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INVESTING
GLOBAL SECURITIES SERVICES
As investment banks join the hunt for outsourcing support, they may end up helping each other * By Tom Groenfeldt
As long as profit margins were fat and back-office operations adequate to their straightforward tasks, investment banks didn't spend a lot of time worrying about such mundane areas as account processing or settlement accounting. They poured their resources instead into front- and middle-office technologies: high-powered trading systems and broadband telecommunications, sophisticated analytics and Internet-based e-business platforms that could distinguish a brokerage from its competitors.
But now the investment banks' seemingly benign neglect of the back office is about to change. The end of the decadelong bull market has squeezed profits, prompting urgent searches for cost cuts and efficiency improvements. With the memory of collective multibillion-dollar Y2K upgrades still fresh, the securities industry is embarking on the potentially more costly T+ 1 initiative to shorten the settlement time on trades from three days to one day after the transaction.
The prospect of expensive new backoffice projects in the midst of a sharp market downturn has led major firms to evaluate a variety of outsourcing alternatives for the first time. "More banks and brokers are looking to outsource backoffice functions than ever before," says Robert Iati, director of security and capital markets research at TowerGroup in Needham, Massachusetts.
"Technology has moved ahead at lightning speed, but at many of these banks, you still see applications that are from the 1970s because all their focus has been on the front office," adds Rob Heyvaert, chairman and chief executive officer of capital markets consulting firm Capco. Now it's the back office's turn, he suggests.
Boston Consulting Group partner Antonio Riera points out that the key to efficiency in securities processing is large scale, which minimizes unit costs. But, he says, 11 even the largest financial institutions often do not have sufficient scale along certain product lines." The solution? Riera calls it "strategic sourcing," which can range from contracts with vendors to joint ventures with peers.
So far there are only hints of the flow of outsourcing work from investment banks that is anticipated by consultants like Riera and technology vendors like Hewlett-Packard Co., IBM Corp. and Sun Microsystems. But these organizations are preparing...