Investment management and securities firms increasingly buy software packages “off-the-shelf” to ensure that their business strategies are aligned with the latest developments in information technology. The resulting explosion in the package software market has led to a confusing array of products that adds to the complexity of the software selection and implementation process.
DCE Consultants’ recent report, Global Investment Package Solutions – 2000 is the result of a systematic survey of the functional and technical capabilities of 90 software packages drawn from all over the world. Conducted and published jointly by DCE Consultants and Banking Technology magazine, this survey provides a comprehensive analysis and commentary on the relative strengths and weaknesses of financial software packages targeted at investment managers, broker-dealers, banks and custodians.
Nearly half of the packages in this survey have client installations spanning three or more continents. This is underpinned by the increasing ability of packages to support global operations. The most popular features are multi-currency (91%) and multi-company (81%) coverage followed by the provision of interfaces to local systems (73%) and the ability to support wide area networks (68%). Support for the more complex capabilities, however, declines to 52% of packages providing support staff in every time zone and only 48% providing local accounting standards.
More than half of the packages participating this year have been launched within the past five years, compared to only 18% last year. This influx of relatively new packages is encouraging, in that many suppliers are developing new products from scratch to incorporate new technology or to add specialist products to their portfolios. This contrasts with the past tendency to extend the life cycle of old products by bolting on more functionality.
The most popular of the emerging e-commerce functionality is client reporting via web site or e-mail, provided by 40% of the packages investigated. However, support declines for functions requiring greater degrees of web integration. Thus only 24% of the packages provide portfolio information via the internet, 18% are able to exchange trade information with counterparties and only 9% provide personalised research capability.
Figure 1 shows the generic architecture of an asset management operation. DCE defined generalist packages as those that support part or all of the core buy/sell securities process broken down into portfolio modelling, order management, trade processing and back office administration. Specialist packages are defined as those which support complex functions such as risk management, performance measurement, treasury and unit trust administration. These specialist functions traverse the entire buy/sell securities process. Using this high-level structure, the survey provides an analysis of each of these functional areas at one or two levels of drill down.
The survey showed that the proportion of generalist packages providing some basic specialist features is quite high but support declines as the function becomes more complex.
q For performance measurement, 50% allow the calculation of time weighted returns but only 32% are AIMR compliant, 16% are GIPS compliant and 21% support scaling within portfolio.
q For risk management, 50% support market risk measurement but only 14–25% support VAR calculations, 29–34% support scenario and sensitivity analysis and 18–25% support back-testing and stress testing.
q For treasury management, 64% support cash flow forecasting but only 39% support netting and 29% support pooling.
q For unit trust administration, 29–34% support unit trust/mutual fund administration but only 16% enable automatic switching between funds, calculating daily price of participations, and administering unit-linked products and only 11% are able to calculate corporate tax
As many as 61% of generalist packages support electronic trade confirmation and 52% support post trade communication via SWIFT. However, only 25% support the SWIFT MT500 message formats while 9% support the emerging FIX protocol for pre-trade communication. The incorporation of workflow technology is also reflected in the finding that 80% of packages enable trade status monitoring, 66% provide some form of exception handling and 25% provide graphical workflow.
The survey results show that no single package can cover all aspects of the generic architecture of an asset management operation shown in Figure 1. Typically, an integrated asset management firm is supported by a backbone system covering either the back office or an integrated front-to-back office system. Then, depending upon the asset manager’s need, packages providing richer functionality can be added to the architecture to boost, for instance, the front end of the core buy-sell process (front-office oriented packages) or specialist processes such as performance measurement (specialist packages). Examples of both these types of packages are shown in Figure 2.
Asset managers and pension fund managers seeking to outsource parts of the “heavy” back office functions such as trade settlement and reconciliation to an external party can use a front office-oriented package as the backbone. These “lighter” front office-oriented systems focus on portfolio management, order management and compliance while providing a few back office functions such as portfolio accounting and corporate actions. Additional specialist packages can then be used to strengthen, for instance, performance measurement capability.
The success of such “mix and match” approaches to developing solutions depends upon the ability to create an architecture that supports flexible connectivity. The survey shows that many generalist packages provide electronic interfaces with a variety of external systems such as front office (59%), treasury (52%), risk management (54%), client reporting (66%), data warehouse (63%) and external general ledgers (66%). However, 57% of packages provide these interfaces based on the traditional import-export capability and only 20% use flexible middleware.
The advantage of middleware solutions is that they provide a common interface to connect multiple systems which allows future changes to be incorporated relatively easily. Traditional one-to-one interfaces are initially cheaper to build but have the tendency to proliferate through the architecture making it inflexible and therefore more costly to maintain in the longer term.
Alka Shah is a senior consultant with DCE Consultants, based in Oxford. Details of the full survey are available from