Early in the year, a number of well respected industry sources cited the main IT priorities for 2009 as cost cutting and system rationalization, respectively. In fact, a report by the Tabb group confirmed that nearly half of the buy-side firms they interviewed were considering changing their OMS and EMS providers despite the complexities involved.

Is this really a feasible solution for buy-side firms looking to reduce costs?

In looking at the front office space there is definitely a convergence of functionality. In general, OMS/EMS solutions are very similar and most vendors have "caught up" with each other in terms of their offerings. If firms were to look at functionality alone, switching systems would not be as daunting of a task as it would appear to be at first glance. Changing an OMS or EMS is more of a lateral move than it was in the past.

New Technology is Solution, Not the Problem

The main reason for switching front office systems is reducing costs. If a buy-side firm has been using OMS and EMS providers for a period of years there are typically annual cost increases involved in the maintenance of the system. If firms evaluate this, they will see that over time they are paying much more than they were at the inception of the agreement. Much like any product or service, the cost of front office solutions has come down to reflect the maturity of industry. So looking at changing systems purely based on cost is a "no brainer." If a new system provided 90% of the underlying functionality of the old one at a third of the cost, why wouldn't you switch?

On the other side of the trade, the main reason cited for maintaining the status quo are the reported difficulties in converting from one system to another along with the added expense of doing so. While any system conversion is a serious project, the cost of conversions has come down, as well as the time that it takes to implement new solutions and front office vendors tend to tout the speed of their implementations. Regarding conversion costs, even with up-front fees included, the total ongoing costs will still typically be much less than what the buy-side firm was paying prior to swapping out systems.

So, in looking at all of these areas combined, one can reasonably conclude that changing front office providers is a viable solution for firms looking to reduce costs.

Significant cost savings can also be achieved by switching to vendors that have a front-to-back office solution. For example, if a buy-side firm is maintaining separate OMS, EMS and portfolio accounting platforms, upgrading to a front-to-back office provider will likely increase efficiency and reduce costs. Many times these providers will have 90% of what the more expensive single solution vendors have in each respective area " all at a fraction of the cost of paying annual maintenance fees on both systems.

So, if a firm is happy with their front office provider, why not look at the same vendor's back office offering or vice versa? An integrated system is not for everyone, but it definitely merits closer scrutiny for buy-side firms looking to reduce costs.

Outsourcing Best Practices

Another way buy-side firms can reduce costs is to consider outsourcing their hardware/software platforms for trading and portfolio management. Why maintain the expense of running servers/workstations in-house for mission-critical applications like trading and portfolio accounting? Supporting the underlying hardware and software that these applications require in-house can be a significant expense in terms of staffing required to maintain these platforms (either in-house or external consultants paid on a retainer basis).

In addition to the periodic upgrades (server memory, operating systems) that these systems require, many times new versions offered by vendors require investing in new hardware. This added expense is typically overlooked and software upgrades can be very expensive by their own right. Outsourcing can reduce in-house IT costs significantly depending on the amount of hardware being maintained.It also provides firms with built-in disaster recovery for mission-critical systems such as portfolio management and trading, further reducing costs and enhancing compliance.

As a best practice for buy-side firms seriously considering outsourcing platforms, firms can look to providers who support a SaaS (Software as a Service) model or dedicated hosted environments because the support of these ancillary hardware/software platforms is usually included as part of the core service.

The bottom line is that if buy-side firms are serious about reducing costs, they do not need to look far. New technology is the solution, not the problem. Firms that look to make changes now will not only reduce costs in the short term, they will increase their operational efficiency, enhance compliance and position themselves for growth when the market comes back.

About the Author:

Dave Csiki is Managing Director of INDATA, a leading industry provider of software solutions for buy-side firms including trade order management (OMS), compliance, portfolio accounting and front to back office.