Much is made in requests for proposals about the amount custodians spend or intend to spend on technology. Some of the world's largest custodians would have you believe that they spend as much every year on custody technology as their chief financial officers say they are spending on the year 2000 problem for the whole banking group. Both cannot be right.
Surely what matters is the service you are getting and what the custodian intends to offer in the future. The reality is that this financial spend yardstick is a poor guide to an institution's intentions; custody was a very significant business for JP Morgan, in fact too big when taken together with EuroClear. This was one of the reasons it left the custody business.
If it is really necessary to spend $100m or even more, every year on custody technology, it would appear that the technology platforms of the custodians in question are decidedly 'long in the tooth' and that they need to spend such large amounts to keep aged and water-cooled boxes from 'falling over'.
Ah! I hear some say, but they have some wonderful Windows-compliant front-end technology that does everything". In other words, to deliver a useable customer screen from an aged mainframe it has probably been necessary to develop a three-tiered architecture. This means more complexity, ergo higher cost.
A modern custody system should contain a single data repository, ie, a fully relational database which allows clients access to all the data relevant to their business; this will probably be run off Unix boxes and provide the opportunity to make changes reasonably quickly to meet customer demands.
Given that the cost of technology today is not in the hardware but in software support and development, it follows that the shorter time it takes to make changes or update your computer systems the less money it is going to cost.
It may be that a reader of this article has recently appointed a custodian for, amongst other reasons, the nice warm feeling he gets when he reads they are going to spend several hundred million dollars each year on their custody systems. What should he do? If the decision has been taken, then there is not a lot he can do expect look for significant improvements every year as a result of all this spend. Please don't hold your breath!
I would strongly suggest that he asks the custodian in question what all the money, quoted in the RFP, is going to be spent on each year. Just as a further thought he might also ponder the possibility that if it is necessary to spend several hundred million dollars each year, top management in the institution concerned may just decide that custody is not a business they want to be in!!
A further point worth making is that it is very easy to spend large sums. The difficult part is making sure that what you think you are going to get for your money is actually delivered to specification, preferably on time and to budget. There are all too many examples of projects being completed, on time and to budget, but not to specification.
If it is important to consultants and clients to have figures on IT spend, then I would suggest that they ask "What percentage of total custody revenues is spent on systems?" Normal business experience should then enable a judgement to be made as to whether or not this seems reasonable on a continuing basis. Currently it would also be wise to ask to be given the percentage net of euro and year 2000 costs
Don't be fooled by telephone number spends on technology. Avoid getting the 'wrong number' - and possibly the wrong custodian.
Wayne Kitcat is managing director of Lloyds Bank Securities Services"