Crisis and Competition: The Forces Fueling Transformative Change

Fees and spreads earned from capital markets activities remain an important revenue source for many financial services firms. At the same time, the market for interest rate, equity, foreign exchange and other traded products is becoming increasingly competitive. Efficient post-trade processing and enhanced automated solutions are essentials for banks to stay competitive. Firms that incur higher than average trade processing costs will suffer competitive disadvantages that can only be addressed through significant investments in technology and process improvements. In addition, enterprise resiliency is a top boardroom agenda item following the major disruptions and losses stemming from the recent Covid-19 pandemic. Ensuring that banks are well prepared to respond to exogenous shocks such as pandemics, flash crashes, and cyber-attacks will be a major focus of executives, regulators and shareholders for years to come.

Due to high investment costs and the likely disruption to established routines and practices, many firms have avoided major system upgrades for a long time period. It often seems easier, faster, and cheaper for banks to develop short-term fixes and workarounds instead of initiating large scale transformation programs. Although this approach may yield satisfying short-term results, there comes a breaking point where outdated technology is no longer sustainable. Based on a number of recent studies and surveys[1], a majority of financial services firms will dedicate significant amounts of resources to enhance their IT infrastructures over the next several years. For firms that lag behind already, change becomes inevitable.

Scoping and Planning

The premise of flawless end-to-end connectivity between the various systems deployed to process capital markets cash and derivatives products is a highly attractive prospect for banking executives. Looking at glossy vendor brochures and videos, it may seem that a full straight-through-processing solution for different asset classes and instruments might be only a few weeks away. In reality, reaching optimal operational performance is a much more complex undertaking. Leading vendor platforms for traded products, such as Broadridge, Calypso, GMI and Murex accommodate a range of asset classes and instrument types and they provide ready-to-go data models. However, in almost all cases, implementation of these systems entails extensive customization and migration work that requires a coordinated and time-consuming effort.

Data Sources and Targets

Most firms deploy a combination of vendor tools, proprietary systems and tactical solutions (e.g. spreadsheets, manual operations, etc.) in support of their core trade booking and post-trade operational processes. Developing a high-level understanding of data sources and targets is an important first step when planning for a system migration effort. It is critical to know how many data feeds and interfaces need to be migrated and to identify simplification opportunities. Migrating every single upstream and downstream feed, report, and interface is a complex undertaking in itself. Even relatively minor system upgrades and migration efforts can result in multi-year efforts and require the involvement of subject matter experts from various business and support functions (see Exhibit 1 below).

It is not unusual for hundreds of data feeds and reports to be generated based on data from a single legacy capital markets system. Many of these reports may be outdated and no longer be required. Similarly, the same data attributes are often shared across a large number of reports. If this is the case, eliminating duplicate attributes and optimizing how feeds are generated and shared with consumers represents a real and obvious optimization opportunity.

Planning with the Future in Mind

A major system implementation or migration program will typically require a multi-year effort until it is fully completed. During that time, banks will execute other programs, technology will evolve, and market standards and practices will continue to progress. There are several categories and types of dependencies that should be considered during the planning and roadmapping phase:

Internal Dependencies

Parallel programs and initiatives
Dependency on other business lines (e.g., to deliver a solution, service, capability, etc.)
Permissions to build and operate a new platform
Permissions to send/receive data to/from other applications and/or vendors
Regulatory notification requirements

External Dependencies

New or changing regulatory requirements (e.g., UMR, LIBOR transition, CAT reporting)
Industry initiatives (e.g., ISDA CDM standardization)
Clearing house rules and capabilities
Vendor status and support (e.g., vendor testing availability, SLA, ongoing product support, financial stability)
Technological innovations (e.g., Cloud, AI/Robotics)
External events (e.g., Covid-19, Brexit, elections)

Any of the above dependencies have the potential to derail or delay the delivery of an IT change program. Identifying critical dependencies upfront is an important aspect of program planning and execution management. Frequent review and executive management discussions of these dependencies will help mitigate issues, risks, and potential roadblocks that might emerge during later phases of the program.

Core Considerations

Implementing new capital markets solutions is almost always a challenging endeavor. Several important strategic considerations need to be assessed upfront, as illustrated in Exhibit 2. Not all of these matters can or should be fully resolved during the planning phase, however, it is important to consider the below aspects to ensure that the capital markets IT change program is headed in the right direction.

Programs that are unable to reach fundamental agreements on the above considerations are likely to encounter difficulties out of the gate. For instance, many banks fund IT programs on a year-by-year basis. A lack of funding commitment can result in roadmaps that cannot be completed due to a lack of resources. Similarly, long-term agreements with legacy system vendors may impact the anticipated savings opportunities if the contract cannot be terminated or is subject to auto-renewal clauses. Lastly, many capital markets front-office users are accustomed to certain routines, tools, and reports over many years. Any major disruptions to these practices can be met with skepticism and resistance. Ongoing communication regarding planned replacement solutions will be critical to overcome stakeholders’ objections at inopportune times.

Know Where You Go

Developing a comprehensive roadmap is the only true and accepted approach to initiate a large-scale IT change program. While developing a high-quality roadmap takes additional time, it is unreasonable to embark on a costly multi-year program without the appropriate groundwork and baseline research. It is important to distinguish between the strategic nature of roadmaps and the detailed project planning efforts that are part of the execution phase, as illustrated in Exhibit 3 below. Product and project roadmaps capture the strategic goals, key features and overall timeline and resources of an initiative. Product and project roadmaps can be maintained as separate artifacts or consolidated into a single document. By contrast, the project plans maintained by the workstreams during the execution phase contain much more detail and should be updated on a daily basis. For larger initiatives, a central program management office (PMO) function typically consolidates the information for the different workstreams, assigns an overall program status (e.g., Red, Amber, Green – RAG) and tracks major risks, assumptions, issues and dependencies, as well as additional program-level information. The strategic roadmap(s) should be periodically reviewed and updated to reflect changing situations, especially when program scope and goals need to be revised.

Exhibit 3 – Roadmap vs. Project Planning

A high-quality product roadmap begins with a clear assessment of the market opportunities, business objectives and key drivers of any particular capital markets IT transformation program, as illustrated in Exhibit 4 below. As a next step, product features and related impacts are assessed to ensure they meet the program’s strategic goals and direction. Finally, technology options need to be evaluated to arrive at the optimal solution for a complete product roadmap. Involving key stakeholders from all impacted areas is a critical factor towards a successful product roadmap. Restricting the input from specific users during the roadmapping process often results in lack of support and additional objections during the execution process, which can cause friction and unwanted delays. It is critical that the product roadmap reflects the dependencies and core considerations discussed in the previous sections.

The development of a high-level project roadmap is relatively straightforward once a comprehensive product roadmap is available. Project goals and objectives should align closely to the product goals, and key tasks and activities should be clear at this point. It is important to note that a project roadmap and a project plan are not the same. A project roadmap should only capture major milestones, program governance structure and budget and resource allocation. The project roadmap should allow for sufficient ‘white space’ for adjustments and optionality to accommodate minor program delays and ‘Plan B’ if a different direction needs to be considered.

Program Execution

Once a program has moved into the execution phase, the general steps to complete the implementation and migration process should be clear, as illustrated in Exhibit 5 below. Although the general actions or activities required towards ‘Go-Live’ status are familiar to IT professionals, there are many different paths and options available to program executives.

Developing repeatable routines and processes early on is a critical aspect program leads need to consider when building an efficient and scaled deliverable framework (see Exhibit 6 below). While this may sound easy in principle, many programs fail to allow sufficient time to incorporate ‘lessons-learned’ into their subsequent planning efforts. Quick ramp ups are often expensive and detrimental to long-term success as a large number of analysts, developers, product team members and project managers need to be onboarded, trained and organized at the same time. This can quickly result in an unwieldy situation where different workstreams are conducting in-depth analysis work in an independent fashion. Without prior experience and program standards, it is inevitable that the resulting outputs vary in level of detail, approach, and format.

Repeatable processes can be achieved by initially focusing on small subsets of products, clients, instruments, or trading books. Demonstrating how an implementation or migration works for a small transaction sample will increase confidence and generate tangible knowledge and proof-of-concept (POC) standards that can benefit the larger program team during later phases of the program. This gives program teams an opportunity to learn from their mistakes, identify weaknesses early on and develop program standards that will benefit the program teams when tackling subsequent challenges. Once programs establish repeatable processes for the key delivery tasks, they are in a position to deliver in a scaled and efficient fashion that ensures success over the remainder of the program.

About Monticello

Monticello Consulting Group is a management consulting firm supporting the financial services industry through deep knowledge and expertise in digital transformation, change management, and financial services advisory. Our understanding of the competitive forces reshaping business models in capital markets, lending, payments, and digital banking are proven enablers that help our clients remain in compliance with regulations, innovate to be more competitive, and gain market share in new and existing businesses. By leveraging our change management and Agile capabilities, Monticello guides its clients in the deployment of the latest digital technologies with confidence and resilience.

[1] IFS Global PR Survey Digital Transformation Investment in 2020 and Beyond: https://www.ifs.com/us/sitecore/media-library/assets/2020/06/29/global-pr-survey-digital-transformation-investment-in-2020-and-beyond/