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Thought Leadership Perspectives
Cost Savings or Business Strategy: Two Sides of the Outsourcing Coin
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Gavin Little Gill
Global Head of Product Strategy
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Ellen Sheehan
Manager, Service Delivery, Linedata
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| The hype surrounding "the cloud" has reached a fever pitch. Pundits preach that now, more than at any other time in our age of technology, outsourcing of function and services is critical to maximizing the bottom line. |
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- Is outsourcing critical?
- Is it right for your company?
- Is it right for the front office?
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Most firms are answering "YES" to all three questions although firms approach this decision from disparate criterion and perspectives. For most firms, the primary criterion is either cost savings or strategic capabilities. For firms without an existing IT infrastructure, there are clear cost savings associated with leveraging an existing outsourced provider’s proven environment. For those with a strong infrastructure, a simple ROI is less clear and the decision is typically driven by a longer term business strategy. What is clear is that the firms who express the highest level of satisfaction with outsourcing are those for whom the financial ROI is a secondary goal to their overall business strategy. |
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If Not for Cost Savings, Then Why?
As companies strive to cut IT costs, the impact reverberates within the organization, impacting the frequency of upgrades and the overall capabilities of in-house IT staff to support increasingly complex trading environments. Systems that might once have managed trading operations effectively are now taxed by the need to improve efficiencies and become more flexible and extensible. Internal systems staffing has become constrained as a response to the ever-increasing cost of doing business. In the front office world, the need to enact change from the original structure is critical and that is where outsourcing makes very good sense.
The most obvious benefit that outsourcing offers is the technology on which the latest application releases can be offered. The high level of performance accompanying these optimizations has an immediate and dramatic impact. Vendors provide highly trained experts to support front office functions, which can include start-of-day preparedness of data and system availability to validation checks intraday, infrastructure monitoring and telecommunications connectivity. Even less obvious functions, such as differential data backups and disaster recovery protocols and testing, are standard in most outsourced paradigms. Hosting vendors are often extensions of the firms they service since they understand the front office criticality of uptime, responsiveness and security. In the best case scenario, end users need never know or care who is supporting the system because the system is readily available and robust.
Additional benefits cited by firms for whom outsourcing is a key technology strategy include:
- Capabilities – Outsourcing ensures your application remains current, running on the latest software and appropriate hardware. It also allows firms tremendous flexibility to grow their businesses. Need to add a new desk in London, another desk to the platform or another business unit? Are you trading in new jurisdictions? Answering all of these questions become infinitely easier with a provider who has done this before and supports similar clients.
- Expertise – Outsourcing service providers have a larger pool of application experts to draw from. If that outsourced provider is also your software provider, they have access to an even broader group of people who are not only experts in the product, but that actually designed and developed that application.
- Hidden Costs – Costs extend well beyond physical technology. Firms need to consider not only production but disaster recovery and QA environments. People represent the highest costs and also the key risk to many businesses. Application support is only the beginning; there’s hardware support, off-hours support, and of course costly budget busters like Disaster Recovery and BCP/Collocating.
- Continuity of Cost – By structuring your contract and licensing over the course of a multi-year partnership, you can forecast and budget more effectively. Outsourcing provides a seamless support system that can provide technical advances without the overhead of internal budgets, red tape or everlasting projects.
- Scalable Technology – Front office end users need to focus on trading and not trading platforms. Appropriate Service Level Agreements will ensure a fully operational system with guaranteed uptimes at 100%.
Is Outsourcing Right for Your Business?
TMaking the decision to outsource your business requires careful consideration. You need to start by answering the question “Why?” If the business rationale makes sense it is then a matter of working in parallel to get an understanding of your own systems’ infrastructure, identifying those opportunities that make the most sense to outsource and choosing the right vendor for your needs.
Early adopters for front office outsourcing tended to be smaller, boutique investment firms and hedge funds that needed to get up and running quickly. These companies never incurred the overhead associated with purchasing hardware, software, building infrastructure and the installation of telecom lines, making a turnkey operation possible. Outsourcing offered them a fully operational, 24/7-supported solution that could be implemented in a matter of days or weeks.
These investment firms and hedge funds utilize the expertise of outsourcing vendors to hit the ground running. Alternatively, large institutional firms view outsourcing in an entirely different way. They see outsourcing as inconceivable because of regulatory constraints, expense and risk. These fears are a bit arcane as outsourced, front-office software provides the effectiveness and efficiency to manage day-to-day operations, react quickly to new requirements and produce results. Instead, it is now a practical solution to ensuring the front-office remains on the latest software versions and is supported by teams tied closely to development groups within the vendor organization. This model provides the effectiveness and efficiency to manage day-to-day operations, react quickly to new requirements and produce results.
The next generation of outsourcing options offers better performance and better technology. Virtualization has revolutionized outsourcing by providing the ability to clone applications and hardware into virtual instances. This means fewer servers to purchase and less rack space and power requirements in co-location facilities. Virtualization means diminishing costs for vendors that then pass a portion of these savings on to clients. In short, outsourcing is more affordable than ever. As such, in the next five years large investment firms will slowly but consistently adopt front office outsourcing functions.
When Outsourcing Makes Sense
If the strategic synergies outsourcing offer make sense for your business, determine what and how you might want to proceed. Consider the following:
System consolidation: Identify redundancy in process or function and assess if the systems supporting your front office are truly necessary. Most firms have platforms that expanded over time because the end user needs have evolved. Vendors can often work with firms to identify those areas for consolidation or systems simplification.
Identify those areas where outsourcing makes the most sense: Outsourcing is not an all or nothing endeavor. Connecting to brokers over proprietary networks and the configuration of those connections can be easily managed by outsourcing vendors. Likewise, customizations can be managed, optimized and considered relative to core software release cycles. Compliance is another area where outsourcing can be an effective means of management. Mandates can be reviewed, verified, QA’d, coded, applied to accounts and presented in both electronic and hard copy format. Outsourcing this function means that the vendor provides both systems’ expertise to your compliance teams and offers the scale to support the peaks in your business.
Find a partner who best suits your needs: Outsourcing is a commitment on behalf of both the firm looking for services and the vendor who supplies them. Vendors who identify themselves as partners in your business goals will likely be more invested in delivering support and services that meet your needs and may often exceed your expectations. Does the provider have the human and technology infrastructure to meet your needs? Are there firms like yours supported by that vendor today?
Conclusion
Front office functions have no room for downtime. From overnight batch processing of data to positions propagated correctly for start-of-day to integrations with 3rd party applications working seamlessly, your vendor of choice provides the infrastructure to support your most critical functions. Each company must contend with today’s economic challenges the best way they see fit. Vendors now have a better understanding of your business. Combined with cutting edge technology advances, vendors make for a powerful partnership. The cost advantage may steer you towards outsourcing, but the real benefits and key to a successful outsourcing marriage starts with a decision based on supporting your business’ strategic objectives.
About the Authors
Gavin Little-Gill is Global Head of Product Strategy and Ellen Sheehan is Manager, Service Delivery at Linedata, a global solutions provider with 700 clients operating in 50 countries. |
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