference data management, and a number of firms have invested in improving their data management foundation to get ready for upcoming regulatory changes. Regulators have put pressure on firms to address data quality issues and improve data integration to mitigate risk. This is now exactly where investments are being made but it all comes at a price. Part of the problem is that the cost of data management is going up at the same time as budgets are under scrutiny. In many cases, firms have to take in more data sources and process data faster to comply with regulation and meet changing customer expectations. It is about having the ability to increase the depth and breadth of data processed in an ever-shrinking timeframe. To adapt and implement changes on time and on budget, many will be looking at optimizing the overall operating model for reference data management to improve efficiencies and cut costs. An exclusive WatersTechnology survey of senior data management decision-makers within international asset servicing firms, investment banks, asset management firms, hedge funds, insurance managers and pension funds conducted in 2012 reveals that the majority of firms are looking at reducing operating costs in the coming years. WatersTechnology I whitepaper l sponsored by Hexaware Technologies 3
Every year it is costing organizations millions of dollars to manage reference data. The WatersTechnology survey shows that 17% of firms spend more than $20 million a year on reference data operations alone (Figure 1). The spend varies depending on the type of organization, and the majority of large custodians and asset servicing firms fall within the group of companies that spend more than $20 million annually. In contrast, the survey shows that asset management firms are more likely to spend between $1 million 5 million a year (52%) or less than $1 million (29%). Figure 1: What are your current annual reference data management operating costs? More than $20 million (17%) $16-20 million (7%) Less than $1 million (35%) $11-15 million (10%) $6-10 million (11%) $1-5 million (20%) For these million-dollar budgets, firms are acquiring, cleansing, enriching and distributing large amounts of reference data. But the level of efficiency in the process will vary greatly from one business to another. The organizations with the most mature data management operations have centralized reference data management processes across the enterprise, defined metrics, introduced service-level agreements with business units and implemented advanced technology. Many firms have already embarked on projects aimed at improving data management. This is evidenced by the fact that 67% of firms now say they have centralized processes enterprise-wide, and 54% have modernized technology platforms capable of accommodating changes (Figure 2). At the other end of the spectrum, there are firms that still do not seem to recognize the value in investing in data management. Sixty nine-per cent said they do not have defined metrics to monitor and measure reference data across the organization, and 59% did not have service-level agreements with business units that consume data. Even more worrying, however, is the fact that 17% of firms said they had none of these aspects of a reference data management strategy, which would indicate that they have still not made any significant investment in improving data management operations. 4 WatersTechnology I whitepaper l sponsored by Hexaware Technologies
Figure 2: Which of the below aspects of a reference data management strategy do your organization have at the moment? Centralized reference data management processes are implemented across the organization (67%) Defined metrics to monitor and measure reference data across the organization (31%) Service-level agreements with business units that consume data (41%) Modernized technology platform capable of accommodating changes (54%) None of the above (17%) 0 10 20 30 40 50 60 70 80 The million-dollar question In the aftermath of the financial crisis, cost control has been a top priority for financial institutions. This has also affected reference data management teams despite the increased awareness of the importance of getting the data right and the focus on costs is set to continue. The WatersTechnology survey shows that the majority of firms are planning to further reduce their reference data management operations budgets in the coming years. Of the firms that plan to make cuts, more than 30% are looking at reducing spend by 5 10% and one in four aim for 1 5% (Figure 3). Although these figures might seem optimistic considering rising data costs and a growing need for more data, they may well be realistic for firms looking at improving the overall operating model and have identified areas where they can make savings. The more surprising result is that close to 30% of the firms that plan to make cuts want to make cuts of more than 20%. The majority of these firms are large-cap asset servicing firms, investment banks or asset management firms with current annual operating budgets of more than $20 million. In addition, the firms with the most ambitious plans to cut costs are typically those with the most mature data management strategies. This could mean that they have a good understanding of where savings can be made, and they might be ready to assess alternative operating models, such as outsourcing options, to realize cost savings. WatersTechnology I whitepaper l sponsored by Hexaware Technologies 5
Figure 3: By how much are you planning to reduce your reference data management operations budget in the coming years? More than 20% (9%) Around 10-20% (15%) Nothing (38%) Around 5-10% (20%) Less than 1% (4%) Around 1-5% (14%) Outsourcing today and in the future With a significant number of businesses looking for ways to reduce the cost of reference data management, the market expects to see a continuous rise in adoption of outsourcing services in the next couple of years. Prior to the financial crisis, it looked as if outsourcing reference data management was going to take longer to mature than some forward-thinking vendors had expected. Now, however, it is clear the market is changing, and it is becoming more common to outsource a component of reference data or at least outsource certain processes as part of a project. According to the WatersTechnology survey, 30% of firms have already started using outsourcing services for reference data management (Figure 4). Within the next five years, it may well become the norm to use outsourcing services, as the majority see outsourcing fitting in to their longer term reference data management programs. In addition to the 30% that already outsource, 7% have made a decision to review outsourcing services and another 30% say they may consider outsourcing services within one year (14%), or within the next two to three years (16%). Yet, there are still firms that do not currently see the benefits of outsourcing. Twentyfive per cent of respondents said outsourcing services is not likely to fit in to their reference data management program in the foreseeable future, highlighting that it is not a model that fits all types of organizations. Instead, however, these firms may be willing to look at other alternative operating models that are also often associated with cost-saving initiatives. 6 WatersTechnology I whitepaper l sponsored by Hexaware Technologies
Figure 4: Where do you see outsourcing fitting in to your longer term reference data management program? We are already using outsourcing services (30%) We have already made a decision to review outsourcing services (7%) We may consider outsourcing services within one year (14%) We may consider outsourcing services within two to three years (16%) Outsourcing services is not likely to fit in to our reference data management program in the foreseeable future (25%) Don t know (8%) 0 5 10 15 20 25 30 Up in the cloud In recent years, software vendors have reported that they see more customers interested in assessing hosted software or software-as-a-service options, which from a cost optimization perspective may work better than on-site deployments for certain clients. Vendors have responded by launching new shared services offerings, including cloud computing for data management, reference data utilities and managed data services. The question now is if the move to using more remote services and shared services is the start of a software revolution in reference data management. The WatersTechnology survey shows that there is appetite in the market to review different operating models in a bid to reduce operational expenditure and capital expenditure. The most popular model to consider is selecting a third-party vendor that can host data management software for one user firm (32%) (Figure 5). In addition to a one-to-one hosted model, cloud-based Software-as-a-Service (SaaS) offerings are also gaining traction. Thirty-one per cent say they would consider using a third-party vendor to host software in a cloud, which could be accessed remotely by different user firms. Data management vendors with SaaS offerings typically market these at buy-side firms with less complex requirements than large custodians or investment banks. This is also reflected in the survey, with 43% of asset management firms saying they would consider SaaS offerings to reduce costs. In contrast, only 18% of investment banks or custodians would do the same. For investment banks and custodians, the managed data services model is more attractive. While only 20% of buy-side firms say they would consider a managed data services model, where a third-party vendor maintains IT and operations for one user firm, 50% of investment banks and custodians would be willing to review this option. WatersTechnology I whitepaper l sponsored by Hexaware Technologies 7
Overall, firms are more interested in involving third-party vendors in maintaining software than in operations. The least popular operating model, which only 11% say they would be willing to consider, is a managed data services model where a third-party vendor maintains operations, but not the technology, for one user firm. Figure 5: Which of the below options would your organization consider to reduce operational expenditure and capital expenditure? Hosted data management software third party vendor hosts software for one user firm (32%) Cloud-based Software-as-a-Service third-party vendor hosts software in a cloud, which can be accessed remotely by different user firms (31%) Managed data services, including IT and operations third-party vendor maintains IT and operations for one user firm (30%) Managed data services, only IT third-party vendor maintains technology for one user firm (16%) Managed data services, only operations third-party vendor maintains operations for one user firm (11%) None of the above (39%) 0 5 10 15 20 25 30 35 40 With a challenging operating environment and pressure to reduce costs, financial institutions are open to reviewing new technologies and operating models. It is no longer just a case of running a request for proposal process with established software vendors and implementing a traditional data management platform. Firms are more interested in getting a full overview of all the different operating models and potential costs before making a decision. For the buy-side, this is likely to mean weighing up the pros and cons of an on-site implementation versus a hosted or SaaS offering, and for the sell-side, it is more likely to involve looking at a managed services model that potentially incorporates both software and operations in addition to reviewing traditional enterprise data management platforms. 8 WatersTechnology I whitepaper l sponsored by Hexaware Technologies
A focus on data The first step for any business reviewing opportunities for changing the data management operating model is to identify how a new structure would fit in with the current strategy. The question that needs to be asked is: what data types and processes could be considered for an alternative operating model? At the moment, firms are particularly interested in alternative operating models for securities reference data and corporate actions data, and a large percentage of firms are also willing to consider pricing data for a managed data services model. Legal entity data, however, is typically viewed as more sensitive, with the majority of organizations wanting to keep tight control of this type of information. In terms of processes, data cleansing is the most common activity to outsource. In addition to using a third-party vendor for data cleansing, around one in three firms are also willing to consider outsourcing data matching, acquisition and validation (Figure 6). That said, not everyone is convinced. Some firms are not interested in exploring outsourcing to save costs, and 27% say they would not be willing to outsource data acquisition, cleansing, validation, matching, enrichment or distribution. Figure 6: Which of these reference data management processes would you be willing to outsource? Data acquisition (36%) Data cleansing (51%) Data validation (37%) Data matching (32%) Data enrichment (20%) Data distribution (17%) None of the above (27%) 0 10 20 30 40 50 60 WatersTechnology I whitepaper l sponsored by Hexaware Technologies 9
Making the move For the firms that are willing to outsource, it is about finding a new model that can help optimize operations and overcome existing challenges. When it comes to outsourcing reference data management, or a component of reference data management, 45% of WatersTechnology survey respondents rate data accuracy as a very important challenge to address. In fact, quality is a key concern, and 36% also say data consistency is an important challenge to address (Figure 7). Still, most firms want to see both high quality and reduced costs when choosing to outsource. The good news is that cost savings often go hand-in-hand with good quality data. Considering the large sums the industry spends on reconciling trades that fail due to poor quality data, getting the data right can make a big difference in terms of optimizing costs. Figure 7: Which current challenges will you address by outsourcing reference data management or a component of reference data management? (Rate 1 5 where 1 is not important and 5 is very important) 1 2 3 4 5 Efficiency 12% 2% 24% 36% 26% Costs 13% 4% 18% 28% 37% Data accuracy 14% 3% 20% 18% 45% Data consistency 13% 4% 21% 26% 36% Streamlined systems and processes 14% 5% 33% 29% 19% Timeliness 12% 7% 37% 20% 24% Access to expertise 13% 16% 31% 25% 15% However, one of the reasons some firms have reservations with regard to outsourcing is concerns about security. Data security continues to appear as a main parameter for firms when deciding which reference data management process or data type can be considered for outsourcing. Security, particularly when it comes to proprietary data, is seen as even more important than other challenges associated with outsourcing, such as relinquishment of control and access to timely support. The good news for outsourcing services providers is that technology advances in recent years means the market has already come a long way in addressing data security concerns, and these challenges should now be easier to overcome than they have been in the past. 10 WatersTechnology I whitepaper l sponsored by Hexaware Technologies
But the success rate of an outsourcing relationship does not only rely on the provider. Firms are more likely to benefit from outsourcing services if data management processes and systems have been centralized internally and a data governance structure has been defined. The WatersTechnology survey shows that most organizations have started the data management journey, and are close to having well-established and defined processes in place. These are the firms that are most likely to be ready to review outsourcing services in the near future. The reality, however, is that many organizations still need to get the foundation right before it would make sense to outsource. Around one in four firms say they do not have operating level agreements with business units, or key performance indicators and dashboards, which are all widely recognized as tools that help firms monitor data quality and consistency (Figure 8). Focusing on making changes in these areas, would be a good starting point for firms aiming to eventually move to an outsourcing model to further optimize data management operations. Figure 8: How would you rate your organization s readiness to outsource based on the following criteria? (Rate 1 5 where 1 is non-existent and 5 is well-established) 1 2 3 4 5 Criticality, security and risk factors are defined for all reference data management processes 11% 20% 42% 17% 10% Financial estimations to decide the options between insourcing vs outsourcing are derived 15% 19% 40% 19% 7% Operating level agreements are established with business units along with KPIs and dashboards 25% 18% 29% 22% 6% Reference data operational processes are independent with clearly identified interrelationships and appropriate controls 16% 19% 40% 20% 5% Ability to decouple reference data technology layer 20% 17% 33% 20% 10% WatersTechnology I whitepaper l sponsored by Hexaware Technologies 11
Conclusion Although the importance of high quality, standardized and integrated reference data is now widely recognized in the financial services industry, cost cutting has continued to be a key area of focus in recent years. Firms are under pressure to improve efficiencies and reduce spend on reference data management operations, and this has resulted in a growing acceptance of innovative outsourcing models, such as managed data services and SaaS. The trend towards outsourcing reference data management processes is expected to continue to increase in the coming years, as firms need to look for ways to reduce costs without compromising on data quality. With more firms recognizing the need to excel in data management, operating models are slowly maturing and firms readiness to outsource is improving. For the up-take of outsourcing services to continue, however, the challenge for vendors is still to ensure clients are confident with how data security issues are being addressed. Firms are set to be more willing to outsource a broader range of data management processes and data types if they are convinced data is safe with outsourcing services providers. The market has already come a long way and, for many, outsourcing is likely to fit in to a longer term data management strategy aimed at helping the organization optimize efficiencies at the same time as meeting regulatory requirements and mitigating risk. 12 WatersTechnology I whitepaper l sponsored by Hexaware Technologies
About Hexaware Technologies Hexaware is a global IT consulting and services firm with a specialized focus in Capital Markets. For last 20 years we have helped leading global custodian banks, Index providers, asset and wealth management firms, exchanges, clearing organizations, and broker/dealers gain industry insights, and transform their businesses to differentiate themselves and achieve operational excellence. Our expertise spans the areas of Portfolio Management, Trade Management, Compliance, Risk Management, Trade Validation & Settlement, fund Accounting & Administration, Market Data Feeds, Reconciliation, Data Governance, Data Management across different asset classes such as Equities, Fixed Income, Derivatives, MBS, ABS, commodities, Cash & Cash equivalents. Hexaware delivers investment data management transformational solutions combining innovative technology and business process services and deep domain expertise of capital market. Hexaware offers full spectrum of data management services from business and architecture consulting to technology and operations outsourcing. Hexaware has implemented point solutions through its proprietary business and technology tools and frameworks and have benefitted clients with accelerated implementation and significant cost savings. Hexaware Technologies, is USD 308 Million (2011 revenues) IT organization, present in 25 countries, across 32 offices and 8600+ employees globally. Hexaware offers business process outsourcing services through its wholly owned subsidiary Caliber Point. Hexaware focuses on delivering business results leveraging technologies in Business Intelligence & Analytics, Enterprise Applications, Independent Testing and Legacy Modernization. Contact Name: Parag Pawar Title: Practice Director Capital Markets Tel: +31 23 557 09 62 Visit: http://hexaware.co.uk Email: paragp@hexaware.com Sell Side WatersTechnology s portfolio incorporates the market-leading industry brands serving financial trading firms in print, in person and online through its series of publications, website, email alerts, conferences, research, training, briefings, webcasts, videos, awards, whitepaper lead generation and special reports. Our 5 financial-market technology titles: Inside Market Data, Inside Reference Data, Buy-Side Technology, Sell-Side Technology and Waters serve the financial community with independent, expert journalism and have built their reputations by providing analysis and news, covering all developments in this fast-moving business in North America, the UK, Europe, and the Asia Pacific region. www.waterstechnology.com WatersTechnology I whitepaper l sponsored by Hexaware Technologies 13