Like other industries, the financial sector is striving towards greater efficiency and lower costs. Many financial organisations see technology as the means to achieving these ends. Most pension and investment firms have already taken the first step along this road, installing computer systems for analysis, accounting, portfolio management and so on.
To achieve further efficiency and savings firms must now take the next step - connecting these systems together and to the outside world. This can speed up operations, reduce errors and give greater access to business information. Although simple in concept, this integration of systems can be difficult to achieve and needs both a long-term strategy and often some short-term tactical solutions.
Most of the first generation of financial systems were designed to operate on their own, whether they be analytical, trading, portfolio management or accounting systems. The systems mostly require users to key in data and, after processing the data, the systems output their results on screen or as printed reports. As firms have added systems they have often found they have had to re-key data if they want to move it from one system to another - an inefficient and error-prone activity.
Connecting stand-alone systems electronically eliminates these re-keying errors and improves efficiency. But it can also have other benefits. It can provide management with better access to information about the firm’s operations and it can give them more control over how they deploy resources and respond to new situations.
But why stop at the door of the firm? Since most of the organisations a pension firm deals with have also computerised there is the potential to interact electronically with them and extend the error reduction and efficiency gains that have been achieved in-house.
Furthermore, as the financial industry goes increasingly on- line, putting research, market prices and other data on the Internet and offering broking, exchange trading and other services electronically, pension and investment firms can no longer operate in technological isolation.
In this brave new world where no firm is an island the watch words are “integration” and “connectivity”. Indeed, Kevin McGilloway, managing director at Lehman Brothers in the US, recently went as far as saying the main purpose of technology in the financial industry is moving on from processing information to facilitating the integration of business activities.
So how does a firm go about integrating its in-house systems and linking to the outside world? One radical solution is to throw out all the old stand-alone equipment and start again. Not many firms can afford to do this, but all firms have to upgrade or replace systems from time to time and they can make integration one of the goals in selecting a new system. This is the approach taken by ABP, the Dutch civil service pension fund.
“In the past we used our own in-house systems for fixed income and equities. Now we’re thinking about using one integrated system for portfolio management and general accounting. One of the requirements is that there should be a good interface between the different parts of the system,” says Jelle Mensonides, managing director at ABP’s equity department.
The advantages of such an integrated system include reducing errors from manual input and reducing the number of stand-alone spreadsheet applications people within the firm use, says Mensonides. ABP has identified a system from a software supplier that will meet its requirements although it will not say which this is.
Where a firm does not want to replace its systems but plans to create an integrated technology infrastructure over time, then adherence to hardware and software industry standards and using the products of a small number of suppliers can offer a solution. PGGM, the Dutch health workers pension fund, has followed this route.
PGGM has systems for analysis, trading, portfolio management, treasury and accounting. It needs to link these systems for reporting purposes and for risk management, says PGGM spokeswoman Dido van Holthe. The organisation achieves its goal by operating an open systems technology policy, whereby all systems must conform with industry or de facto standards and must be able to interface with other systems.
“We are strongly standardised and have one database management platform and two operating systems,” says van Holthe. The firm’s main suppliers are Sybase (database), Microsoft (operating system and user interface) and Sun Microsystems (hardware and operating system). “PGGM always considers the problem of integration when choosing a new system. All new systems have to fit into the existing IT architecture,” says van Holthe.
Application suppliers have become aware of the integration issue too and now know that their software must be open to linking with other applications if they are to get on firms’ short-lists for new systems. Los Angeles-based Capital Management Sciences, for example, knows that its customers now rarely use its bond portfolio analytics system in isolation.
“We work closely with the portfolio accounting software vendors to make it easy for our clients to link these systems together,” says Teri Geske, senior vice president for product development at CMS. “The most important task is to transfer each portfolio’s holdings from the accounting system - which keeps track of purchases, sales, paydowns, maturities, etc. - into our BondEdge software so that the portfolio manager does not have to enter this information manually.”
Most application software suppliers are choosing a narrow set of industry standards on which to base their products. For data, this tends to be relational databases that conform to the SQL query language standard, with Sybase, Oracle and Microsoft as the most common suppliers. In terms of operating systems, Windows NT is the number one choice for the desktop component with NT also used in the server processing role by some, while others, particularly those who need more robust, high performance systems, tend to use Unix. CSM’s BondEdge runs on Windows NT, for example.
The choice of this underlying technology is a first step towards integration although on its own will not guarantee it. Different applications often hold data in different formats or process it in different ways. Passing data between systems often requires translation between one format and another. Application suppliers can make the task of integration easier by providing programs called “interfaces” that perform this translation and other co- ordination between systems.
For firms that cannot afford to throw out all their old systems and start again or that have not adhered to open standards in the past, all is not lost. The computer industry has developed a layer of technology that firms can use to tie their disparate systems together. Called “middleware”, the technology comprises a set of interfaces and data translation and management tools. There are now a number of suppliers that specialise in middleware technology for the financial industry, such New Era of Networks (Neon), Mint Communications, Braid and OpenTrade.
Middleware is often helpful where an organisation needs to gather all its data into some central repository, for example for risk analysis. Middleware can be the means to collect, standardise and consolidate the data. However, where an organisation is able to make integration a pre-requisite of the systems it chooses, it may be able to avoid this extra layer of technology.
“We try to prevent having to use middleware by using systems which are connected to each other by interfaces developed by the systems providers themselves,” says Mensonides at ABP.
But whether starting anew or working with what they have got, firms must now develop strategies for linking their systems. The benefits are too important to ignore. The same goes for linking to the outside world.

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