For those that have read my past blog posts, corporate intelligence insights and industry perspective communications, you know that vendor consolidation is a bit of a favorite of mine. If you’ve been paying attention to the technology vendors prevalent (or once prevalent) in the investment management space, it is hard to ignore how radically the ‘standalone’ vendor market has shrunk over the past 5-10 years. Rewind the clock to 2005 or even 2010; Citisoft was conducting evaluation and selection engagements for our clients across various facets of the investment management lifecycle – order management & trading (OMS), portfolio accounting (let’s call it IBOR to keep up with the current ‘trend’), client reporting, data management and several other critical functions.
Let’s take OMS and IBOR systems as a case study. While not naming names, by my own count, there were approximately 9 viable OMS vendors and 11 feasible IBOR vendors if you were to undertake a software evaluation and selection initiative between 2005 and 2010. Now let’s fast forward to the present. By my estimation, if you were to kick off a project to replace your OMS, you’re looking at anywhere between 3 and 5 vendors that are capable of handling the majority of your order management, portfolio construction and pre-trade compliance requirements. Even then, most of these vendors that are left standing will be hard-pressed to address all of the asset types and products that may be part of your current and future investment strategy.
The IBOR vendor picture is even murkier. Again, by my count (which I’m happy to debate), the 11 viable IBOR ‘standalone’ software vendors is now down to 2 (maybe 3). That’s right – only 2 or 3. You can call it consolidation, rationalization, irrelevance or incompetence, but the fact is that options have dwindled alarmingly over the past 5-10 years. Ironically (and likely related), there was a general lack of emphasis on the middle office over the same timeframe, resulting in several investment management firms running on antiquated, and in some cases, obsolete software. Well now, firms are being forced to pay up, either in the form of risky, expensive and lengthy upgrades to their legacy platforms, or through expensive and lengthy transitions to new vendors (of which the choices are few) or in several cases, third-party service providers.
Why does this all matter? Citisoft is currently working with a number of investment managers facing massive changes in their technology and operations infrastructure as they adapt to a rapidly changing industry. Much has been written regarding the increased regulatory burden; the proliferation of investment products; the global nature of distribution. These trends and challenges are compounded by the conspicuous paucity and instability of software vendors properly equipped to address the growing complexity of our clients’ business. I view this shrinking ‘standalone’ vendor market as playing directly into the hands of those service providers and outsourcers (especially in the IBOR world) who can offer a differentiated level of service and the financial strength to alleviate some of the vendor risk that is increasingly top of mind for firms looking to improve their operating models.
I believe we are at a tipping point, and the scale is moving decidedly in favor of the service providers and outsourcers in our marketplace. Particularly, as it relates to IBOR, the service providers still standing (yes, there has been a survival of the fittest in this space as well!) are investing significant time, resources and money in order to rapidly mature both their technology footprint and operating models. I wish I could say the same for the software market.
Tom was a co-founder of The Rowan Group, which merged with Citisoft in 2002. Tom has been instrumental in the rapid growth of Citisoft’s investment management consulting brand over the past decade and has responsibility for corporate functions including business development, operations, client relationship management, and practice development. During his tenure with Citisoft, Tom has managed operations and technology transformations ranging from strategic initiatives to evaluation/selection projects and implementation programs.
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