Solving the legacy technology conundrum: Successful strategies for back-office transformation

Abstract

The challenges of post-trade cost have persisted for over a decade, as the aftermath of the 2008 crisis led to a fundamental restructuring of the capital markets industry. This restructuring impacted all of the post-trade value chain, with banks looking to reduce in-house TCO (total cost of operations), custodians pressured to reduce margins and emerging vendors looking to deliver innovation in response. But the cost journey that banks have taken still leaves many with a back-office infrastructure that limits innovation — be that through time to market for product enhancement or the limited ability to leverage emerging technology — effectively leaving them between a rock and a hard place. Overlaying the additional cost of regulations onto this infrastructure has meant that for most, success has only been running to stand still — offsetting this incremental cost through traditional cost levers such as delayering or offshoring. Against this backdrop of industry restructuring, however, the costs of production continue to be significant across the back office. Out of an estimated end-toend cost base of US$700bn, the capital markets industry spent over US$130bn on asset servicing alone (in areas such as settlement, clearing, reconciliation, corporate actions) in 2017,1 which appears unsustainable against a macro backdrop of ongoing cost pressure. This pressure is not just focused on the corporate and investment banks (CIBs) — whose cost challenges are well publicised as a segment — but all through the value chain as the buy side also comes under increasing pressure on margins. So although running to stand still may have been a focus in the past, it will not be enough to futureproof business models into the next decade. To survive in the future, capital markets organisations will have to ultimately address this cost of inefficiency and, having largely exhausted traditional cost levers, can only succeed through technology-led transformation. This paper will explore strategies for successful technology transformation across the back-office environment and how organisations should respond to the challenge.