A slew of research reports and related announcements have come out recently to report on observations of where investment managers are spending the few dollars they have for IT and post-trade operational projects.
Budget cuts and lays offs drove IT spending within most investment managers to a near dead stop, but with budget season just around the corner and some bright spots in the markets, firms looking to plans for projects that suit the ongoing need to survive but also put the company in a position to thrive when markets do fully recover.
Naturally, anything with risk in the name gets an immediate upgrade on the to do lists of many investment management firms but there are some related projects that are also gaining some attention and portion of the budget.
Generally, most consultants and research analysts agree on the select few areas where firms are investing in now and into 2010: data management, risk management, (particularly collateral management and related counterparty risk operations), regulatory compliance and reporting (both internal and external).
In a report published late in 2008, TowerGroup analyst Dayle Scher examined how the credit crisis would impact IT spending in the back office.
In the report Go or No Go: The Status of Buy-Side Back-Office Projects in 2009, Scher listed projects to be a go for 2009 and those to be put on the backburner. In this report she asserted that cost management would be the main concern among investment managers, but they would counterbalance this focus with projects aimed at risk mitigation and improving efficiencies.
More specifically, projects related to counterparty and customer data management, reporting and straight-through processing initiatives which enhance or improve existing infrastructure would likely be carried out whereas the more costly, longer-term projects such as replacement of legacy systems, would likely be postponed or even canned completely. My chats with various individual investment management firms over the past several months confirm Scher’s predictions of a focus on cost containment and smaller and more risk or regulatory projects to be true.
Collateral management, for instance, is a hot topic for many investment managers and most investment managers plan to make some sort of change whether it is to improve internal processes or allocate more functions to be completed by the fund administrator/custodian. Either way, collateral management is an area that all investment managers are actively improving. And more spending on risk management is expected in the next several years to come, according to recent research.
In Global IT Spending Forecast for Risk Management: A Growth Opportunity for Business and Technology, TowerGroup analysts and co-authors share statistics for growth in spending on risk and where spending will be most concentrated.
Within the report, the analysts estimate that by 2012 the global financial services industry will spend $30 billion each year on risk management (about 7% of total IT budgets); this is a compound annual growth rate of 6.15% which is significant especially given IT spending cuts. Unsurprising, the report suggests that most spending will be based on projects which aim to increase visibility, transparency and understanding of various risks, markets and products.
On the other side of the pond, Investit recently announced the results of polls taken at its own industry conference by attendees which included top tier investment management groups and fund administrators. According to Investit, data management, counterparty and market risk, client reporting and regulatory issues are the top priorities for firms for the year ahead because most are beginning to now improve businesses in lieu of the market conditions and global financial crisis.
Specifically, 82% of respondents of a poll taken at the Investit conference in July declared data management as a key priority while 77% named counterparty and market risk and 77% client reporting and 75% regulatory change as other main priorities.
These main priorities are very different from the results of a poll taken two years ago by Investit whereby the main priorities revolved around efforts to support mergers and acquisitions, and the building of new offshore centers. Clearly, the market climate was very different in 2007 and as consequence, so was the focus for many investment managers then.
With budget season coming up again, no doubt many players will be debating expenditures once again and though bright spots and supposed signs of recovery have colored market activity in recent weeks, IT spending is generally expected to remain conservative. In fact, some firms may delay projects progressing beyond the concept stage until the ongoing market transformation firms up a little more, especially in the area of regulatory change. IT may make sense that some investment managers will want to wait for more information before finalizing strategies.
Of course, the brighter side of patience is often overlooked. Dayle Scher points out in her research report that there is a benefit for firms taking some time to re-assess IT spending this year.
In her note, Scher advises that the lull in IT spending offers firms an opportunity to really evaluate postponed projects, particularly those which are costly and longer term projects, again legacy system replacement, for instance. Some firms may find themselves reviewing strategies, such as Application Service Provider (ASP) models or third party services, which they may not have typically considered in normal market conditions. Today, investment managers have the time to the research other options out there and perhaps develop a new and fresh perspective and re-strategize a better and more efficient project.
Where will you spend your IT budget on in 2010?
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