Journal of Applied IT and Investment Management - Vol.4No.1 by SimCorp

# JOURNAL of Applied IT and Investment Management

Bruno Bonati, Frank J. Furrer and Stephan Murer

The silo effect

Losing the game with a decoupled IT strategy

Repositioning IT FROM SUPPORTING TO EMPOWERING THE BUSINESS Claiming a seat at the head table WHY IT EXECUTIVES SHOULD HAVE A SAY AT THE TOP IT system selection process CHOOSING THE RIGHT SOLUTION TO MEET INVESTMENT MANAGEMENT GOALS Business process management ADOPTING A HOLISTIC IT STRATEGY ACROSS THE VALUE CHAIN Mastering investment management operations ENSURING IT DELIVERS ON STRATEGIC BUSINESS OBJECTIVES IT as key innovation driver TURNING IT INTO COMPETITIVE ADVANTAGE

Volume 4 路 No. 1 路 May 2012

May 2012

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

CEO COMMENT:

Aligning IT and business strategies

by CEO Peter L. Ravn To succeed in maintaining a profitable and competitive business in these difficult days, it virtually goes without saying that global investment management organisations need an operational platform strategy that is fully and seamlessly aligned with the business strategy.

In my mind there is a clear trend in our market today towards getting back to basics. For several years now, and 2011 was no exception, we have been through one crisis after another; before that we were in a market that only went in one direction – up. All the basics were forgotten and we learned the consequences the hard way. Now it’s back to basics and getting the basics right. If you want to focus on simplicity in the business, having a complex patchwork of IT systems stitched haphazardly together doesn’t really fit the strategy. For instance, it would certainly prove very difficult to achieve daily processing and reconciliation with the level of simplicity you may have in mind. You have to start with having the overall business strategy in place. Then, as described in our lead article on pp. 3–6 and in subsequent external contributions to this issue, you do your best not only to support the business strategy with your IT platform but also to make IT empower it. You add more as you go along, facilitating and enabling the strategies by having not only the right IT system in place but also examining the procedures and the internal processes to make sure they are as efficient as possible to control cost and leave resources for innovation. The IT system has to cope with the very complex and challenging issues that often surface in the daily processing arising from carrying out investment strategies to meet business goals. However, bearing in mind that sometimes a more simplistic approach is called for, it is vital to ensure that business and IT strategies are aligned to avoid suffering the negative effects of working in silo structures, as described in the cover story on pp. 12–15. I believe that if you take a holistic view and try to map the ideal systems landscape, you will come to the conclusion that an integrated platform is the answer. Along the entire value chain, your business is empowered by the benefits of one core database and an integrated approach to data management and processing that at the same time supports and protects the investment made in all systems. For SimCorp, prerequisites for being a successful vendor of investment management systems include having the right architecture and strong solutions for the challenges the industry is facing. Outstanding is also the continued support of our clients. The partnership we maintain with our clients is all about keeping open and loyal relations based on a sound commercial understanding. Peter L. Ravn, Ph.D., is CEO at SimCorp.

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CONTENTS 3 Repositioning IT: from supporting to empowering the business 8 Claiming a seat at the head table: why IT executives should have a say at the top 12 The silo effect: losing the game with a decoupled IT strategy 16 IT system selection process: choosing the right solution to meet investment management goals 21 Business process management: adopting a holistic IT strategy across the value chain 25 Mastering investment management operations: ensuring IT delivers on strategic business objectives 28 IT as key innovation driver: turning IT into competitive advantage 32 CXO Corner: Michael Jarzabek, Managing Director, LBBW Asset Management 34 Book reviews 36 Regulatory update 38 Recent research and white papers SUBSCRIPTION Subscription to the Journal is free of charge for members of the industry, associated institutions and academics. To subscribe, please visit www.simcorp.com/journal. Change of address should be e-mailed to journal@simcorp.com. EDITOR-IN-CHIEF Lars Bjørn Falkenberg, Senior Vice President, SimCorp A/S, lars.b.falkenberg@simcorp.com CO-EDITORS Michael Metcalfe, Financial Journalist, michael.metcalfe@gmx.de Mette Trier, Copy & Translations Manager, SimCorp A/S, mette.trier@simcorp.com DESIGN AND PRODUCTION Thomas Lystlund, Art Direction & Design, SimCorp A/S, thomas.lystlund@simcorp.com Søren Olsen, Design & Print Production, SimCorp A/S, soren.olsen@simcorp.com PUBLISHER SimCorp A/S, Weidekampsgade 16, 2300 Copenhagen S, Denmark, phone: +45 35 44 88 00. Journal of Applied IT and Investment Management is a financial industry periodical, published and distributed globally by SimCorp A/S. Print run: 26,000. SUBMISSION GUIDELINES Articles, book reviews, new reports and information on recent research can be submitted for review to Co-Editor Mette Trier, mette.trier@simcorp.com. For submission guidelines, please visit www.simcorp.com/journal. LEGAL NOTICE The contents of this publication are for general information and illustrative purposes only and are used at the reader’s own risk. SimCorp uses all reasonable endeavours to ensure the accuracy of the information. However, SimCorp does not guarantee or warrant the accuracy or completeness, factual correctness or reliability of any information in this publication and does not accept liability for errors, omissions, inaccuracies or typographical errors. The views and opinions expressed in this publication are not necessarily those of SimCorp. © 2012 SimCorp A/S. All rights reserved. Without limiting rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form, by any means (electronic, mechanical, photocopying, recording or otherwise) or for any purpose without the express written permission of SimCorp A/S. SimCorp, the SimCorp logo, SimCorp Dimension and SimCorp Services are either registered trademarks or trademarks of SimCorp A/S in Denmark and/or other countries. Refer to www.simcorp.com/trademarks for a full list of SimCorp A/S trademarks. Other trademarks referred to in this document are the property of their respective owners. ISSN 1903-6914

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May 2012

# Repositioning IT: from

supporting to empowering the business One of the top priorities emerging for investment management organisations is the need to reposition IT strategically. This article examines why the focus must shift from viewing the investment management system as merely a standard costing item to recognising it as an enabling strategic management tool for value creation across all business lines.

t is generally recognised in the investment management industry today that information technology serves a key business supporting role for almost every organisation. Most have high hopes that their investment in IT will generate the desired benefits for the business. Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management.

These anticipated but not always realised benefits range from reducing costs, standardising processes, streamlining workf lows and communications, improving risk control mechanisms, over enhancing productivity to automating manual tasks. Until recently, however, the traditional role reserved for IT has been fairly subservient in terms of business planning. IT has been widely perceived as no more than a standard business strategy implementation tool that is not intrinsi-

“Most business executives understand that an organisation’s key IT and operational processes should be tied into business strategy goals, yet processes and business objectives too often part ways.” Thomas M. Phelps, Managing Director, Cutter Research.

cally involved in shaping strategy – more of a cost burden than a business enabler. But as the realisation has grown that evolving technology is capable of creating more and more business opportunities, investment managers are starting to realise that IT must play an increasingly proactive role in developing and determining long-term business goals and strategies. IT IN SYNCH WITH BUSINESS In order to achieve these common goals going forward, it is now widely accepted in the industry that an investment management company’s business and IT strategies need to be running on the same track – to be coupled or aligned with one another. What is less commonplace, however, is the conviction among investment managers that their organisations must take this one-track process further down the line, moving from alignment to realignment of the business-IT strategy by fully exploiting and extending the capabilities IT has to offer to make growth sustainable over a longer horizon. This article explores some ways that organisations can take to reposition their investment management system, transforming it from a supporting to an empowering role in achieving business objectives for competitive success. Ways include identifying and embracing innovation, optimising core business IT processes, minimising information silos, as well as integrating and automating basic IT knowledge-sharing processes.

COUNTER-PRODUCTIVE STRATEGIC DIVERGENCE A number of recent research reports1 indicate that efforts to bring into line business and IT strategies are not as uniform and integrated across business functions as they should be. Also in doubt is whether IT plays a sufficiently important role in driving process efficiency, knowledge transfer, innovation and strategy execution within the business organisation. The principal reported – and lamentable – situation is that there are very few instances of fully integrated and aligned business-oriented IT strategies to be found in the investment management industry at present; many are still completely technology-centric and focused on improving daily operations. Divergence is the rule and convergence the exception. One reason for the disparity is that process improvements are often poorly aligned with strategic imperatives. Correcting this imbalance begins with reassessing the performance measures that underlie key business unit and functional activities. “Most business executives understand that an organisation’s key IT and operational processes should be tied into business strategy goals, yet processes and business objectives too often part ways,” says Thomas M. Phelps, Managing Director of Cutter Research, the research arm of US-based consultancy Cutter Associates. This strategic divergence is not only hugely frustrating but also extremely

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

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# Repositioning IT: from

supporting to empowering the business counter-productive, generally resulting in a legacy of overly complex IT infrastructures that struggle to sustain the overlying business operations and are difficult to modify.

challenges of managing globalisation, optimising regulatory compliance, increasing transparency and securing competitive advantage,” urged Dushyant Shahrawat.

All too often this is because IT strategy is ‘bolted’ onto the business, more or less as an afterthought, rather than embodying the corporate backbone and central nervous system of the organisation.

Across the industry, business technology trends offer CIOs the opportunity to reinvigorate the role of their applied IT processes, but the task of translating arcane technology into business value will need vendor support. “While spending on technology will be largely devoted to addressing regulatory requirements in 2012, vendors must help to identify and articulate other areas of strategic and business value that these IT investments

RECOGNISED NEED TO REALIGN IT So what can be done to remedy this situation? First, there must be a recognised need to realign IT. In a TowerGroup

“Whenever we focus on IT initiatives, our goal is enabling the business. This allows us to have a much more sustainable IT system so we can focus on the core value, which is creating innovative investment solutions for all our clients.” Dirk Buggenhout, COO, ING Investment Management.

presentation earlier this year, 2 the Corporate Executive Board Company’s Senior Research Director Dushyant Shahrawat and Research Director Gert Raeves outlined some of the key IT initiatives the investment management industry should consider taking in 2012 and beyond. Among the top priorities was the need for organisations to reassess the IT operating model, with a view to enhancing operational and IT efficiency. “A realignment and revitalisation of IT processes and operational capabilities are called for in much of the investment management industry today if firms are to rise to the

offer and that may not be immediately evident,” noted Dushyant Shahrawat. Areas of potential strategic and business value include a wider application of collaborative business models, business intelligence and IT-enabled management disciplines, such as business process management (BPM). Also on the radar screen are cloud computing, mobility, and improved analytics. In its Cutter AdvantEdge report on ‘Operational Efficiency’ published earlier in 2012, 3 Cutter Associates argues that by providing a top-level, holistic view of to-

tal operations, BPM solutions can prove effective when working in conjunction with the workflow capabilities embedded in a specific application. Although many organisations have yet to deploy BPM products, interest among the investment community has grown in recent years, and BPM providers are beginning to gain a foothold in what was once a predominately untouched market. RISKS AND CHALLENGES IN ACHIEVING SUCCESS According to Jeremy Hurwitz, Principal and Founder of US-based InvestTech Systems Consulting, LLC, the risks and challenges in achieving success in business-driven and technology-aligned investment management systems in the years to come are likely to include some of the following business complexities or industry developments: • m arket volatility and cost sensitivity will almost certainly rank as the two leading factors to impact investment management business and IT projects. Sought after will be IT solutions that promise to shorten timeto-market and improve business-IT alignment. • c ompliance, risk and regulatory demands will continue to accelerate, putting stress on system data demands and forcing constant systems customisation and systems replacements. • w hile advanced technology trends steering towards more outsourcing, platform-hosting, software-as-aservice (SaaS), cloud technology and virtual services will create huge opportunities, they will also engender greater technology complexities, vendor risks and stress on the systems selection procedures and business-IT alignments. OPERATIONAL PLATFORM AS STRATEGIC ENABLER Adapting to these challenges requires the implementation of a systematic strategy process that embraces IT, enabling it not only to achieve the required flexibility but also to use IT as a strategic tool

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in obtaining long-term success. When a company’s IT strategy is realigned with the business strategy in this fashion, real added value can be achieved on a longterm basis, and the organisation can use IT investment as an enabling tool to achieve growth. Jacob Elsborg, Head of Technology for Danish pension fund ATP’s Investment Area, argues that it is not possible to calibrate IT strategy with the business strategy without considering the role of the operational platform. In his view, the synchronisation is enabled through the operational platform strategy (see Figure 1). “The IT strategy outlines the framework in which the business has to work. There is no tactical level in an IT strategy. The tactical level is at the operational level and must be owned by the business. IT and business have to collaborate in all IT aspects related to the business, but it is the business function that has to assume responsibility concerning the operational – or tactical – level,” he states. THE CASE FOR MOVING BEYOND BUSINESS-IT ALIGNMENT A critical success criterion for the investment management organisation

Alignment: Business development and operational strategy

“The C-suite is now more aware of what can be done with technology, so they’re becoming more demanding. This is challenging CIOs to step up to an agenda that has much greater expectations of them and their future roles.” Hans-Georg Klinkenberg, CIO of SGSS Deutschland Kapitalanlagegesellschaft GmbH. is to implement and maintain an IT infrastructure that enables continual innovation and growth. Research in the investment management industry has established that technology is at the core of innovation;4 therefore, it plays a key role in driving business change. Too often, however, the change is expected to derive from technology’s shortterm or immediate impact on improving investment products or services, or on enhancing operating capabilities. Less often is it seen as a key strategic enabler of early change in a company. In its report ‘Divide and conquer: Rethinking IT strategy,’ 5 research and consultancy firm McKinsey & Company found that while companies can deploy IT as a competitive weapon, managing IT to deliver on that promise

requires a differentiated approach that many companies find difficult to implement – either because they fail to see the potential or because they refuse to distinguish between basic IT services and innovation. This is a subtlety that forward-thinking CIOs are now starting to grasp. “The C-suite is now more aware of what can be done with technology, so they’re becoming more demanding,” observes Hans-Georg Klinkenberg, CIO of SGSS Deutschland Kapitalanlagegesellschaft GmbH. “This is challenging CIOs to step up to an agenda that has much greater expectations of them and their future roles.” To move beyond simple business-IT alignment, firms must drive innovation and boost their business-partner relaFigure 1. Illustration of an operational platform strategy as an aligned part of the business IT strategy. Source: ATP, 2012.

‘The investment management rocket’

Alignment: Investment strategy and development

May 2012

Investment management

Management layer Management participants: CIO

Management participants: CIO/COO

Management participants: COO/CTO

Responsible for alignment between operation strategy and IT strategy

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

“The operational platform at the core of an effective investment organisation today must be viewed as a vehicle to transport business value, driving rather than merely supporting value creation across all the business lines.” Jacob Elsborg, Head of Technology, ATP. tionships. One way to do this is to reach out to technology innovators and open lines of communication to absorb rapid innovation. “Getting their input ensures that you as the client are brought into the loop when new opportunities surface,” states Dirk Buggenhout, COO of ING Investment Management. Also to be considered is opening up centralised vendor sourcing so all business and IT leaders have access to an agile and flexible method for quickly sourcing and assembling new technologies into innovative business solutions. Most importantly, leadership teams must adopt an iterative approach to developing integrated business-IT strategies that assumes change and focuses innovation on the core business competencies that will sustain their competitive advantage over the long term. Such innovation includes initiatives that may seem mundane but that make the business operate faster, better and at lower cost by doing something differently. “The challenge (and opportunity) for us as CIOs is to define and redefine through our words and actions what innovation means to our organisations. We have to instil in our culture the necessary mindset and recognise team members who demonstrate it,” argues Hans-Georg Klinkenberg. IT’S ROLE IN ENABLING OPERATIONAL AGILITY It may seem self-evident that IT should play an important role in enabling in-

vestment management organisations to become more agile and flexible operationally. Often not fully appreciated or underestimated, however, is the extent to which IT can function as an agent for change in the use and adoption of best-in-class knowledge-sharing processes in order to improve use of critical data. For most investment management organisations, the path to operational agility and flexibility involves business transformation, the ability to trim inefficiency and regroup around what is truly core to the business. While the task may appear daunting, there are a number of steps that management can consider to lighten the burden of change: • optimise core business IT processes; • minimise information silos; • integrate and automate fundamental IT knowledge-sharing processes. With the first step, by minimising excess IT spending and non-core programmes, investment management organisations can better channel limited resources into satisfying client expectations and into activities that position a company well not only during times of downturn but also for long periods of growth. In the second step, barriers to change include conflicting departmental goals and priorities, a culture of risk aversion and silo-based information. By reducing silos, business leaders can improve

collaboration inside and outside their enterprise and better realign their IT goals with overall business strategy.6 With the third, such integration will enable IT to advance an organisation’s ability to problem-solve, improve decision-making and convert information into insight. ENHANCING IT EFFICIENCIES TO FACILITATE CONTINUED INNOVATION By breaking down internal barriers and enhancing cross-organisational and cross-functional IT efficiencies, overarching business goals can be more easily reached. “Whenever we focus on IT initiatives, our goal is enabling the business,” says Dirk Buggenhout. “This allows us to have a much more sustainable IT system so we can focus on the core value, which is creating innovative investment solutions for all our clients.” Drawing on the research referred to earlier in this article, the following measures can help to facilitate innovation and drive the process of realigning IT forward: • C reate a durable foundation. View the IT initiative as a long-term continuous improvement effort. • D esign with the end-result in mind. Design the business-IT solution with future-proof strategic refinements, while leveraging as many existing investments as possible. • Execute in a structured way. A comprehensive strategy and a well-structured execution plan can reduce overall cost and minimise risks in achieving the goal of ‘moved-and-improved’. • Implement in phases. Once the re alignment plan is in place, choose a ‘quick win’ that can be implemented with limited risk while achieving significant value. MOVING ON TO INTEGRATING IT INTO THE EVOLVING BUSINESS Investment management organisations and the systems they operate need to move on from the old-world thinking of retro-fitting business functionality into an IT strategy, towards a more businessfocused approach where IT becomes an

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integral part of evolving business considerations and decision-making. While the benefits of aligning IT with business strategy as an essential means to long-term success should be clear to most in the industry, a further step needs to be taken. “The operational platform at the core of an effective investment organisation today must be viewed as a vehicle to transport business value, driving rather than merely supporting value creation across all the business lines,” argues Jacob Elsborg. Despite the growing trend towards service homogeneity and the widespread adoption of packaged financial software systems, there are still real opportunities for IT to make a difference. But the IT contribution is less likely to take the form of the ‘killer’ application that provides specific competitive advantage. It is far more likely that the principal benefit will be derived from applying robust, but adaptable, technology throughout the organisation, thus facilitating an agile, flexible and integrated businessIT strategy all along the value chain. Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management. A financial journalist by profession, he has worked for such publications as The Economist, Financial Times and International Herald Tribune. Based in Germany, he also worked in the Luxembourg financial sector for 10 years, including tenures with Nordea Investment Funds S.A. and Lombard International Assurance S.A. 1 ‘Accenture Technology Vision 2012: Emerging Technology Trends for IT Leaders’, Accenture, January 2012. ‘Harnessing the Power of New Technology’, Cutter AdvantEdge, November 2011. ‘Investment Innovations: raising the bar’, Professor Amin Rajan/CREATE-Research, June 2011. ‘Growth and value creation in asset management’, SimCorp StrategyLab, July 2010. 2 ‘Top 10 Business Drivers and IT Initiatives in 2012’, TowerGroup, Inc., January 2012. 3 ‘Operational Efficiency’, Cutter AdvantEdge, January 2012. 4 ‘IT and the Changing Competitive Landscape: 10 Questions Executives Need to Ask to be “Futures Ready” ’, Accenture, October 2011. 5 ‘Divide and conquer: Rethinking IT strategy’, McKinsey & Company, October 2006. 6 ‘Managed Evolution – A Strategy for Very Large Information Systems’, Stephan Murer, Bruno Bonati, Frank J. Furrer. Springer Verlag, Berlin & Heidelberg, Germany, May 2011.

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May 2012

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

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# Claiming a seat at the head table: why IT executives should have a say at the top

It has become standard industry practice for CEOs to identify and formulate investment management business growth goals for their IT executives not only to support but also to act on. How should IT heads respond to this demand? This article argues that IT executives should stake a claim to corporate influence by developing successful IT strategies to deliver enterprise objectives.

I Mette Trier is Co-Editor of the Journal of Applied IT and Investment Management.

n view of the growing importance of information technology in investment management activities, and its increasing contribution to the business in terms of executing strategy, it is dawning on the industry that senior IT executives must be involved in the decision-making process at every level of the organisational structure – including the top. In inter v iews w ith the Journal of Applied IT and Investment Management, a leading COO, CIO and Head of IT, all with long investment management industry experience, discuss some of the main challenges facing IT executives as

“I think the biggest fault in the last few years was that a lot of IT heads were not in the right position to understand their company strategy. Their information was confined to departmental level and not to the top.” Matthias Biedenkapp, Managing Partner, Internal Services, Lupus alpha Asset Management AG, Frankfurt, Germany.

demands increase and get more complex. While their advice to fellow senior IT heads is to have a clear IT strategy in place to deliver enterprise objectives, they also stress the importance of having an awareness of IT’s value as a strategic resource for corporate boards. Senior IT executives can and should contribute to the success of the strategy process, and our panel of experts advises them to seize the initiative and claim a seat at executive management board level. DEFINING THE ROLE OF EXECUTIVE MANAGEMENT Distinct from a company’s board of directors, the executive management board, also referred to as senior management, is responsible for the day-to-day execution of the company’s operations, including IT operations. As an example of the evolving use of IT as a strategic resource, Benita M. Warmbold, Senior Vice-President and COO of CPP Investment Board (CPPIB), Toronto, Canada, explains: “At CPPIB, the senior management team informs the board of directors, and the board appreciates, if you will, the importance of the COO’s role, not just in setting up the technology systems, but helping to set and drive the corporation’s strategic objectives.” TRADITION AT PLAY IN RECOGNITION DELAY Although IT is now established as a critical corporate driver in the investment management industry, why has it taken so long for most organisations to recognise that senior IT executives must have a greater say in the strategic decision-making process?

According to Hans-Georg Klinkenberg, CIO of SGSS Deutschland Kapitalanlagegesellschaft GmbH, based in Munich, Germany, the delay is rooted in tradition. When organisational walls were widely torn down about a decade ago, IT and business were mostly decoupled and the relationship dominated by mutual distrust and suspicion. “ IT was seen purely as a technical department, the sole purpose of which was to assist the business departments, thus – first and foremost – presenting a source of cost. There was no understanding of IT as a strategic resource, as the topic itself was too complex for business leaders,” explains Hans-Georg Klinkenberg. On the one side, CEOs only dealt with IT as a financial controlling aid. On the other side, IT departments saw their role and competencies as purely technological, delivering the systems and applications as ‘ordered’. The requirements were based on strategies developed and defined without IT input. Both the business and IT sides lived well with this arrangement: in the case of success, both parties claimed to be the critical factor; in case of failure, both sides were able to prove that the other side was to blame. “Thus, it is all rooted in a history of ‘segregation’ of responsibility and not being able to see the ‘big picture’. Over time, it was clear that this set-up was not healthy and that the strategy had to include the IT landscape, innovation, etc., as we know it now,” adds Hans-Georg Klinkenberg.

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Benita M. Warmbold is Senior Vice-President and COO of CPP Investment Board, Toronto, Canada, where she is responsible for the treasury, investment risk, operations, investment finance and technology functions. Prior to joining CPP Investment Board, she spent 11 years as Managing Director and Chief Financial Officer for Northwater Capital Management Inc. With over 25 years of finance experience, she has held senior positions with Canada Development Investment Corporation and KPMG.

Matthias Biedenkapp is Managing Partner, Internal Services, at Lupus alpha Asset Management AG, Frankfurt, Germany. He is a member of the Executive Committee, which drives the operative day-to-day business at Lupus alpha. His experience spans more than 25 years in the financial services industry, including tenures at The Royal Bank of Canada, Bank in Liechtenstein and INVESCO Bank.

Matthias Biedenkapp, Managing Partner, Internal Services and responsible for IT at Lupus alpha Asset Management AG in Frankfurt, Germany, agrees: “I think the biggest fault in the last few years was that a lot of IT heads were not in the right position to understand their company strategy one, two or even three years out. Their information was confined to departmental level and not to the top, which is why they were not in a position to help plan the right strategy for the company.” MOVING IT FROM ENABLER TO STRATEGIC ASSET It was always clear that IT is an enabler, meaning that business first defined the strategy, and product development then came up with the necessary products. In other words, IT only became involved after work on the strategy was completed - in order to enable the strategy. With the mounting complexity of business processes driven by more demanding clients and the myriad of regulatory requirements, all business tasks are increasingly in need of IT applications that engender more automated processes. Due to more demanding clients and the myriad of regulatory requirements, all

May 2012

Hans-Georg Klinkenberg is CIO of SGSS Deutschland Kapitalanlagegesellschaft GmbH, Munich, Germany, where he is responsible for the IT Services department, development and alignment of IT strategy, as well as improvements in the IT platform. With 15 years of experience in the IT, consultancy and banking industry, he has led various large-scale projects, including the designing of a future-oriented IT application landscape at the legal entities merging into SGSS Deutschland KAG.

“It is becoming increasingly clear to the decisionmakers that an effective IT strategy is an asset and can thus be the driver for innovation and should therefore play a major part in the company’s strategy.” Hans-Georg Klinkenberg, CIO of SGSS Deutschland Kapitalanlagegesellschaft GmbH, Munich, Germany. business processes are increasingly in need of IT applications that can handle the mounting complexity involved. As a consequence, when defining a company strategy demanding fulfillment of client requirements and regulatory compliance, the CIO is the only executive who is able to ensure that it can be implemented from an IT perspective. In Hans-Georg Klinkenberg’s view: “It is becoming increasingly clear to the decision-makers that an effective IT strategy is an asset and can thus be the driver for innovation and should therefore play a major part in the company’s strategy.”

BUSINESS RESULTS AND INNOVATION DRIVE SUCCESS To help achieve business success, it is key that senior IT executives understand the business model and needs to find out what these mean for their systems and their organisation. According to HansGeorg Klinkenberg: “They must be able to ‘translate’, e.g. the difference between a growth strategy and a cost-oriented optimisation strategy.” As a means to achieving this success, senior IT executives may want to consider how their IT strategy, plans and actions support the task of amplifying performance – turning up the value of

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Amplifying IT starts with amplifying the IT strategy

Leader

Enterprise effectiveness

IT effectiveness

IT strategy is integrated with the overall business strategy

Largest gap

IT strategy informs business strategy

Second largest gap

Key stakeholders understand the IT strategy

Late follower

Largest gap

Second largest gap

Strategy creation process includes significant non-IT participation Strategy contains real trade-offs linked to business success IT strategy is separate to the plan IT strategy is clearly defined

Figure 1. Using technology as a business amplifier and source of innovation. Source: ‘Amplify the Enterprise: the 2012 CIO Agenda’, Gartner, Inc., 2012.

Completely disagree

technology without creating distortion or negative feedback. Commenting on a global survey of CIOs by Gartner, Inc.’s Executive Programs1 published in 2012, Mark P. McDonald, Group Vice President for Gartner Executive

Completely agree

Completely disagree

that effective leaders use technology, which includes IT, to strengthen the customer experience and eliminate costly internal distortions. “They are using technology to ‘amplify’ the enterprise.” (See Figure 1).

“If you don’t have an aligned IT strategy, then you’re running two different businesses at cross purposes, and so you need that strong alliance of IT strategy to enable your business strategy.” Benita M. Warmbold, Senior Vice-President and COO of CPP Investment Board, Toronto, Canada.

Programs and Gartner Fellow, states: “Technology’s role in the enterprise is increasing. This does not mean, however, that the role of the IT organisation is increasing.” In his view, “CIOs concentrating on IT as a force of operational automation, integration and control are losing ground to executives who see technology as a business amplifier and source of innovation.” Mark McDonald goes on to argue

For CIOs, COOs and other IT heads to succeed in accomplishing business goals, they need to develop their staff in a business-oriented thinking. At SGSS Deutschland KAG, IT business analysts work with the business experts, develop ideas and promote them together. “So also on a bottom-up level, we’re trying to ensure that everything is aligned, that we’re really going in the same direction,” adds Hans-Georg Klinkenberg.

Completely agree

HAVING THE RIGHT DECISION-MAKING STRUCTURES IN PLACE Despite the widely acknowledged need for and advantages of an alignment of business and IT strategies, some companies are still far from achieving it, whereas others have formalised processes in place to ensure its success. At CPPIB, the case is that, in Benita Warmbold’s words, “governance prescribes that most large investment management organisations, including ours, have what we call our IT steering committee, which is composed of senior executives, including the CEO.” This set-up governs the IT strategy and stance to ensure that they stay aligned with the overall organisation. “IT management becomes an integral part of the decision-making process which means you can then set your strategy as an organisation. If you don’t have an aligned IT strategy, then you’re running two different businesses at cross purposes, and so you need that strong alliance of IT strategy to enable your business strategy,” she stresses. In the case of Lupus alpha, it is an executive committee that drives the operative day-to-day business and serves as a platform for a regular exchange of ideas and information, as well as interface management at executive level. “The

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Raise benefits realisation performance

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Build and rebalance internal skills Business leadership

Deliver business results and growth

Embrace new infrastructure delivery options

Increase CIO success and influence

Maximise time as a business leader

IT leadership Refocus IT towards the truly strategic

corporate partnership structure of Lupus alpha creates an environment that ensures the greatest possible continuity of personnel at management level and also allows key players to be integrated entrepreneurially into Lupus alpha,” says Matthias Biedenkapp, who is responsible for IT at Lupus alpha and also sits on the executive committee to ensure that IT matters have a say in the decisionmaking process. At SGSS Deutschland KAG, the IT Department forms part of the same division as Client Services and Product Development. The department heads meet on a regular basis, so it is guaranteed that the IT landscape can be aligned to the different business strategies. At Société Générale Group level, the CIO of the Securities Services Division is a member of the Executive Board and supervises all the transformation projects of the business in order to reinforce SGSS’s growth dynamics in an evolving regulatory context. At the K AG level, apart from the managing director, only the legal head and the CIO hold the commercial power of attorney. This is based on the recognition of IT’s degree of influence in the success of the company and the resulting need to align business and IT strategies – not just on an operational level but also on the strategic and tactical levels.

Embrace new infrastructure delivery options

SENIOR IT DECISIONMAKING IN ACTION – THE CPPIB EXAMPLE In the case of CPPIB, IT executives must be capable of delivering sophisticated technology and operational capabilities to fully capitalise on its structural advantages of a very long investment horizon, certainty of assets, and large portfolio size. To align IT strategy with the goals of the business strategy, Benita Warmbold identifies two focus areas: scalability and sustainability.

Figure 2. Creating a new success cycle based on business and IT leadership. Source: ‘Reimagining IT: Insights From the 2011 Gartner CIO Agenda Report’, Gartner, Inc., 2011.

If, as this article suggests, this means that greater demands will be placed on the shoulders of IT heads and the IT organisation over the next decade – in what ways should IT heads respond to this challenge?

realise and drive business growth. By pursuing this course of action successfully, IT executives are better prepared to climb the corporate ladder and rightfully claim a seat at the head table.

To promote these, manual solutions and processes are being systematically eliminated. CPPIB is also focusing its IT resources on improving data management processes. “We are making conscious trade-offs in our systems and process development to ensure durability versus just speed of execution,” explains Benita Warmbold.

The statements from our panel show that it is time for senior IT executives to embrace a new mission statement, which will declare that generating revenue and not merely cutting costs must become a new and central component of their IT organisation’s licence to operate. Leading IT executives will have to seek new answers to the questions of revenue growth, global reach and innovation – all questions that define an organisation’s source of competitive advantage. They will have to be actively engaged in creating a new success cycle based on business and IT leadership (see Figure 2).

Mette Trier is Co-Editor of the ‘Journal of Applied IT and Investment Management’. She also works as a Copy & Translations Manager and was previously Marketing Manager for DJØF Publishing and the Copenhagen Business School Press. She holds a Master’s degree in Arts, English and Economics from the University of Aarhus, Denmark.

“Looking to the future, we are shifting from a technology-only focus to a business process focus, managing initiatives that cross organisational boundaries. This approach is designed to optimise capabilities across CPPIB rather than within functional departments,” she adds.

Business results and business growth constitute both the outcome of, and the critical input to, this success. Senior IT executives will be responsible for delivering the business results, which should be a sufficient claim to have a say at the corporate top.

IT EXECUTIVES MUST MOVE INTO THE DRIVER’S SEAT Senior investment management executives around the world have identified business growth as their highest priority.

However, taking an active part at the decision-making level must be done in a holistic and astute manner, addressing areas outside their direct control and being disciplined about what it takes to

1 ‘Amplify the Enterprise: the 2012 CIO Agenda’, Gartner, Inc., 2012.

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# The silo effect: losing the game

with a decoupled IT strategy The phrase ‘silo effect’ refers to a lack of communication and common goals between business units, which prevents companies from efficiently responding to changing demands and opportunities. To enable organisations to utilise the synergies and flexibility created by pooling IT and business resources as a competitive advantage, the authors make a case for managed evolution as a management approach to transform a decoupled IT landscape to a business-empowering information system.

s in other large and complex institutions, the development of information systems in global investment management companies often depends strongly on the organisational set-up of the business. IT budgets are owned by the individual business units, and any change in the organisation also leads to a corresponding change of direction in systems development, with IT investments sometimes driven purely by the local needs of the individual business unit.

Stephan Murer, previously Chief Architect responsible for the overall design of Credit Suisse’s information systems, is Senior Advisor to the bank’s IT division, Zurich, Switzerland. Bruno Bonati, formerly Head of IT at Credit Suisse, is an independent consultant based in Zug, Switzerland. Frank J. Furrer is a specialist in application architecture and IT security, based as an independent consultant in Zurich, Switzerland.

As organisations are often more flexible than their underlying, tightly integrated information systems, the state outlined above can lead to a situation where multiple units implement changes simultaneously without strategic coordination. The changes are driven purely by their business requirements on the same information system and as nobody owns the system, nobody feels accountable for the overall architecture. UNHEALTHY SYMPTOMS OF THE SILO EFFECT As a consequence of the traditional silo approach just described, the efficiency in operating and evolving the information system decreases to a point where the system becomes unstable or requirements can only be implemented at disproportionate cost and risk. Over the years, the investment management organisation will find that this situation leads to an IT landscape, which is either highly fragmented in silos or tightly coupled and highly complex.1 A situation arises where IT is hindering rather than empowering the business.

If a corrective attempt is made to bring these silos together in an integrated information system, however, a number of issues arise. First, the borders of these silos are cut in a way that makes integration with other silos very expensive, if not impossible. Second, whereas the silos are highly redundant, the functions and the data are not. And third, the silos build on independent architecture stacks, additionally complicating cross-silo integration. Often ‘horizontalisation’ strategies, trying to break down the silos fail, because the integration challenge is too overwhelming. CORRECTIVE IT STRATEGY MUST BALANCE THREE OBJECTIVES A good remedial IT strategy should ensure a systematic development of a future-proof information system by balancing three objectives: • a ll business requirements should be met within reasonable time-tomarket and cost; • in order to deliver on the first objective, the IT strategy must maintain agility of the system with regard to implementing new requirements; • to maintain agility and cost effectiveness, the strategy must contain complexity and continuously strive to remove redundant and outdated functionality and technology. 2 A key prerequisite for achieving these strategic objectives is a good alignment of business and IT. In our view, the right strategy to fulfil these goals and to avoid the potentially fatal trend in the evolution of an information system towards

unmanageable legacy is the concept of managed evolution. 3 The key idea of managed evolution is to steer the evolution of an enterprise’s information system, such that the efficiency in developing and operating the system is preserved or even increased. This is accomplished by striking a balance between investments in efficiency improvement and investments in business functionality development. ARCHITECTURE MANAGEMENT The concept of managed evolution consists of different elements. One important element is architecture management. A target architecture needs to be defined and system evolution must be driven systematically towards the target architecture. Disparities with the target state need to be identified and used to steer architecture-driven investments. There must be a clear roadmap of how to develop the IT landscape from silos to a future-proof agile information system. The key to architecture management of large information systems is to break them down into a hierarchy of manageable pieces, or so-called domains. In a siloed environment, it makes sense to define the domains more horizontally in order to emphasise common functionality among the silos. Often, architects use two different domain models, one for infrastructure and one for the application landscape. The infrastructure domain model is mainly structured according to the market in IT infrastructure, with domains, such as databases, operating systems, and end-user platform.

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The co-authors of this article, Stephan Murer, Bruno Bonati and Frank J. Furrer (from left to right), discuss why a decoupled IT landscape is not an option.

The application domain model often groups domains according to common data and functionality. The domain structure also serves as a structure to federate the architecture organisation with a small central group for coordination and decentralised domain architects allocated with the organisations in charge of engineering or development in the respective domain. Good architecture management is based on successfully dividing the very large information system into manageable parts.

INTEGRATION ARCHITECTURE AS VITAL ELEMENT One particularly vital element in successfully pursuing managed evolution is integration architecture. This defines the appropriate coupling and decoupling of the systemâ&#x20AC;&#x2122;s components. At the heart of integration architecture is the interface management process that manages evolving interface contracts between producers and consumers of a service. Accepting that a very large information

System state at starting point of period

Agility at end point of a period

Agility at starting point of a period

Agility

system cannot be replaced as a whole requires a component replacement strategy. For this, it is paramount that the interfaces are stable or at least evolve in defined, predictable ways. One area that is often neglected is the infrastructure technology portfolio underneath a very large information system. It is essential for a long-lived system to continuously adapt to modern technology. If not managed carefully, this leads to a very broad, expensive

Desired system state

Modifications to the system during a period

System state at end point of a period

Business value Business value at starting point of period

Business value at end point of a period

Figure 1. Continuous loss of information system efficiency/agility due to unbalanced business functionality implementation. Source: Managed Evolution â&#x20AC;&#x201C; A Strategy for Very Large Information Systems. Springer Verlag, Berlin & Heidelberg, Germany, 2011.

and often partially outdated technology portfolio. This is a typical problem of silo-based organisations, where each silo follows an independent infrastructure strategy. One difficulty with technology portfolio management is that applications depend in many ways on the underlying technology. So if the abstraction layer between infrastructure and applications is not managed with care, changes in the underlying technology portfolio can become extremely expensive. In the case of a silo structure, bringing the silos together may be harder than necessary due to incompatible infrastructure. In this context, the approach of defining platforms that combine a technology stack with well-def ined processes and services for running and developing applications is a very powerful abstraction concept. TAKING A BALANCED APPROACH A strong relationship exists between business-IT alignment and managed evolution. Managed evolution requires a method of business-IT alignment that ensures balanced investments in new business functionality and in IT efficiency at one and the same time. It is current business-IT alignment practice in most organisations to ensure that business requirements are defined by the business in a systematic and efficient way, that IT departments understand and accept these requirements, and that they provide adequate IT solutions fulfilling the requirements. Focusing entirely on business requirements results in a project

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â&#x20AC;&#x153;Managed evolution is about developing and implementing a holistic IT strategy. This requires much deeper cooperation and more formal coordination in strategic business-IT alignment.â&#x20AC;?

The co-authors sketch out the main parameters of managed evolution as a remedial IT strategy.

portfolio that is driven purely by business requirements and little or no consideration for efficiency and agility issues. Business requirements in such a portfolio are implemented in the system where it takes least effort, easily available resources and in the shortest time from the point of view of the individual project instead of where change arises from a conceptual integrity. As more and more functionality is added without regard to architectural principles, the system becomes more and more complex. This is common in a decoupled IT strategy.

This opportunistic approach drives the system into the complexity trap (see Figure 1 on page 13). Once an information system is caught in the complexity trap, it is extremely costly to evolve and becomes in many cases unstable and unreliable. DEVELOPING AND IMPLEMENTING A HOLISTIC IT STRATEGY Often information systems grow opportunistically over years, while the organisation keeps changing. Over time, the architectural system boundaries no longer fit the business organisation. This

is to be expected, because organisational change is much easier than structural system change. This leads to a situation where business and IT are no longer aligned to the architectural scope of the system. In a very clear sense, the system becomes decoupled. As a consequence, this can lead to uncoordinated silos, with massive redundancy and divergence in functionality, interfaces and data. Such silos are overly complex, difficult to integrate and, therefore, slow down the strategic development of an information system.

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Consequently, the first step towards a strategic development of the IT platform is to shape business-IT alignment based on the scope of the system.

progress is measured and, in the case of insufficient progress, corrective action is taken. The simplest way to measure architectural progress is to gauge the quality of the processes by measuring whether all standards are kept up to date, projects are properly reviewed and review results are followed through.

Another important aspect is the balance of power between business and IT. The common practice in many companies is to develop individual IT strategies in each business unit with little coordination at the corporate level. Strategic responsibility is decentralised. In this model, business unit heads decide on their IT budgets, within the constraints of the overall business unit budget. Managed evolution is about developing and implementing a holistic IT strategy. This requires much deeper cooperation and more formal coordination in strategic business-IT alignment. Collaboration in joint committees fosters the understanding of IT managers for business requirements and of business managers for IT needs. Of crucial importance is that both business and IT are represented in decision-making in a well-balanced way. This reflects the key idea of managed evolution – to balance investments into business value, as well as into IT agility. This is implemented by matching roles for business and IT participants at all levels and balanced representation of IT and business in all decision-making bodies. IT ORGANISATION EMBEDDED IN THE BUSINESS In order to support business-IT alignment, the IT organisation needs to be properly embedded in the investment management business it serves. It is very hard to manage the complex processes and dependencies necessary for managed evolution, if the IT organisation working on a single system is distributed among many business lines. Large organisations and large systems only move in a certain direction if

The next level is to measure the progress towards the target architecture, by looking at adoption rates of technology standards or reuse factors of interfaces. The highest level is to measure whether the system makes progress towards better agility or not. There is a clear correlation between improved agility and business value of the system. The case is made for a more balanced approach that takes architectural aspects and the long-term viability of the underlying information system into account. Ideally, this governance is based on a domain model that reflects the architectural structure of the information system, on an IT organisation that spans the whole system scope under one lead, on a strong architectural leadership, on a balanced governance model bringing all stakeholders together around one table, and finally on a culture where stakeholders understand and appreciate how they strategically depend on one another. ONE PROVEN WAY TO MOVE FROM SILOS A highly developed, efficient and cohesive information system is an indispensable enabler of many of the daily operations run by investment management organisations, and must evolve in order to support the business it serves in a competitive and changing environment. Information system evolution should be guided by a suitable IT strategy, which has to cope with the business strategy and a number of influencing factors.

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“ A key prerequisite for achieving these strategic objectives is a good alignment of business and IT.” A sound alignment of business and IT strategies is the primary ingredient for a successfully integrated IT approach applied by investment management organisations. It must be more than just collecting and prioritising business requirements within the available budget in each business line if the enterprise wants to avoid ending up with siloed systems that are hard – if not impossible – to change. This article has attempted to establish one proven way to meet the challenges of the development over time of missioncritical, very large information systems that include significant legacy parts. The recommended strategy is managed evolution. Managed evolution leads to a continuous improvement and sustainable lifecycle evolution of information systems. It also improves agility in the form of reduced time-to-market and lower cost for adapting to new requirements. Stephan Murer, Diploma in IT engineering and Ph.D. in computer science, continued his academic career at the International Computer Science Institute at UCLA, Berkeley. He joined Credit Suisse in 1994, where he held a number of different positions. In 2000, he completed his MBA from the University of St. Gallen. 2000–2012 he was Chief Architect, responsible for the overall design of Credit Suisse’s information systems. He is now

Senior Advisor to the bank’s IT division, Zurich, Switzerland. Bruno Bonati, lic.oec.HSG, is an independent consultant based in Zug, Switzerland. After working in several companies, he became Member of the Executive Board and Head of IT and Operations in Credit Suisse in 1996. Credit Suisse started the managed evolution strategy in IT in 1997 and developed the Service Oriented Architecture for the Swiss IT Platform. He has been the senior consultant for the SAP Industry Value Network, including 20 large banks and 20 suppliers. Frank J. Furrer, M.Sc., earned his Ph.D. in advanced communications engineering in 1975. He started his own consulting practice in 1997, focusing on applications architecture and security for very large information systems. Frank J. Furrer is the author of several books on industrial communications and information system security and works as an independent consultant. 1 Tom Graves: Bridging the Silos – Enterprise Architecture for IT Architects. Tetradian Books, Colchester, UK, 2008. ISBN 978-1-906681-02-9. 2 Jeanne W. Ross, Peter Weill, David C. Robertson: Enterprise Architecture as Strategy – Creating a Foundation for Business Execution. Harvard Business School Publishing, Boston, USA, 2006. ISBN 978-1-59139-839-4. 3 Stephan Murer, Bruno Bonati, Frank J. Furrer: Managed Evolution – A Strategy for Very Large Information Systems. Springer Verlag, Berlin & Heidelberg, Germany, 2011. ISBN 978-3-642-01632-5.

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# IT system selection process: c hoosing the right solution to meet investment management goals

Selecting an investment management system should not be a decoupled IT project but a process that is fully aligned with the business strategy’s goals. Examining this statement from the perspectives of the individual company, consultant and vendor, this article illustrates why it is important to map the IT system’s architecture against business strategy as a means to ensure strategic goals are met.

h i le in for mat ion technology is critical to the successful operation of investment management processes, successive industry reports and surveys indicate that it can also prove to be an organisation’s most significant expenditure.1 Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management.

With senior IT executives therefore under intense pressure to achieve efficiency and deliver value, addressing these demands takes expertise in choosing the right investment management system solution right from the start – but also entails associated risks and challenges. The IT function needs to support and integrate the business functions at the investment management system’s operational level while optimising the related

“Successful system selection projects take careful planning, alignment with business goals, access to methodologies and tools, project management, communication and perseverance.”

IT spending. To succeed in meeting these demands both in the short and the long run takes the right system. Successful system selection projects take careful planning, alignment with business goals, access to methodologies and tools, project management, communication and perseverance. In addition, proven expertise is needed to support the entire development and implementation cycle of a system selection and integration project. KEY FACTORS FOR CONSIDERATION When embarking on a process of selecting an investment management system, a number of key factors should be considered, including formulating a valid business case, obtaining stakeholder commitment and setting clear objectives upfront. This article draws on the individual expertise and perspective of the participants in this process, respectively, selected consultants, an investment manager and a vendor, to shed light on the common approach to the system selection process and establish: • w hat the critical areas are to focus on to achieve selection success; • how to ensure that main demands for the IT system are identified, defined and maintained during the selection process to fulfil key business goals.

SETTING CLEAR OBJECTIVES FROM THE START The real objective of selecting an enterprise system is ultimately to add value to the organisation. This requires alignment of the selection project and the business strategy right from the start of the process. Jeremy Hurwitz, Principal at InvestTech Systems Consulting, LLC, suggests that in cases where strategic IT systems are selected, “the alignment or coupling to the business goals is critical.” In his view, many investment management organisations run the risk of ending up with systems based on a crisis reactive-driven model. The business does not articulate a long-term strategic vision but rather fires off unpredictable demands at IT with the loudest voice getting the highest priority. “This approach is contrary to a strategydriven model and will result in severe long-term misalignment in the businessIT roadmap, with a negative long-term impact on IT and the strategic system architecture,” he adds. In 20 years of assisting investment management companies in delivering strategic system architecture plans, InvestTech has developed an optimised strategic selection process that enforces a business-driven approach to the strategic architecture design and delivery roadmap (see Figure 1).

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“… in cases where strategic IT systems are selected, the alignment or coupling to the business goals is critical.” Jeremy Hurwitz, Principal of InvestTech Systems Consulting, LLC, Los Angeles, USA.

Understand business, objectives, approach

External industry drivers impacting architecture

High-level strategic business review

Current state assessment and understand business needs

Operational workflow / data review

Future state functional requirements assessment and solution assessment

Apply high-level tech and business requirements

Buy vs. build / ASP vs. out-source analysis

Future state functional and technology design to support operating model

Statement of business goals and objectives

Data management architecture priorities, gap analysis and opportunities

Deliverables

Data, technology and business application architecture review

Application identification, rationalisation, enterprise data management review

Outputs / Deliverables

Business and technology requirements impact analysis

Business process

Statement of strategic architecture vision, goals and drivers

Report and presentation review

Current state requirements (problem statements)

Application architecture and data /systems needs to support operating model

Reporting and presentation requirements

Organisational requirements and metrics

Data management architecture maturity level recommendations

Future state EDM design recommendation to support operating model

Organisational resourcing requirements

Enterprise data management rationalisation models

Target state roadmap, budget and implementation plan

Technology process

Figure 1. Example of an optimised strategic selection process to enforce a business-driven approach to strategic architecture design and delivery roadmap. Source: InvestTech, 2012. The strategic architecture design process is initiated through a clear articulation of the business strategy from the onset. The process then exposes the current and future state business requirements, as well as the gaps analysis and limitations that exist in supporting the strategic business model. The system architecture is then designed to deliver the future state technical capabilities to optimally align them with the business roadmap.

“Building a roadmap starts with understanding the gap between the current situation and the target operating model (TOM),” comments Sam Dezillie, a Partner at FRONT, an IT consultancy. A key factor is to set clear goals from the start and ensure a common understanding of these objectives. Equally important is ensuring that all ambiguity is removed from the onset,

so that the current processes, organisation and system architecture can move through an interim transitional phase to realise the attributes of the target model (see Figure 2 on p. 18). In his opinion, the three components – processes, organisation and system architecture – are the key drivers for selection. All three need to be considered all along the enterprise’s value

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Figure 2. Example of a roadmap to delineate the gap between the current situation and the target operating model (TOM). Source: FRONT, 2012.

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As-is processes

Interim processes

Target processes

As-is organisation

Interim organisation

Target organisation

As-is system architecture

Interim system architecture

Target system architecture

chain and need to be in harmony for a well-balanced operating model that fits strategic goals. “In order to best align IT strategy with business strategy, an IT system architecture must be selected that is

“Business and IT must be brought together to ensure objectives are shared, understood and met.” Hans Otto Engkilde, Vice President, Implementation and Account Management, SimCorp Benelux.

attuned to the business model, with priorities set according to clearly defined short- and long-term goals,” stresses Sam Dezillie. Setting clear objectives and limits for the system selection project is important upfront for a number of reasons, including:

• m anaging the scope and scale of these objectives; • being able to clearly articulate these to stakeholders; and • v alidating objectives on a running basis throughout the project. POTHOLES DOTTING THE ROADMAP In the process, launching an enterprisewide strategic architecture design initiative is a challenging task for which the organisation typically does not have the time, interest or awareness. For Dirk Buggenhout, COO of ING Investment Management, a senior management business and IT partnership committee or similar forum “has to drive the process and enforce a business-driven design from the top down.” If the organisation opts for the easy way out by not clearly defining a coupled business-IT strategy from the onset of the process, a number of obstacles are likely to result. These include curtailed flexibility to anticipate and respond to changes in business direction; lack of sponsorship and alignment, leaving IT exposed on project delivery; constant

conflict resolution on the roadmap and resource priorities; and inefficient leverage of business-IT resources. CRITICAL ORGANISATIONAL AREAS TO FOCUS ON If an organisational structure and mindset that pool IT and business unit resources and work in cross-organisational and cross-functional teams are not fostered, there is a clear risk of losing the flexibility and synergies that are required to deliver sustainable business goals. To prevent such a risk from arising, a number of critical organisational factors need to be in place. In the view of Hans Otto Engkilde, Vice President, Implementation and Account Management, SimCorp Benelux, these should include joint businessIT steering committees; setting key system design priorities; and validating the design jointly by the company and the vendor. “Business and IT must be brought together to ensure objectives are shared, understood and met,” he notes. APPLY AN INTEGRATED SELECTION METHODOLOGY Selecting and implementing systems more often than not will impact the

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Jeremy Hurwitz is Principal & Founder of InvestTech Systems Consulting, LLC, Los Angeles, USA. He leads the enterprise data management practice and has over 25 years’ experience in strategic data architecture design and investment systems integration projects. He also has extensive vendor data management product knowhow from 20 years of selection and implementation projects. Jeremy Hurwitz provides technology consulting in design and implementation of investment data management systems, vendor systems and technology integration projects.

Sam Dezillie is a Partner at FRONT, Brussels, Belgium. Graduating as commercial engineer from Antwerp University in 1998, Sam Dezillie joined PricewaterhouseCoopers (PwC) to work as a business consultant in the financial industry with a strong focus on business process reengineering (BPR) work within investment management. Before joining FRONT in 2006, Sam worked as global project manager within Fortis Bank on the IFRS and Basel II subject matter.

Hans Otto Engkilde is Vice President, Implementation and Account Management, SimCorp Benelux, Brussels, Belgium since 2007. He commands more than 15 years of experience in the area of selecting and implementing investment management IT applications. Prior to joining SimCorp, where he for 12 years has worked with clients and consultants in the role of investment management software vendor, he was for five years as an investment manager for Danske Bank and Handelsbanken in Copenhagen, Denmark.

investment management organisation across the board. However, according to Hans Otto Engkilde, “it seldom proves to be the silver bullet initially thought, nor does it resolve each and every problem the organisation may have been facing prior to it being implemented.” Important here is to exercise mutual flexibility and the ability to build on the solution provided to absorb market and regulatory changes as they arise.

poorly conducted system selections generally attract critical attention in the form of auditors, negative post-implementation reviews and uncomfortable questions from senior management or the board. So it is crucial to secure buy-in from all the relevant stakeholders in the organisation right from the start of the selection process.

aligned with the business, its strategy and its objectives. Historically, owing to a lack of business-driven strategy and too many decoupled projects, IT tended to take ownership and responsibility for systems delivery.

Systems selected and implemented in an arbitrary and decoupled way can impact profitability and ultimately jeopardise the organisation’s survival. In addition,

BUSINESS-ALIGNED IT SYSTEMS AS SELECTED WINNERS Emerging as the winners of the IT system selection process going forward will be those systems that are best

More often than not, it was the case that large and complex projects with a technical focus ensued, producing sub-optimal results, reduced business confidence and diminished trust in IT’s capabilities to deliver business-oriented objectives. “Nowadays, more and more of the delivery approach is shifting away from IT-

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Dirk Buggenhout is the COO of ING Investment Management. Prior to joining ING IM in February 2010, he spent eight years working for NIBC as part of the leadership team within the business area Technology and Operations. Before that, he was a consultant working for Capco and IBM, delivering large transformation projects in the finance industry in major financial centres. He started his career as a research and teaching assistant in Finance at the University of Antwerp.

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# IT system selection process: c hoosing the right solution to meet investment management goals

10 steps for a successful IT selection process

The selection process should:

Establish a partnership model and IT roadmap based on upfrontmade agreements.

Include a clear view of the level of uncertainty surrounding the strategy.

Figure 3. 10 steps for an IT system selection process to succeed.

Be guided by a thorough understanding of the company’s short- and long-term strategic goals.

Ensure an open and transparent communication of expectations.

Be directed by a clearly defined and mutually agreed target operating model (TOM), a target model architecture and a fully transparent price/cost model

Ensure upfront defining of the architectural fit of requested functionality.

e guided by a wide B range of pre-defined business cases.

Include agreement on realistic implementation deadlines and expectations of success.

driven projects and towards a businessdriven model,” argues Sam Dezillie. Jeremy Hurwitz agrees: “The key design principles going forward will be providing more agile, flexible and businessaligned technology platforms.”

and steward the technical delivery of different business operational systems.” Crucial here is to have a clear strategic direction with aligned business and technolog y and operations (T&O) strategies.

With regard to the selection process, these changes will require hands-on design and implementation experience with the market-leading systems in relevant segments and a structured, quantifiable systems selection and evaluation methodology.

In his view, which is shared by the consultants and vendor in this article, in no way or on any level should the technology be decoupled from the business, whether strategic, technical or operational.

By definition, this approach must be driven by the business owners and rooted in business requirements, stresses Dirk Buggenhout. In his words: “IT’s role as a services and support entity should be to advise on the technical complexities

When embarking on a successful system selection process, which in 10 crucial steps is outlined in Figure 3, it is vital for the organisation that the IT strategy, the high-level IT architecture and roadmap are in line and on the agenda of senior management. “Then you have a selec-

Be run by a steering committee with involvement of all stakeholders to ensure buy-in based on continuous review process.

Include establishing and fostering willingness to accept change within the company.

tion process in place that really helps you choose the right system,” adds Dirk Buggenhout. Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management. A financial journalist by profession, he has worked for such publications as The Economist, Financial Times and International Herald Tribune. Based in Germany, he also worked in the Luxembourg financial sector for 10 years, including tenures with Nordea Investment Funds S.A. and Lombard International Assurance S.A. 1 ‘The State of the CIO 2011’, CIO, 2011. ‘State of the CIO Survey 2010’, CIO, 2010.

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# Business process management: a dopting a holistic IT strategy across the value chain

Business process management (BPM) represents a fundamental change in how processes are managed. As an IT-enabled management discipline, it requires organisations to shift to process-centric thinking. BPM’s holistic approach is interlinked with the enterprise architecture and operating model, both of which are decisive in business processes. This article explores how greater integration and agility are to be gained from applying BPM step by step to exploit IT capabilities and drive success.

I Anders Kirkeby is global Domain Manager for System Architecture at SimCorp, London, UK.

n these cost-conscious times, it is hard to generate a profit while keeping clients happy at the same time. If an investment management company is unable to generate sustainable growth, it must turn to cost-cutting measures. Often a short-term solution is most ready to hand but not necessarily the right path to take strategically. As examples of short-term tactical responses to a harsh business climate, we see drives to cut staff costs through layoffs, salary restraints, and reduced and reshaped bonus pools. These measures to turn the figures around, however, can only do so much without impeding the long-term ability to grow. An alternative and more strategic costreduction measure is to shift the focus to business process management (BPM) as one way to optimise processes further, while also allowing the enterprise to grow with the help of greater integration and agility. BPM is not a technology but rather an IT-enabled management discipline that requires organisations to make a fundamental shift to process-centric thinking. The holistic BPM approach is interlinked with the enterprise architecture and operating model of the enterprise, as these are decisive factors for the level of standardisation or integration of business processes. Conventional holistic BPM typically requires that organisations adopt a revolutionary big-bang approach to transform the entire enterprise to process-centric thinking. However, for many investment

management firms, a more pragmatic evolutionary approach demonstrating value along the way is more suitable and mitigates risk, while requiring relatively fewer resources. But why and how best should BPM be implemented? BUILDING A CASE FOR BPM ADOPTION There is a real need for an increased focus on BPM in the global investment management industry. In many other industries, the motivation would most likely be related to cost reduction. But in investment management, increas-

Manual processes should obviously be the first port of call when looking to optimise efficiency and reduce operational risk. Despite decades of ICT-driven improvements in efficiency, there is still scope for further worthwhile improvement. What holds organisations back here is a combination of the fact that there is less ‘low-hanging fruit’ left, general organisational resistance to change, and ‘being too busy to improve’. Simplification and automation of manual processes is outside the scope of this article, but is no less important. Complex bespoke workarounds cover any compromising combinations of

“There is a real need for an increased focus on BPM in the global investment management industry.” ingly complex and growing processing requirements related to mounting regulatory pressures, market-driven innovation and client-driven product demands – combined with relatively high personnel costs – build the case for BPM adoption. The greatest potential for improvement is typically found in: • m anual processes; • complex bespoke workarounds; • non-integrated processes across multiple systems.

manual and system processes, which are perceived to go against the grain of the systems and business processes involved. Such compromises are typically the weak links in the process chain. Therefore, such compromises must be kept at a minimum and be fully understood. This is an area that is typically very specific to the organisation and thus hard to provide prescriptive advice for. But it is certainly an area where a ‘comply-orexplain’ approach is useful to force

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Data-centric

Bulk-loading batches via ETL1 or a stream of database data change events.

Operational database A

ETL

Operational database B

data changes

Pros

Low initial cost and very wellunderstood integration pattern.

Figure 1. The four different integration methods typically seen with multiple systems in investment management companies and their pros and cons.

Cons

Exposes data in native formats used in point-to-point interfaces, which may have to change whenever a system at either end changes.

Event-driven

Publishing discrete business events and subset of data on to a message queue/ESB2

Operational system A

Pros

Flexible loose coupling and close to business architecture terminology and views; rela tively easy to change behaviour.

“The thrust of the argument is really to take a gradual iterative approach to BPM and build on success, applying what is proven to work to a growing part of the business processes across the enterprise.” the stakeholders to either comply with the target architecture, or to clearly explain why not. Non-integrated processes across multiple systems can take many forms but will either hinder the free automatic flow of data or timely function calls across operational systems. Whether you see this as BPM or data integration depends on your viewpoint, as the distinction between the two can be very fuzzy when the integration occurs at a business process, event or object level. If we look at the specific integration methods between multiple systems in investment management companies, we find four different approaches that are not necessarily used exclusively but rather are mixed and matched depending on the need and the capabilities of the systems involved (see Figure 1). The pros and cons of each integration method clearly indicate a strong impact on the business, both with regard to cost and agility. However, each method has its virtues and all can be considered part

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of BPM, which is not about preferring a particular method or tool to another but rather about taking a holistic view of business processes and the corresponding systems. INTEGRATING AND ORCHESTRATING ACROSS MULTIPLE SYSTEMS The four integration methods outlined above address how to orchestrate processes across multiple systems. The actual data exchanged also has an impact on agility and the ability to change and adapt. Communication between the individual components or systems making up the larger enterprise system will rely heavily on the available interfaces. In some cases, the interfaces are largely fixed, and in others, they can be configured precisely as deemed necessary, but integration is an area where it is easy to go overboard. It may seem that more options and higher granularity are better. But that is often not the case for a couple of reasons:

Interface

Operational system B

Cons

May be abstract from a data point of view.

First, higher granularity – wider interfaces if you will – requires that the persons involved in the integration of two systems know more about each other, whereas a slim interface requires less interaction between skills bases for the two systems. This will often mean different sets of people, with a resulting increase in time spent on coordination and testing during both initial implementation and subsequent changes. Secondly, a wide interface increases the effective change resistance in the system. The more detailed the interface is, the more likely it is to be changed in a subsequent upgrade of the underlying system. APPROACH IS KEY TO BPM PROJECT START-UP Having established a general need for BPM, how should work on a BPM project start? Thomas M. Phelps, CFA and Managing Director of CutterResearch, Cutter Associates, suggests that organisations looking to increase efficiencies without impeding growth capabilities adopt the following down-to-earth approach to implement BPM: 1 Do something 2 Manage scope 3 Measure outcomes 4 Be willing to make mistakes 5 Be willing to make changes 6 ‘Advertise’ impact The idea behind this is to decide to implement new processes or technology to take control of the processes in a confined area. There will always be adjoining areas, which at first glance seem very appealing to include in the plan; hence the need to manage the scope and avoid that the project steals

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Function-centric

Batch-job scheduling via external scheduler or web service calls via ESB or point-to-point. Batch job

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BPM system-controlled

Maximising integration with single enterprise BPM system supplier.

ESB

Operational system A BPM tool

Operational system A

Pros

Use of batch jobs is a very well-known approach; web services are fundamental to firms with service-oriented architecture (SOA) target architectures.

Operational system B

Cons

Pros

Cons

as advocated by some software suppliers and BPM practitioners. According to Tom Phelps, “while strategy is critically important, strategy needs to be tempered with practicality.”

DEMONSTRATING RETURN ON INVESTMENT (ROI) In order to ensure that a clear picture of ‘before-and-after’ process costs is available, it is crucial to find ways to measure the effect of a particular process optimisation before the optimisation is implemented. If the process optimisation to be measured aims to increase automation defined as a percentage of zero-touch transactions, then it should be fairly straightforward to measure based on one system or a few that are closely connected.

Anders Kirkeby, global Domain Manager for System Architecture at SimCorp, explains how increasingly complex and growing processing requirements build a case for BPM adoption in the investment management industry.

Integration costs may be high due to the need for detailed understanding of the connected systems to manage the sequence of calls; somewhat expensive to change flows.

Single unified process management experience across operational systems; easy and cheap to change flows.

Despite standards, there will be some vendor lock-in; potentially expensive to get all systems to participate.

its way into other areas, which would only add risk to the project. Since much of the motivation behind improving or introducing BPM concepts is to optimise processes, it is critical to have the ability to measure the outcome. This means that it must be possible for investment management companies to measure what they are trying to improve, both before and after the change. GRADUAL ITERATIVE APPROACH TO BUILD ON SUCCESS Investment management business processes are often complex and getting new processes right the first time around is hardly a given. It is important to be willing to experiment and take an iterative approach when something new is tried out. Adjustments are likely to be needed, and not only initially but also on a continuous basis as the business evolves over time. Once the implemented change has sufficiently matured, it is important to communicate and advertise the positive impact internally to prove to all stakeholders that the project was objectively worth the effort to take on and fully carry out – also to create an appetite for wider adoption. The thrust of the argument is really to take a gradual iterative approach to BPM and build on success, applying what is proven to work to a growing part of the business processes across the enterprise. This incremental approach should be seen in opposition to ‘taking the grand BPM tour de force across everything’,

Another reason for promoting a gradual approach is to ensure that it is the business that drives the shaping of IT processes, rather than seeing that the changing of processes becomes a technology project alone, where IT moulds the business around it. IT must enable, facilitate and empower the business rather than constrain it.

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“While strategy is critically important, strategy needs to be tempered with practicality.” Thomas M. Phelps, CFA and Managing Director of CutterResearch, Cutter Associates, USA.

However, if the measurement is to cover areas that are more complex, such as how much time is saved in manual handling, then the metrics will have to span both data from the operational systems defining the start and end of the process. Also to be taken into consideration are any time-tracking systems to understand how much time is actually being spent on what needs to be measured. Whether it can be measured in the first place depends greatly on the granularity of the data and in some cases, it may be necessary to make certain assumptions to generate ‘good-enough’ metrics. Another challenge in creating useful metrics on the expected measurable effects is that ideally BPM covers – if not the entire value chain spanning and linking the organisation – then at least multiple parts of it. Being crossdepartmental as they are in nature, such metrics are harder to establish and maintain. Putting measurements in place is a rather thankless job. But without at least spending the effort to attempt to define a model to measure ROI, the risk is high that a BPM project will have to fight even harder for existence, or that it becomes a technology project for technology’s sake. Put squarely, it would be ill advised to consider a BPM project without first establishing how to measure success and ROI. BPM AS A COMPETITIVE DIFFERENTIATOR Companies in the investment management industry have been in an escalating IT ‘arms race’ for decades. This is evidenced by IT budgets across the financial industry, which, according to numerous

consultancy reports, articles and surveys, are reported to be substantially higher than all other major industries.3 It is paramount to continue to invest in the right technology to retain, reinforce or improve the competitiveness of the firm. Nowhere is this effect more visible than in high-frequency trading, where the company with the fastest trading kit is the one most likely to benefit from the majority of latent inefficiencies found in the market. But several of the current technology trends in the industry are also part of what drives changes in the competitive landscape. In today’s long-term volatile markets, ‘real-time’ risk analytics has the potential to become a competitive differentiator, whereas BPM has potential to first lower ongoing costs and then to facilitate agility and innovation. BPM does not do anything by itself. However, as discussed in an earlier Journal article, 4 by abstracting the processes into easily comprehensible formats, it becomes easier for a larger group of stakeholders to work together and quickly and cheaply make robust and secure changes to optimise parts of the business processes. AN EXAMPLE OF BPM IN ACTION For illustrative purposes, let us take as an example a wealth management function in a financial services company. Here the wealthy clients can log on to a web portal to view their current investments and obtain some high-level analytics that display the exposure and historical performance of their investments. In order to produce the content presented in the portal, the enterprise needs a

web-reporting platform, a risk system, a performance measurement system and data warehouse of sorts that holds both market data and the underlying positions and transactions as required. Imagine that one of the key clients seeks external independent advice and is recommended to obtain additional measures of exposure and performance against a custom composite index. In many, if not most, systems, the account manager would probably be asked by IT to kindly inform the client that his or her request cannot be met with the current systems, or that it will take months. The main reason for this lack of agility in meeting the client’s wishes is that a number of systems, which may be bestof-breed individually, are not particularly good at integrating effectively. Nor is it clear how, where and when these systems communicate. However, with a BPM system in place, a tool exists that should both be able to communicate the current processes and the relevant workflows, as well as perform the necessary orchestration of processes. All these factors combine to ensure that – with a defined delay – the client can view current ‘real-time’ figures for the new data calculated by risk and performance measurement systems. In this scenario, adopting a holistic BPM approach offers an opportunity to simplify and standardise through commonly shared tooling that ideally removes much of the explicit point-topoint communication between systems that would otherwise be necessary. THINK BIG, START SMALL If BPM is so attractive for the many reasons outlined earlier in this article, how come most in the industry are hardly tripping over themselves to adopt and apply BPM? This may have something to do with the misguided impression that BPM projects have to be big and cover everything initially. But the fact is that BPM is an instrument of change that can cater for companies of all shapes and sizes. It is important to view BPM as a holistic approach to process and systems integration across the entire value chain. However, it is prudent to extend the BPM coverage and depth gradually – based on the success of the previous step.

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The evolutionary approach is a good pragmatic way to gain comparatively faster results to attain recognition and buy-in from significant stakeholders. However, as BPM matures through incremental initiatives, then organisations should consider making changes to their existing business and IT governance to become more process-centric in order to fully benefit from the potential of BPM. Moving the business forward takes process awareness and process-change agility, and BPM is not a solution for everything – also required are time and effort, as well as an early focus on results. Anders Kirkeby is global Domain Manager for System Architecture in the Strategic Research department at SimCorp. His specific focus areas include scalability, enterprise-wide cross-functional consistency and overall user experience. Prior to joining SimCorp, he served in software architecture and consultant roles focused on the Microsoft technology stack as well as a three-year IT start-up engagement as technologist and product owner for a SaaS product. He earned his degree in Computer Science and Human-Computer Interaction from the University of Aarhus, Denmark. 1 Extract, Transform, Load – is a basic database and data warehousing approach generally applied to bulk loads. 2 An ESB (enterprise service bus) is a message-based capability that facilitates interaction between distributed resources. 3 ‘State of the CIO Survey 2010’, CIO, 2010. According to this report, financial services companies still spend relatively more on IT (IT budget is 8.6% of revenue) than other non-technology industries (2.6–5.4%). 4 ‘Business Process Management: a pragmatic approach to reducing costs and mitigating risk’, ‘Journal of Applied IT and Investment Management’, Volume 3, No. 2, September 2011.

More about BPM

Learn more about the BPM approach, read the article ‘Business Process Management: a pragmatic approach to reducing costs and mitigating risk’. Download at www.simcorp.com/journal-bpm Recommended scanners: Android - Barcode

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May 2012

# Mastering investment management operations: ensuring

IT delivers on strategic business objectives

When trying to master operational processes and deliver on strategic business goals, it is crucial for investment management companies to exercise control across the entire value chain. For KAS BANK, taking a holistic view of its IT requirements is imperative to achieve this goal. This article examines how a suitably aligned IT strategy and best-managed processes along the entire chain empowered the Dutch bank to optimise its financial performance to create competitive advantage.

T Bob Enthoven is Manager of IMS Systems & Data Management, KAS BANK, Amsterdam, Netherlands.

he operations of any investment management enterprise entail numerous software system processes, which must be designed and constantly monitored to ensure the delivery of strategic business goals. Firms adopt system processes for a variety of reasons, but chiefly to improve their control mechanisms and enhance client benefits. Several approaches, or frameworks, for building and managing investment systems have evolved over the years. Despite the growing use of systems in organisations of all shapes and sizes, signif icant problems cause f irms to experience difficulties in implementing these systems. The processing problems cover a wide range and include: • e xcessive diversity in data quality and information system integration problems; • lack of linkage to IT strategy; • f undamental differences in how an IT strategy is formulated and executed in the company; • i ll-def ined metrics identif ication processes; • h igh levels of often unnecessary change for change’s sake; • analytical challenges; • judgment and decision biases; • and organisational barriers that can undermine cross-functional systems usage.

To help address these problems, it is necessary for investment management companies to identify a set of critical factors for their system processes to succeed. Given the increasing amount of data and processing capacity improvements coupled with the advances in business strategy theory, not to mention decisionmaking analyses, organisational learning and a mounting complexity of systems processes overall, systems stand at a crossroads of difficult challenges and interesting opportunities. CHALLENGES IN MAINTAINING CONTROL AND EFFICIENCY The IT-related operations of a typical investment management organisation often comprise a mixed brew of costs, inefficiencies, complexities and risks. Despite a wide use of automated systems, many processes remain manual and vulnerable to human error. In addition, organisations must respond to demands for growth and expansion, all while fulfilling more stringent regulation, accountability, transparency and disclosure requirements. In combination, these factors make it difficult for investment managers to perform their actual role: that of contributing to the success of the company by helping it achieve its strategic goals, improve decision-making and create value for shareholders and clients alike. Why then is it so difficult to maintain both control and efficiency across the

entire corporate value chain? A number of issues emerge: • • • •

a dopting short-term tactical thinking; pursuing path of least resistance; sustainability is not considered; lack of a business case.

CONTINUAL PROCESS OF TRANSFORMATION Most investment management organisations are compelled to continuously transform the way they perform to achieve their strategic business objectives. Organisations undergoing transformation often struggle to find the right balance between demonstrating short-term success and achieving long-term benefits at the enterprise level. Improvement in enterprise-related business functions without due consideration for the underlying system processes may result in short-term gains but often is not sustainable and may actually subvert the enterprise as a whole. Transformation has to operate on two levels: the strategic level, where tangible improvements are coordinated to achieve enterprise-level benefits, and the tactical level, in which localised improvements are demonstrated. In the case of KAS BANK, the Dutch bank is engaged in a continual process of transformation, both at the strategic and the tactical level; looking to align and continuously optimise its investment management system processes to help meet its business objectives, as well as secure a maximum return on its software system investments.

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ADOPTING A HOLISTIC APPROACH TO IT REQUIREMENTS In its daily operations, KAS BANK has found that while technology to automate manual processes can reduce risk and inefficiencies, technology alone is not a comprehensive and viable strategy. The successful deployment of any technology rests on mapping that technology with well-designed processes and capable talent who perform and deliver the results desired and indeed required.

Management and maintenance Interface to data vendors Interface to fund managers

Integrated investment management software solution: a combination of processes and applications IMS Dashboard / App

Risk Monitor

Interface applications Upgrades and releases Product development

SimCorp

Performance measurement

Compliance Monitoring (incl. ESG)

VEV Report

RJ610 Report

FTK Year

Financial Accounting

FTK Quarter FTK Month (Funding ratio)

DRA

Peek/Look-through

Moving from a pure technology-based solution towards successfully resolving broader based issues related to its fund accounting, reporting, performance and custodial systems, KAS BANK with its 750 employees and €276 billion in assets under management has adopted a holistic approach in which IT forms an integral component in the enterprise’s entire value chain.

Figure 1. KAS BANK’s services to pension funds are based on software applications and fine-tuned processes that require continuous management and maintenance. Source: KAS BANK.

A holistic approach that understands how people, processes, and systems contribute (both individually and collectively) to the entire chain may help organisations improve efficiency, control, and the quality of their financial accounting and reporting. By understanding how to implement all along the value chain, the IT function can become a key strategic contributor to the company’s success by empowering its business strategy.

process forward, an appropriate organisational structure was created within the bank. The base layer of this structure comprises the Investment Management Services (IMS) department, which provides fund and financial accounting, compliance monitoring, performance measurement, risk attribution and regulatory reporting services to the bank’s clients, which include pension funds, investment funds and insurance companies.

In order to establish an agile and robust fund accounting and reporting system consistent with international best practices, the bank has adopted a three-tiered strategy of consolidating its existing accounting system, developing a futureproof reporting system and integrating its custodian and compliance system – all on the basis of a single integrated platform.

KAS BANK does not provide active asset management services itself, but rather targets institutional investors and financial institutions with value-added services in treasury, risk control and management information, which stem from its basic service platform of investment administration, custody, clearing and settlement.

ORGANISATIONAL CHANGE IN SUPPORT OF IT STRATEGY To drive the overhaul of this complex

ICT (information, communication and technology) and software providers

Investment Accounting

Custody (own / 3rd party)

For the bank, its holistic approach naturally also involves people. Virtually all stages of data gathering, analysis, reporting, and evaluating by the 100 em-

ployees in the IMS department require a human interface. Here are a few ways the department has found to minimise fund and investment accounting and reporting risk as it relates to the human aspect: • d ef ining roles may reduce gaps and overlaps in roles and responsibilities, which can lead to failures in obtaining, processing, or analysing information, or to conflicting information; • ensuring that the right people are exercising the right functions, and that they know enough about the business, increases the likelihood that potential risk areas will be identified and acted on in time; • developing employee skills through cross-functional training may enhance their ability to perform new tasks; • communicating on an on-going basis across the organisation, and within departments or units, may reinforce the importance and common understanding of control-related activities.

ENABLING AND EMPOWERING BUSINESS PROCESSES It was further determined at K AS BANK that a holistic approach to consideration and integration of system lifecycle processes (i.e. design, development and production) enables and empowers business processes, as well as key leadership processes in the areas of strategy, planning and resources. As a means to achieve this, continued efforts were made to evolve fund accounting and financial reporting requirements at KAS BANK, with a checklist of process considerations compiled to help IT executives reconcile issues and increase efficiencies: • a utomate and centralise processes to reduce errors and costs; • standardise and integrate systems to reduce software licencing costs; • p ut standards in place across the enterprise to mitigate risk; • use benchmarks, milestones, documentation, and performance meas-

“A holistic approach that understands how people, processes, and systems contribute (both individually and collectively) may help organisations improve efficiency, control, and the quality of their financial accounting and reporting.”

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IT function can become a key strategic enabler to help the company achieve success, not only in the short term but also over the longer time horizon. In addition, an aligned IT strategy will help capture increased efficiency and realise greater effectiveness. Achieving more efficient and effective systems processing requires the adoption of a fully integrated and seamless financial software programme – not one component, and not the sum of its parts, but true development and coordination of people, processes, and systems. Starting with the strategy and followed by the tactics, investment management organisations can realise greater cost effectiveness, improved quality of operations, enhanced client benefits, reduced risk, as well as the ability to redeploy people into higher value activities that support and contribute to the overall growth of the business. If a fully integrated investment management system is efficiently implemented and operated across the entire value chain, the IT function can succeed in delivering key strategic business goals, explains Bob Enthoven, Manager of IMS Systems & Data Management, KAS BANK. ures to reduce risks associated with f inancial reporting and exercise greater control and due diligence where needed; • clarify policies and procedures for the settlement process (and accounting policies) to ensure that staff know what information to submit, when to submit it, and what format to use. INTEGRATED HARDWARE AND SOFTWARE SOLUTION Hardware and software can be critical tools in working seamlessly and synchronously with people and processes, provided they are used correctly and considered as one of several components in the IT system process and not the sole component. A suitable checklist would look like the following: • a utomate processes to dramatically accelerate the execution and settlement process and reduce labour costs associated with manual effort; • reserve analysts for special situations and not for consolidation and reconciliation of routine data in view of the fact that manual data entry presents risk and should be reduced to the minimum; • fi x and redesign the processes first – automation should not be used to simply speed up a broken process; • put controls in place to manage the

transition from manual to automated processes. It has to be made clear that isolating people, processes, and systems in a discussion of financial controls and reporting is an artificial construct, as these three components must work in tandem to achieve a common end. In the specific case of KAS BANK, its investment in a holistic IT model that incorporates and understands these interdependencies is the key to achieving: • Improved timeliness. Information is provided on time to support key decisions and reporting requirements. • Increased transparency. Managers, investors, and analysts have a clear view of business performance to inform their decisions. • Greater confidence. Reports provide a true picture of performance, which boosts client confidence and reduces the risk of restatements.

the technologies enabling the activities related to fund and financial accounting, compliance monitoring and performance measurement. In the final analysis, this integrated strategy will enhance the bank’s operational efficiencies and realise greater effectiveness as it pursues a business strategy geared to growth. THE BENEFITS OF A FULLY INTEGRATED SYSTEM With the investment management industry taking a hard look at profitability and performance, the spotlight is on developing new products, processes and revenue sources, and organisations will require carefully crafted and aligned business-IT strategies to address the impact of regulatory reform, technology change, competitive dynamics and market volatility.

To best achieve these objectives, KAS BANK’s services are based on an integrated financial software solution, which features a combination of processes and applications (see Figure 1).

A holistic approach that understands how people, processes, and systems contribute in the best and most effective way across the value chain may help investment management organisations improve operational efficiencies, compliance and control functions, as well as the quality of their fund accounting and financial reporting.

Implementing finely tuned processes as illustrated enables the IT function at KAS BANK to grow on the back of

By understanding how to implement, operate and fine-tune a fully integrated system across the entire value chain, the

Bob Enthoven is Manager of IMS Systems & Data Management, KAS BANK. The IMS department provides services to pension funds, investment funds, and insurance companies. Working in the investment management industry since 1988, Bob Enthoven has previously held managerial functions at K AS BANK and ABN AMRO Asset Management.

KAS BANK N.V. KAS BANK is a European specialist in wholesale securities services. As an independent bank with offices in Amsterdam, London and Wiesbaden, it connects professional financial institutions both within Europe and across the globe. It focuses on providing added-value services to national and international organisations active in the pensions and securities industries. More information at www.kasbank.com.

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# IT as key innovation driver: t urning IT into competitive advantage How do investment management enterprises retool their IT and business strategies to achieve success through innovation? This article outlines why it is crucial for companies to create more flexible and innovative IT capabilities to ensure competitive advantage. To illustrate this, the authors drill down to IT’s strategic importance as one of the key drivers to provide management with the necessary tools to empower sustained growth and profitability.

t is often a misconception that IT innovation is all about the latest cutting-edge technology. It is in fact more about how companies can and should use IT for breakthroughs in business performance: increasing competitiveness, becoming a more dynamic market player, repositioning the company against its competitors, or allowing entry into new markets. Investment management companies face a specific innovation challenge these days. With a business model that is almost entirely variable on the revenue side while largely fixed on the cost side, and a market that is in turmoil, they are facing an imminent cost challenge. Volumes keep growing – globally more in Asia and Africa than in Europe and North America.

Dr Kai Engel is Global Head of A.T. Kearney’s Innovation Management Practice, Dusseldorf, Germany. Michael Römer is a Partner at A.T. Kearney’s Strategic IT Practice, Dusseldorf, Germany. Eyal Knoll is Senior Manager at A.T. Kearney’s Operations Practice, Dusseldorf, Germany.

The situation is not gloomy in general, but Europe with a traditionally high margin business is stagnating while growth stems from lower margin businesses. Looking at Europe and the period from 2006 to 2010, total asset management industry volumes have grown from €7.6 trillion to €8.1 trillion, with the growth coming entirely from the non-UCITS part of the industry. If one takes into account that more and more institutional investors also rely on UCITS, this trend is even more obvious. Traditional business is squeezed between emerging alternative investments and passive products. And perhaps most importantly, asset managers are forced to react to the massive advent of new regulatory requirements.

Growth in institutional business is certainly not over. Major institutional investors like insurers or pension funds face increasing regulatory requirements, a need to produce returns on capital investments in a low-interest environment, and an increasing need to readjust investment allocation in light of regulations like Solvency II or Basel III. This goes along with a realisation that investment management requires more global reach, diversification, risk management approaches (e.g. overlay management) and in general a further professionalisation in asset management. As many institutions realise they may not have the necessary inhouse expertise or capabilities, outsourcing of larger parts of investment management could become one of the important trends in coming years. Tied together with this is a significant upgrade on the side of asset managers serving those segments. Operational requirements range from new shadow accounting and limit checks even for advisory mandates assigned abroad, to a range of ‘solutions’ destined to take over and manage performance risks over time cycles (as opposed to daily reporting). Putting these two major trends together, i.e. 1) reduced revenue pools as volumes shift to lower margin segments, and 2) the need to invest and innovate in ‘solutions’ in order to capture more sophisticated institutional growth segments, requires room for investments beyond a mere adjustment of the IT infrastructure and cost to the new revenue pool realities. With the emphasis on keeping the basics running, and often just plain ‘fire-fighting’, a more flexible IT foster-

ing innovation tends to be overlooked or worse, even neglected. Do CIOs and their IT teams have time left over to reflect on and develop the capabilities that are required to anticipate and act on tomorrow’s opportunities? Is the IT function able to add sustainable value to the core business on the one hand, and, on the other, enable the innovation that can potentially create competitive advantage for the company? CLOSING THE GAP BETWEEN MEETING NEEDS AND CREATING VALUE For the IT department to close the gap between fulfilling the company’s innovation requirements and its ability to generate and deliver future-proof value to the business, the enterprise needs to think differently about its strategic technology and human investments. This article provides a few illustrative examples to help consider the challenges an IT organisation is tested on in its ability to transform itself from a cost burden to an organisation that empowers the enterprise to innovate. As the company grows, its employees, clients and external partners look to IT to evolve accordingly, while reducing transactional unit costs. Clearly, the role of IT for an investment management firm in its early days differs from that of a global player contending with multi-billion dollar balance sheets in multiple currencies and jurisdictions (see Figure 1). In the evolution from the early entrepreneurial phase to mature growth, the stakes for IT-driven innovation1 are high. The capabilities that IT is expected

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High

Business life cycle

IT capability

IT capabilities – Ensure that IT operations are efficient, flexible and aligned to business strategy – Integrate data and processes across operational and financial systems – Formalise IT standards – Set portfolio and risk management strategies in place

Constrained growth

Early growth Entrepreneurial

Low

Business needs – Start up – Growth – Process development

IT capabilities – Adapt as you go – Design for specific functional needs – Integrate data and processes (minimal) – Use spreadsheets, customise databases

Small

IT capabilities – Integrate corporate or financial models – Integrate (ad hoc) – Integrate functions – Formalise IT standards and processes

IT capabilities – Perform functional improvements incrementally – Integrate data, processes and new functions partially – Integrate ‘point-to-point’ across fragmented applications

Medium

Large

Company size

Figure 1. IT ’s role in transformation and growth. Source: A.T. Kearney. to deliver come to play an increasingly critical role for investment managers in their quest to defend market positions and gain competitive ground. Further, with increasing size, pressures to reduce costs mount. Market-related shifts in industry fundamentals (i.e. massive and rapid fund in- and outf lows, reduced new sales, and lower, volatile markets) may stress existing cost structures to a tipping point. For example, one leading bank-owned asset manager recently announced that it was quitting the business altogether, citing high fixed-cost structures with IT as a significant contributor. Managing this evolution is not easy. Business leaders look to their CIOs to play their part in driving efficiencies, and CIOs in turn find they often do not win the support they wish in the form of additional IT investments. Within IT, it is not uncommon to observe multiple rounds of offshoring and layoffs in conjunction with targeted one-off solutions to enable new business initiatives.

CIOs understand and align with the company’s overall innovation agenda. In a consideration of the deliverables that IT provides on the basis of this unfurling time-horizon, a useful first step might be to split activities into three distinct levels: • I nnovate and increase f lexibility: anticipate and build capabilities for emerging applications and technologies; • Evolve: change management/business enablement; • Run: IT operational excellence. Next, technology-related initiatives must be assigned to these three areas. A first quick win on the path to wider credibility for IT is possibly to define and communicate expectations related to these three dimensions of lT activity and make deployment of IT resources more transparent.

A recent paper published by Celent, shows that growth in IT outsourcing continues.2 Specif ically, IT outsourcing within European asset management companies grew from €5.2 billion in 2008, to an anticipated €6.8 billion in 2012.

The majority of participants in a recent study 3 rank IT as ‘important’ or ‘very important’ to differentiate against competitors (see Figure 2). Clearly, IT’s role in the investment management industry is no longer confined to critical business tasks along the value chain such as selection of securities, portfolio execution, performance evaluation, risk management and reporting.

UNDERSTANDING AND ALIGNING WITH THE INNOVATION AGENDA To add insult to injury, CIOs may have to undo years of having IT pushed away from the corporate strategy table. Technology-enabled innovation requires that

Today, IT plays an integral part in product development and, as a consequence, growth is linked directly to IT’s capability to create flexible IT solutions meeting client needs. A recent A.T. Kearney study reports that 70% of business management requires that IT representatives

Sustained growth

Business needs – Innovative business solutions – Back office – Shared services – Operations (integration) – Acquisitions

Business needs – Back office (basic) – Operations – Sales support – Sophisticated analytics

May 2012

“Technology-enabled innovation requires that CIOs understand and align with the company’s overall innovation agenda.” with an entrepreneurial mindset also understand the business challenges and talk ‘the business language’. A CASE STUDY OF IT’S CAPABILITY TO EMPOWER PRODUCT INNOVATION In recent work with a European investment management client, we have seen an example that illustrates these points well. In this case, the IT department had created a tool that is capable of real-time exposure assessment of what is termed ‘virtual counterparties’.

IT capabilities and innovation become more important for your company and top executives?”

Not sure No 4% 12%

Yes 84%

Figure 2. IT innovation is becoming a more important differentiator. Source: A.T. Kearney Research (2011).

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“Today, IT plays an integral part in product development and, as a consequence, growth is linked directly to IT’s capability to create flexible IT solutions meeting client needs.”

Four questions to ask when building a capability-driven IT-setup Clearly, a flexible and innovative IT department is a critical capability in the investment management industry. Our clients’ feedback confirms that our ‘Four-Part Question’ approach can be a quick and pragmatic way to embark on the process of building a capability-driven IT organisation.

1 What?

Define the required IT capabilities. Start by defining the IT vision and prioritise the capabilities that are required: • What business goals have been defined based on a competitive advantage to be achieved by IT-driven innovation? • What IT strategy must be defined for the IT organisation to enable it to deliver against these business priorities? • What is the expected bottom- and top-line impact? • What gaps currently exist in the IT organisation to prevent it from delivering this vision? • What specific IT capabilities need to be developed to deliver future-proof IT services?

2 How?

Design the end-state IT organisation: • How should IT be organised to support the delivery of capabilities? • How should IT partner with the business? (More about this in the section on ‘Deploying managerial assets to produce a mindset change’.) • How can external IT providers be better leveraged for more ideas on technology trends and accelerated innovation delivery? • How should new governance models look? Sustain eﬃciencies on the one hand, foster innovation on the other?

3 How much?

Develop a costing model with two approaches: 1) start with a baseline or 2) blank-page view. There are clear benefits and drawbacks to both; the choice depends on data availability and time constraints: • How much is current spending, what exactly is it being spent on? • How much spending can be cut from things that are non-essential? • How much should be invested to create required capabilities? • How much will it cost to sustain and optimise existing plus new capabilities?

4 What roadmap?

Create a forward-looking blueprint for the IT enterprise landscape defining at a high level: migration paths, development of new capabilities, integrated implementation plan. Key questions here: • What are my ‘immovable’ (existing contractual) obligations? • What is my IT organisation realistically able to deliver? Where do we need external support?

• What considerations and dependencies stipulate timelines for key milestones? • How much will be allocated to change management, to support incremental eﬃciencies, as against how much resources are allocated towards more loosely defined goals and innovation?

As an asset manager assumes or continues to hold various positions on the virtual counterparty, called for example ‘Fixed Income Italy’, the tool is used to drill down in real time to the various types of contract exposures: pure bonds, indexed derivatives and complex structured products. All relevant and configurable components are rolled up into an overall view of exposure to a virtual counterparty. For our client, this tool has become an enabler of data-driven, board- and auditor-level analyses and discussions. Rather than waiting for weeks to have a dollar figure for the credit-risk exposure towards the Italian fixed-income market, users are now empowered to set up virtual counterparties in a few simple steps, taking only a matter of minutes. To answer the question ‘How exposed are we to low liquidity markets?’, a user can simply define and configure ‘illiquid markets’ as a virtual counterparty, and start tracking the numbers daily. This is a vivid example of innovation, which 1) leverages outside resources to gain traction; 2) delivers a new capability; and 3) could expand the list of service offerings. At first glance, the questions posed in this four-step approach may sound unassuming. But if one examines recent changes in the realm of enterprise IT, it becomes clear that if anything hard choices are required. Take cloud computing as an example. Over the past few years, it has evolved from being a promising cutting-edge technology to a reality, which brings with it a fresh set of challenges and potential benefits. IGNORING POTENTIAL OPERATIONAL EFFICIENCIES AT YOUR PERIL Assuming for a moment that an investment management firm has achieved such scale that it cannot ignore the potential operational efficiencies it would otherwise stand to gain by adopting

cloud services. The choices include: what type of cloud: public, private, hybrid, or what? This paradigm shift brings challenges with regards to data security, integration, data integrity, reliability, and breaches. To take advantage of this shift, CIOs will need to focus on what it means for their business if the IT capabilities they want to build and provide end up comprising a collection of outside services. From the CIO’s point of view, the question to be asked would be: can my IT vendors’ capabilities now and in the future support and build on the new offerings emerging? The board-level discussion could begin along the lines: ‘Leveraging the cloud is good for costs and innovation, but data breaches may no longer be something that can be handled internally in our firm.’ This is not necessarily a bad thing. External vendors might be better at handling such risks. As if these choices were not complex enough, the recent ‘regulatory storm’ increasingly shapes the business. Not only do several directives change the business directly (e.g. UCITS V, MiFID 2, AIFMD), but others redefine the needs and requirements of institutional clients (Basel III, Solvency II). The challenge is to fulfil these complex requirements without losing focus on emerging business opportunities – i.e. to act rather than merely react. DEPLOYING MANAGERIAL ASSETS TO PRODUCE A MINDSET CHANGE One salient fact must be accepted if efforts to further IT innovation are to succeed. IT must act as a service provider to its financial institution, to its clients (both internal and external), and to its employees. A service mentality has to be created within the institution in order to engage in a constructive dialogue to

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The six critical mandates for IT-based innovation While many companies think IT-based innovation is becoming more important, they fail to allocate resources to it, limiting their focus to the day-to-day activities. But throwing more money at it is not going to make the difference. According to an A.T. Kearney study, innovation leaders share six critical mandates that effectively position IT within the organisation: 1 Develop and sustain world-class cost-effective IT delivery. 2 Enable IT innovation through targeted investments and measurement. 3 Include IT leadership as part of the core corporate value system, with leaders held accountable for results. 4 Actively pursue integration of products and services with back-office IT. 5 Open source collaboration: customers, employees, suppliers are all leveraged for IT innovation efforts. 6 No technology religion: make sound business decisions on emerging technologies and cull legacy ways of doing things.

promote business growth on an opensource and collaborative basis. In addition to the six critical mandates we see at work with IT-enabled innovation leaders (see Figure 3), there is another organisational element we have observed with companies consistently leveraging IT for growth. A team to foster business-IT partnerships is in place. Innovation leaders deploy top talent in a function – call them IT business relationship managers (BRM) – who act as internal account managers and a single point of contact for specific business teams. Irrespective of its precise composition, this managerial role is a key operational link navigating conf licting demands made on the various touch points in the organisation. It is hard to imagine a successful, innovative IT environment without a solid definition and robust resourcing of this role. It is often a successful move if a former business representative becomes part of the IT BRM team. This could easily be a very experienced operational risk manager with extensive knowledge of operational risk scenarios (i.e. contingency planning, etc.), who is able to take part in fruitful discussions with the IT innovation team.

IT-BASED INNOVATION AS KEY DIFFERENTIATOR IN TRANSFORMATION IT-based innovation is no longer to be considered as a gratuitous add-on. In today’s hyper-competitive markets where revenue from innovation is sometimes the only source of healthy margins, flexible IT innovation is a key differentiator that will help transform an investment management enterprise from good to great. Today, sustaining operations and business-process enablement comprise the basics but no more than that. An additional element, flexible and innovative IT solutions, has been neglected historically, but needs to come to the fore. To participate actively in strategic planning, IT executives must refocus and look beyond day-to-day execution. By taking a few simple steps to bring clarity to what IT can contribute in terms of flexibility and innovation, they will gain status with their business counterparts, and become co-authors of the agendas on the corporate strategy table. In due course and with additional focus, they will be well on their way to transforming IT from a cost burden, which reliably delivers mission-critical and transactional support, to one that is core to the company’s next generation of products and services.

“… if one examines recent changes in the realm of enterprise IT, it becomes clear that if anything hard choices are required.”

Dr Kai Engel is Global Head of A.T. Kearney’s Innovation Management Practice, Dusseldorf, Germany. He holds an MBA from Braunschweig University, Germany, as well as degrees in mechanical engineering from the University of Hannover, Germany. Kai Engel has extensive experience in working with clients to sharpen innovation strategies, speed up the time-to-profit performance, better leverage suppliers’ innovation power and drive cultural transformations. Prior to joining A.T. Kearney, Kai Engel had a leadership role in R&D in the laser industry. Michael Römer is a Partner at A.T. Kearney’s Strategic IT Practice, Dusseldorf, Germany. He holds a Master of Electrical Engineering Degree from the Technical University of Darmstadt, Germany. His areas of expertise lie in business process and IT outsourcing, IT growth strategies, IT transformation, supply chain and sales & marketing optimisation. He covers diverse industries including automotive and consumer goods. Michael Römer has led numerous transformational engagements for the firm’s largest automotive clients, optimising sales & marketing, IT and other shared service functions. Eyal Knoll is Senior Manager at A.T. Kearney’s Operations Practice, Dusseldorf, Germany. He holds an MBA degree with distinction from Cornell University in New York, USA. Eyal Knoll has previously managed technical service delivery for Cisco Systems in the emerging markets sphere, spanning operations in more than 70 countries. In his previous leadership roles with Cisco, he was responsible for implementation and adoption of the Oracle 11i platform in the company’s EMEA’s manufacturing and direct fulfilment sites.

Figure 3. The six critical mandates shared by IT innovation leaders. Source: A.T. Kearney.

A.T. Kearney A.T. Kearney is a global management consulting f irm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, it has acted as an entrusted adviser on CEO-agenda issues to the world’s leading corporations across all major industries. With 3,000 employees worldwide, 2,200 of whom are consultants with broad industry experience and from leading business schools and universities, A.T. Kearney has 57 offices located in major business centres in 39 countries. More information at www.atkearney.com.

1 IT innovation refers broadly to any ‘game-shifting’ strategy enabled by IT that allows a company to create sustainable competitive advantage. 2 Celent Research Study: Outsourcing in European Asset Management, March 2011. 3 A.T. Kearney sponsors research on how technology inno vations are incorporated into companies’ business strategies. Figure 2 and 3 are based on this research. Figure 2 includes figures from the latest, 2011 survey (not yet published). Figure 3 is based on ‘IT Innovation and Effectiveness Study, A.T. Kearny, 2009’; ‘Where the Money Isn’t’, MIT Sloan Management Review Vol. 51 No. 4 (Summer 2010). In 2011, respondents included nearly 150 board members and senior level executives from the firm’s client base (approximately half from North America, the other half from Europe and the Middle East).

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Michael Jarzabek

# A roadmap for aligning IT and business strategies

Michael Jarzabek, Managing Director, LBBW Asset Management

Michael Jarzabek is Managing Director for LBBW Asset Management’s Institutional Client Relationship Management and Client Reporting. Holding a DiplomKaufmann business administration degree, he has spent his entire professional life in the financial industry.

Starting his career at Bayerische Landesbank, he has held several positions in portfolio/fund management for Munich Re, Ampega Investment and ABN AMRO. Since 2005, he has been working for LBBW Asset Management, the German asset management company of Landesbank BadenWürttemberg in Stuttgart, with around €23 billion in assets under management.

# Journal: In the last issue of our Journal, Dr Frank Wellhöfer, Managing Director at MEAG, handed over the CXO relay, asking you to share some of your personal views on the best ways for an investment management business to align its IT and business strategies. Touching upon the aims of this alignment, and drawing on your personal experience, we would also like to know what you think it takes to achieve this synch in order to promote continued growth? Michael Jarzabek: It takes a holistic view in my view, meaning in other words that the challenge for our business strategy is not only to react to recent circumstances; it is as well to anticipate future developments regarding markets and possible investor needs. As an example, we as asset managers have to cope with current and future regulatory challenges. Against

C O CORNER

Michael Jarzabek has a wide range of investment experience in active and passive portfolio management, covering Asian, African and European fixed income and equity markets, as well as strategic and tactical asset allocation.

this background, an on-going and pointby-point improvement is necessary in the operational and organisational processes where it is important to integrate IT issues right from the start in business policy and strategic considerations. IT should be represented in the strategic planning process and in the corresponding committees. Customising the respective necessary IT environments to the corresponding business needs is important too. Cost restrictions must be taken into account, without impeding your targeted business growth. This means that IT cost efficiency is crucial. # Journal: One of the main challenges when investing in technology infrastructure is to decide what software system and specific functionality and design will deliver the best value for the organisation. To best align

IT strategy with business strategy, the IT system architecture should be mapped to the business model, with priorities set according to short-term and long-term goals, and other important business drivers. What in your view is the winning formula here to ensure that this happens? Michael Jarzabek: To me there is no doubt that the strategic planning process should be an integrated part of the system selection and development process, taking into consideration all the necessary divisions of an investment management company. Such an approach helps create and foster a common understanding. Dependent on the business model, the company should decide on the most important elements of the business strategy and success factors. Defining your short- and long-term goals should

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ning process of aligning IT functionality and business goals or can a future-proof platform based on value-adding technology do it alone?

# Journal: To strike the right balance for this winning formula, can the company draw on any best-practice solutions or must it think out of the box? And what about innovation and agility considerations – is there a risk of getting caught up in pure operational concerns?

Michael Jarzabek: Major criteria include involving the important business divisions to ensure a more or less relatively complete view of the goals and needs to be achieved and to find a suitable IT environment, as there is no complete solution for everything. Another very important point is an exchange of views on a regular basis and the creation of a common understanding of company needs. This should include GAP analysis, profiles of the strengths and weaknesses of the existing IT environment, as well as anticipating future regulatory, tax and accounting demands and their possible implications.

Michael Jarzabek: Any guideline is dependent on the specif ic business model and size, as well as future growth targets. For some business challenges, best-practice solutions are available; for others, thinking out of the box can deliver better solutions. The right balance between IT flexibility and cost efficiency must be found to ensure the most suitable support for innovation and the ability to act on business opportunities. # Journal: What in your view are the best strategic means to ensure that an investment management software system is suitably equipped to empower rather than merely support the business? Is it the strategic plan-

Previous CXO relay participants

The global investment management industry faces a myriad of challenges going forward. In this regular CXO relay column, we ask top executives to lead the way ahead, sharing personal views and experiences to give insights into best practices for meeting the challenges as and when they emerge.

reflect your core competences regarding products and clients. Translating this into a successful future-proof IT system architecture means defining the specific IT requirements covering all sections of the value chain. The challenge here is to strike the right balance between integrated standard software and bestof-breed solutions, as well as making the right decision regarding dependence on external suppliers versus independence with internal solutions. One other important point to consider relates to ‘soft’ facts. Service hours, customer service, response times to requests, the frequency of release changes and the philosophy of the IT provider to suit your company’s own philosophy, all play an important role in the selection of IT providers. In my view, the winning formula here should include elements like flexibility, cost efficiency, time-to-market and customer satisfaction.

May 2012

Marc van den Berg is COO at PGGM Investments

and other departments share the same language. Therefore, it is essential to have special ‘IT coordinators’ understanding hands-on needs across the departments and the different needs all along the value chain.

Dr Frank Wellhöfer is Managing Director at MEAG

for success and will result in improved profitability.

Michael Jarzabek: A strategic planning process, which includes both business and IT as described by you and a dynamic IT environment, should enable an empowering open IT architecture. With this approach, management can apply an appropriate IT infrastructure as a driver that can take the business to a new level, not only using it just for underlying investment processes. # Journal: Drawing on your long professional experience, what are the key criteria to ensure that the process of mapping the investment management software system against strategic business goals remains dynamic and continues to generate the necessary innovation across the entire value chain?

# Journal: What role does the organisational structure play and how can it best be developed to create synergies between IT and business department resources in order to ensure that business goals are met?

Michael Jarzabek: Besides sharing know-how, it is also important that IT

# Journal: To what extent does the experience, insight, active support and buy-in from IT executives i.e. at the CEO, CFO and CIO level lead to the successful delivery of a business strategy? In your experience, should IT executives be members of the executive management board?

Michael Jarzabek: Definitely yes. I think that the IT business is one of the most important areas to require substantial resources in any company in our industry. In order to appreciate the importance of this and to ensure an appropriate weighting of the topic, this would be necessary. IT executives should also be part of all the relevant, necessary and important committees. # Journal: Looking ahead, what do you personally foresee emerging as the main IT challenges and business growth opportunities for investment management companies? Will the focus remain on profitabilitydriven business expansion, will the process become even more IT-driven and/or will client-centricity emerge as one of the key factors determining success? Michael Jarzabek: The challenge for IT systems is the ability to fully support even the most complex and highly sophisticated financial products along the entire value chain. This also depends on a company’s business model. The regulatory environment is challenging for every company, and sometimes it may be wise to give up parts of your value chain to improve the profitability of the company. Concentrating on your strengths, improving automation, and a high level of client focus will be the major factors

# Journal: With an already long career in the financial industry behind you, how do you keep up to date with new developments and trends in your own particular professional field of interest? Do you for instance participate in financial industry conferences and seminars, and make use of networking with peers and academics to share knowledge and experiences? Michael Jarzabek: These are exactly some of the ways I use to stay tuned in with new trends. Very important is the regular exchange of views, experience and knowledge within my network inside and outside my company. Regular participation in financial industry conferences, as well as seminars, user groups and industry interest groups, is essential from my point of view. New academic works are a source of new ideas and perspectives as well.

# Journal: Thank you for your penetrating thoughts. With a view to continuing the dialogue, whom would you like to hand over the relay to in the next issue of CXO Corner? Michael Jarzabek: I would like to hand over the word to Benita M. Warmbold, Senior Vice-President and COO of CPP Investment Board (CPPIB), Toronto, Canada, who I’m sure with her considerable experience will provide some illuminating insights into best practices for meeting what she sees as the main challenges facing the investment management industry.

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BOOK REVIEW:

# W hat Matters Now: How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation Gary Hamel, Wiley Business & Finance Publishing, 2012

L , entless Change a World of Rel ovation How to Win in toppable Inn Uns and n, itio ocious Compet

Fer

EL G A RY H A M t inﬂuential

Ranked #1 mos

l Street Journal

ker by the Wal

business thin

eaders today confront a world where the unpredictable and unprecedented are the norm. Whether it is next generation employees shunning blue chips for social start-ups or 100 year-old business models being rendered irrelevant overnight – one sees the exceptional and the extraordinary wherever one looks. About the only thing a leader can be sure of is that what worked yesterday is unlikely to work today, let alone tomorrow. If ever there was a need for fundamentally new thinking about capitalism, management, leadership, and innovation, and how these things

are directly tied to competitive success, it is now. This is not a book about doing better. It’s not a manual for people who want to tinker at the margins of their organisation. Instead, it’s an impassioned plea to reinvent management as we know it – to rethink the fundamental assumptions we have about capitalism, institutions, and life at work. This is not a book that fetes today’s winners. It’s not a celebration of companies that have been doing great so far. Instead, it’s a blueprint for creating organisations that are fit for the future and fit for human beings.

GARY HAMEL has been called the world’s “most influential business thinker” (Wall Street Journal) and “the leading expert on business strategy” (Fortune). His landmark books have appeared on every management bestseller list. He is also author of 17 articles for the Harvard Business Review and articles for the WSJ, Fortune and Financial Times. He is on the faculty of the London Business School and consults with many of the world’s most influential companies. He is director of the Management Lab and is leading a pioneering effort to “crowdsource” the future of management.

BOOK REVIEW:

# The New IT Outsourcing Landscape – From Innovation to Cloud Services

Leslie P. Willcocks and Mary C. Lacity, Palgrave Macmillan, 2011

he business and IT services market exceeded US$ 450 billion of revenues in 2011 and will grow bet ween 5-12% per annum over the next five years. This book provides a detailed review of how managers and suppliers are changing their practices, and the challenges they face. Written by the world’s leading academics in the field, it gives detailed insight into new practices in innovation, offshoring, onshoring, capabilities required, project management and the promise and challenges of moving to cloud services. The authors also review the theory base for outsourcing and introduce a new and distinctive theory to guide practice. This is a vital text for researchers, client organisations, suppliers and analysts needing to understand the latest developments in the outsourcing landscape, and the management practices that will support effective use of the external services market.

LESLIE P. WILLCOCKS is Professor of Technology Work and Globalization, Director of the Outsourcing Unit, and Head of the Information Systems and Innovation Group in the Department of Management, at the London School of Economics and Political Science, UK. He is co-author of 33 books and has published over 190 refereed papers in journals such as Harvard Business Review, Sloan Management Review, California Management Review, MIS Quarterly and MISQ Executive. He is also Editor-in-Chief of the Journal of Information Technology and is internationally recognised for his academic research, and his advisory work for major corporations and government agencies. MARY C. LACITY is Professor of Information Systems and International Business Fellow at the University of Missouri-St. Louis, USA. She has written 12 books, most recently China’s Emerging Outsourcing Capabilities (Palgrave, 2010; co-editors

Leslie Willcocks and Yingquin Zheng) and Information Systems Outsourcing: Theory and Practice (Palgrave, 2009; co-author: Leslie P. Willcocks). More than 50 of her publications have appeared in the Harvard Business Review, Sloan Management Review, MIS Quarterly, IEEE Computer, Communications of the ACM, and many other academic and practitioner outlets. She is Senior Editor of the Journal of Information Technology, Co-editor of the Palgrave Series: Work, Technology, and Globalization and on the Editorial Boards for MIS Quarterly Executive, Journal of Strategic Information Systems, Strategic Outsourcing: An International Journal, and Journal of the Association for Information Systems.

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BOOK REVIEW:

# Benefits Realization from Information Technology Colin Ashurst, Palgrave Macmillan, 2011

here is a considerable gap between what we know about the value of a ‘benefits-led’ approach and the extent of effective adoption of these approaches in organisations. A key challenge is overcoming this ‘knowingdoing’ gap. Colin Ashurst tackles this from the perspective of developing an organisational capability for benefits realisation. Developing this benefits realisation capability is a strategic change programme, which involves changing attitudes and behaviour – not just the adoption of a new approach to pro-

jects. He provides insights to improve practices and a foundation for future research. This book provides a fresh perspective on the challenges of benefit realisation from IT. It draws on the recent and on-going research of the author to explore how to build the organisational capability to realise the strategic potential of information technology. It seeks to tackle the gap between theory and practice and to explore how to gain wider adoption of successful socio-technical and benefits-driven approaches to investments in IT.

COLIN ASHURST is Senior Fellow in Information Systems and Business Transformation in the Business School at the University of Durham, UK. His research interests focus on realising benefits from IT through business innovation and change. His teaching is directly linked to his research and also builds on his 25 years of professional experience as a chartered accountant, consultant and IT manager.

BOOK REVIEW:

# Managed Evolution: A Strategy for Very Large Information Systems

Stephan Murer, Bruno Bonati and Frank J. Furrer, Springer, 2011

his book shows one proven way to meet the challenges of the development over time of mission-critical, very large information systems that include significant legacy parts. It takes the reader from the analysis of the issues of very large information systems to an assessment of the different approaches. The recommended strategy is managed evolution. Managed evolution leads to a continuous improvement and sustainable lifecycle evolution of very large information systems. It also improves agility in the form of reduced time to market and lower cost for adapting to new requirements. The elements and the implementation of this strategy, including the main processes, instruments and metrics, are described in this book. Based on their own experience at a major bank, over more than a decade, the authors have developed a successful strategy to deal with these challenges, including: 1) a thorough analysis of the challenges associated with very large information systems; 2) an assessment of possible strategies for the

development of these systems, resulting in managed evolution as the preferred strategy; 3) describing key system aspects for the success of managed evolution, such as architecture management, integration architecture and infrastructure; and 4) developing the necessary organisational, cultural, governance and controlling mechanisms for successful execution. STEPHAN MURER graduated with an information technology engineering diploma and a Ph.D. in computer science from the ETH in Zürich in 1992. After that he continued his academic career at the International Computer Science Institute of the University of California, Berkeley. He joined Credit Suisse in 1994, where he held a number of different positions. In 2000 he completed his MBA from the University of St. Gallen. 2000–2012 he was Chief Architect, responsible for the overall design of Credit Suisse’s information systems. He is now Senior Advisor to the bank’s IT division, Zurich, Switzerland. BRUNO BONATI studied Economics at the University of St. Gallen and graduated

as lic.oec. HSG in 1973. After graduation he worked in several companies and in 1996 became Member of the Executive Board and Head of IT and Operations in Credit Suisse. In 1997 Credit Suisse started the managed evolution strategy in IT and developed the Service Oriented Architecture for the Swiss IT Platform. He has been the senior consultant for the Industry Value Network, an initiative led by SAP with 40 member companies (20 large banks and 20 vendors). FR ANK J. FURRER studied electrical engineering at the Swiss Federal Institute of Technology in Zurich (ETH Zurich). He graduated as Master of Science in 1969. After graduation he worked as a research assistant at the Institute of Technical Physics at the Swiss Federal Institute of Technology in Zurich and earned his Ph.D. in advanced communications engineering in 1975. 1997 he started his own consulting practice, focussed on applications architecture and security for very large information systems. Frank J. Furrer is the author of several books on industrial communications and information system security and works as an independent consultant.

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Regulatory update This regulatory update covers major new regulatory requirements and significant developments that affect the investment management industry.

OECD SETS OUT PRINCIPLES FOR GOOD REGULATION

The Organisation for Economic Co-operation and Development (OECD) has published guidance to help its members build and strengthen capacity for regulatory quality and reform. The report outlines several inter-related principles which traverse all stages of the regulatory policy-making process and constitute what the OECD considers ‘best practice’. The guidance is the fruit of over a decade of analysis and country reviews and represents a ‘maturing of thinking and learning from experience’, according to the think-tank. Firstly, the OECD believes that governments should have an overarching policy for regulatory quality which informs decisions across all industry regulators. The policy should have clear objectives and frameworks for implementation to ensure that, if regulation is used (regardless of the industry), the benefits should outweigh the costs. To buffer this process, the report recommends that mechanisms and institutions should be established to actively provide oversight of regulatory policy procedures and goals to ensure that regulation serves the public interest. Based on the OCED’s research, ‘best practice’ regulatory processes tend to result in better regulations. In spite of the fact that much still needs to be done to address weaknesses identified by the financial crisis, European financial regulators need to start (re)applying these principles wholesale, in the interest of better regulation, as well as the competitiveness of the financial industry and European economies. http://www.pwc.com/gx/en/financial-services/european-financial-regulationupdates/april-23-2012.jhtml#3

The European Securities and Markets Authority (ESMA) is starting to flesh out some of the key concepts within the Alternative Investment Funds Management Directive (AIFMD). In a discussion paper published on 23 February 2012, ESMA sets out its thinking on some key parameters on the directive’s scope and outlines how the new regime may interact with other key pieces of EU legislation. The discussion paper closed for comments on 23 March 2012 and responses will provide input to a consultation paper, which ESMA plans to issue in the second quarter of 2012 setting out its complete proposals for the draft regulatory technical standards (RTS) required under Article 4(4) of the directive. Following consultation, ESMA will finalise the draft RTS and submit them to the European Commission for endorsement by the end of 2012.

ESMA HELPS CLARIFY BENEFITS OF UCITS IV

The European Securities and Markets Authority (ESMA) has stepped in to try and help asset managers benefit from the UCITS IV reforms, which have yet to be implemented by most member states. The authority clarified situations in which some of the directive’s changes, including the newly streamlined fund notification procedure, can be used despite late implementation by some EU countries. The deadline for UCITS IV implementation was July 2011, but most member states have yet to fully transpose the directive and its implementing measures. The difficulty late implementation poses is that it “can create difficult situations where some competent authorities may not have the legislative framework in place to allow proper implementation of the directive”, says ESMA. The Parisbased authority says practical arrangements between regulators should resolve a number of issues caused by late transposition. A key point raised by ESMA is that a regulator in a ‘late country’ cannot refuse notification of a new fund. ESMA has also set out the specific conditions under which fund notification should be possible from a country where the directive has not yet been implemented. http://www.ft.com/intl/cms/s/0/d51f2778-f63d-11e0-86dc-00144feab49a. html#axzz1b2aUkyDY

EUROPEAN RULES ALARM FUND MANAGERS

Some fund managers’ worst fears over pan-European regulation have reemerged, prompting the hedge fund and private equity industries to hit back at Brussels’ proposed technical standards that they say will damage business and shut out the USA and Asia. The European Commission’s draft text of “supplementing rules” to enforce the contentious Alternative Investment Fund Managers Directive (AIFMD) is causing alarm, partly because it diverges from the European Securities and Markets Authority (ESMA) advice. While the debate revolves round specialist rules on how to apply the directive, the industry sees the hawkish Commission interpretation as unpicking some of the hardfought political compromises that underpinned the AIFMD deal in 2011. Banks and investment managers are adamant that the Commission is adopting a tougher line on numerous areas and will drive up the cost of alternative investments. Some asset managers are, in addition, unhappy about changes to rules for depositories, particularly for assets subject to collateral arrangements. http://www.ft.com/intl/cms/s/0/ed8dd884-7c0e-11e1-9100-00144feab49a. html#axzz1qz4hRwCw

ESMA CONSULTS ON KEY AIFMD CONCEPTS

http://www.pwc.com/gx/en/financial-services/issues/regulation/european-fsregulation-update/updates/march-5-2012.jhtml

PENSION FUNDS TEMPORARILY EXEMPT FROM NEW DERIVIATIVES RULES

The European Parliament has adopted a ‘soft’ approach to pension funds on the new European Market Infrastructure Regulation (EMIR) directive on overthe-counter (OTC) derivatives, confirming that they will be exempt from the legislation temporarily. After protracted negotiations, a compromise agreement to regulate trade in OTC derivatives has finally been agreed by both the Parliament and European Council representatives. Under the agreement, European pension funds will be exempt from the EMIR directive for three years, although it is still unclear whether the reprieve will be extended. After three years, the European Commission will revise the regulation to ensure the effectiveness of the supervisory framework for central counterparties (CCPs). The Parliament said the exemption aimed to prevent pension funds from incurring disproportionate costs that could ultimately impact European pensioners. However, the Parliament insisted that, once the industry developed the appropriate technical solutions for the provision of non-cash collateral, pension funds would be subject to central clearing. http://www.ipe.com/news/pension-funds-to-enjoy-temporary-exemptionfrom-new-derivatives-rules_44022.php

EUROPEAN PARLIAMENT APPROVES NEW OTC DERIVATIVES LEGISLATION

The European Parliament has approved new legislation for over-the-counter (OTC) derivatives trades, confirming the temporary exemption of pension funds from the EMIR Directive and sticking with the requirement to report all derivatives contracts to central data centres. Following a draft regulation that was provisionally agreed on 9 February 2012 by Parliament and Council negotiators, the Parliament confirmed on 29 March 2012 the implementation of a number of proposals to make OTC derivatives “safer and more transparent”. In the new legislation, MEPs secured a requirement that all derivatives contracts – not only OTC derivatives – must now be reported to central data centres or trade repositories. Those centres or repositories would then have to publish aggregate positions by class of derivatives, “thereby offering market players a clearer view of the market”, according to the Parliament. It confirmed that trade repositories will be monitored by the European Securities and Markets Authority (ESMA), which will be responsible for granting or revoking registrations. http://www.ipe.com/news/european-parliament-approves-new-legislation-onotc-derivatives_44598.php

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

IOSCO OUTLINES DISCLOSURE PRINCIPLES FOR ASSET-BACKED SECURITIES

The International Organisation of Securities Commissions (IOSCO) published on 20 February 2012 draft principles, which it considers essential to enhancing investor protection. The principles are designed to offer guidance to securities regulators who are developing or reviewing their regulatory regimes for ongoing disclosure of asset-backed securities (ABS). They are expected to be adopted by regulators to varying degrees in different jurisdictions, depending on the characteristics of the issuing entity or of the securities involved. IOSCO recognises that adopting these principles globally will be difficult, given differences in legal frameworks across jurisdictions. The consultation period on these principles closes on 21 May 2012, after which IOSCO will publish finalised principles later this year. Much of the requirements are based on common sense, but should be given consideration by industry. Clearly, these requirements will cost financial institutions in some regions money to implement and will add to the sizable reporting requirements they will face in the next few years. http://www.pwc.com/gx/en/financial-services/issues/regulation/europeanfs-regulation-update/updates/march-5-2012.jhtml

IMPLEMENTING DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT — UPCOMING ACTIVITY

The European Securities and Markets Authority (ESMA) has published a consultation paper (ESMA/2012/44) setting out future guidelines on UCITS Exchange-Traded Funds (UCITS ETFs) and other UCITS-related issues. The proposals cover both synthetic and physical UCITS ETFs and detail the obligations to come for UCITS ETFs, index-tracking UCITS, efficient portfolio management techniques, total return swaps and strategy indices for UCITS. ESMA’s proposals therefore go wider than ETFs and cover such areas as the use of total return swaps by any UCITS, for which ESMA envisages additional obligations with respect to the collateral to be provided, or UCITS investing in strategy indices, where the requirements on eligibility of such indices have been tightened. http://w w w.esma.europa.eu /news/ESM A-outlines-future-regulator yframework-ETFs-and-other-UCITS-issues

The agencies of the Council of Financial Regulators are considering the question of central clearing of over-the-counter (OTC) derivatives transacted in Australian financial markets. This issue is one in which all Council agencies have an interest. To co-ordinate the development of recommendations to the government, the agencies have issued this discussion paper as a basis for consultation with all interested stakeholders.

LATEST FATCA RULES CONTAIN WELCOME CLARIFICATIONS

On 8 February 2012, the US Internal Revenue Service and Treasury Department finally released long-awaited proposed regulations under the provisions of the Foreign Account Tax Compliance Act (FATCA). On the same day, the Treasury Department issued a joint statement with the governments of France, Germany, Italy, Spain and the United Kingdom that set out a framework for an intergovernmental approach to international tax compliance generally, and implementing FATCA in particular. The proposed FATCA regulations increase the value of accounts subject to an enhanced review to US$1 million from US$500,000, which is a welcome modification. The latest FATCA regulations also address trusts in some detail for the first time. The joint statement outlining how the governments of France, Germany, Italy, Spain and the UK intend to work together on ensuring tax compliance, meanwhile, is extremely interesting. If the steps in the joint statement are implemented, they could be the first steps towards a coordinated, multi-jurisdictional approach to tackling global tax avoidance. More immediately, a primary benefit is that FFI agreement and reporting requirements under FATCA will not apply to FFIs in these jurisdictions, provided they properly report to the authorities in that jurisdiction. http://www.international-adviser.com/profiles-and-analysis/analysis/latestversion-of-fatca-rules-clarify-simplify

http://www.sec.gov/spotlight/dodd-frank/dfactivity-upcoming.shtml

ESMA OUTLINES FUTURE REGULATORY FRAMEWORK FOR ETFS AND OTHER UCITS ISSUES

CENTRAL CLEARING OF OTC DERIVATIVES IN AUSTRALIA

http://www.rba.gov.au/publications/consultations/201106-otc-derivatives/ pdf/201106-otc-derivatives.pdf

This overview chart published by the US Securities and Exchange Commission (SEC) includes rulemaking and public reporting with all section references relating to the Dodd-Frank Wall Street Reform and Consumer Protection Act unless otherwise indicated. Within each time period, activity is presented according to subject matter, and in the order of the section numbers of the Act to which the activity is related.

CONSULTATION BEGINS ON PROPOSED REGULATORY REGIME FOR OTC DERIVATIVES MARKET

ht t p://w w w.hk ma.gov.hk /eng/ key-information /press-releases/2011/ 20111017-3.shtml

http://w w w.ef inancialnews.com/story/2012-02-14/esma-secures-emirextension

The Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC) have issued a joint consultation paper on the proposed regulatory regime for Hong Kong’s over-the-counter (OTC) derivatives market. The HKMA and SFC have been working on developing a regulatory regime for the OTC derivatives market locally, in accordance with commitments the G20 leaders made in September 2009 to carry out reform in that area.

ESMA SECURES EMIR EXTENSION

The European Securities and Markets Authority (ESMA), Europe’s top securities regulator, has been given an extra three months to finalise its technical standards for the region’s vast programme of derivatives reform. ESMA will now have until the end of September to finalise the technical standards for the so-called European Market Infrastructure Regulation (EMIR). The extension comes less than a week after the European Parliament and European Council formally agreed to the text of the EMIR legislation. The legislation will mirror parts of the Dodd-Frank act in the USA. ESMA, which came into force in January last year as part of a new European regulatory framework, now faces the monumental task of turning the high-level text into practical, implementable standards. Pressing issues include determining which types of derivatives will be eligible for clearing and setting organisational standards for clearing houses and data repositories.

May 2012

EFFECT ANALYSIS FOR IFRS10 AND IFRS 11

The European Insurance and Occupational Pensions Authority (EIOPA) has issued a report to provide input to the European Commission’s policy-making on Insurance Guarantee Schemes (IGSs). The purpose of the report is to summarise the findings of a mapping exercise of the existing mechanisms for cross-border cooperation between insurance guarantee schemes of member states and/or between insurance guarantee schemes and national supervisory authorities, and to provide general recommendations to the European Commission in the area of cooperation between IGSs as well as between supervisors and IGSs. https://eiopa.europa.eu /f ileadmin /t x _dam/f iles/publications/reports/ EIOPA%20Repor t %20 on%20 Cross%20Border %20 Cooperat ion%20 between%20IGS%20July%202011.pdf

May 2012

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

Recent research and white papers

SOLVENCY II: A UNIQUE OPPORTUNITY FOR HEDGE FUND STRATEGIES

There is growing empirical evidence that the complexity of financial markets makes it increasingly challenging for institutional investors to manage their asset/ liability profile efficiently. Changes in the regulatory framework and in accounting rules make it even trickier for insurance companies. While the benefits of hedge fund strategies in asset liability management have been documented in the academic literature, the integration of these strategies into the global asset allocation of insurance companies may be jeopardised by recent developments on the regulatory front. The report argues that a Solvency capital requirement of 49% does not reflect the risks inherent in hedge fund strategies. The report finds that a capital charge of no more than 25% is deemed appropriate for a diversified hedge fund allocation, and concludes that hedge fund investing is appealing from both a risk-adjusted performance standpoint and a capital efficiency perspective. Contrary to the conventional wisdom, Solvency II could be a unique opportunity for hedge fund strategies to find their way into insurers’ core portfolios. ‘Solvency II: A unique opportunity for hedge fund strategies’, EDHEC-Risk Institute 2012 http://www.ipe.com/resources/view.php?data=Q2F0ZWdvcnkmMjAxODgmY2F0ZWdvcmllcyZma WxlJklwZVZpc2l0b3ImUmVzb3VyY2U=&name=solvency-ii-a-unique-opportunity-for-hedge-fundstrategies.pdf EDHEC-Risk Institute, 17 pages, January 2012

BUY-SIDE MARKET RISK MANAGEMENT TRENDS

Regulation, transparency and organisational change will be key concerns for risk managers in buy-side institutions during 2012, according to a survey by SunGard and the Professional Risk Managers’ International Association (PRMIA). The survey polled 388 industry participants in 62 countries, including asset managers, private banks, hedge funds, insurance firms, pension funds and regulators, who gave their views on the challenges and trends they see shaping the industry in 2012. According to 85% of the respondents, regulations will shape 2012 risk management practices, with Dodd Frank, Solvency II and UCITS being the key regulations impacting risk managers. The summary also concludes that risk technology will be able to make significant positive contributions to risk management in 2012, specifically with more flexible risk reporting, faster riskreporting, extended asset coverage and more timely market data.

Institutional investors’ appetite for hedge funds has grown in recent years, but they have taken more time to allocate to the asset class as their expectations of asset managers increases. According to a report by SEI, in collaboration with Greenwich Associates, institutional investors have become more willing to invest in hedge funds, with more than one-third of them – out of the 105 institutions surveyed – planning to increase target allocations over the next 12 months. The study, entitled ‘The shifting hedge fund landscape: Institutions put fund managers to the test’, also revealed that most respondents are focusing increasingly on non-correlated investment strategies. However, this number is lower than in recent years, while institutional investors’ standards for selecting fund managers are rising. The report pointed to a real need for hedge fund managers to help clients better understand their investment strategies, performance expectations and the trade-offs between risk and reward to maintain investor confidence and attract new capital. ‘The shifting hedge fund landscape: Institutions put fund managers to the test’, SEI/Greenwich Associates, 2012 https://a248.e.akamai.net/f/248/25855/14d/ig.rsys1.net/responsysimages/seic/__RS_CP__/ IMS_0112_SEI_ShiftingLandscapePt1_US.pdf SEI, 22 pages, January 2012

Asset Management CEOs remain positive about the next 12 months despite the economic challenges. They see growth in both existing and emerging markets and are seeking to foster talent in-house. Five key finding are: 1. Increased focus on existing markets: a third of asset management CEOs view existing markets as the best route to growth by designing products with stable returns and finding ways to deliver high quality advice. 2. Emerging markets – growth potential: over 75% of asset management CEOs intend to grow operations in Asia – especially China. 3. Seeking growth while cutting costs: in light of the European sovereign debt crisis, 78% of CEOs have cut costs and 66% plan to in the next year. 4. Changing approach to managing risk: 75% of CEOs are changing the way they manage risk in the next year with regulatory risk becoming a key area of focus. 67% of CEOs are concerned about over-regulation. 5. Developing tomorrow’s leaders: asset management CEOs are taking an increasingly long-term approach to developing talent in-house. 65% say they want to spend more time developing leadership and talent, with 57% highlighting high-potential middle managers as their priority. ‘15th Annual Global CEO Survey – Asset management industry findings’, PwC, 2012 http://www.pwc.com/gx/en/ceo-survey/industry/asset-management.jhtml PwC, January 2012

‘2012 Buy-side Market Risk Management Trends’, A Survey by SunGard APT and PRIMA, 2012 http://www.sungard.com/APTMarketRiskSurvey2012 SunGard APT and PRIMA, 19 pages, February 2012

INSTITUTIONAL INVESTOR APPETITE FOR HEDGE FUNDS GROWS IN REPORT

15TH ANNUAL GLOBAL CEO SURVEY – ASSET MANAGEMENT INDUSTRY FINDINGS

2012 GLOBAL INSURANCE OUTLOOK

Insurance companies across the industry will have to overcome significant hurdles as they look to bolster their top- and bottom-lines in 2012. This new Deloitte Outlook states that it takes operational excellence and innovation for global insurance companies to generate growth in a challenging economy. These are extraordinarily difficult times for insurers to grow their business, with Europe and the USA struggling to jump-start their economies and a double-dip recession not out of the question. But the economy is not the sole obstacle confronting carriers. There’s also the more fundamental need to change how the industry does business to meet rapidly evolving consumer expectations in terms of products, distribution, service and technology. To succeed in this demanding environment, insurers will need to come up with creative strategies to generate growth, achieve operational excellence and drive innovation. While this might be easier said than done, opportunities are available for insurers that can seize the moment. This Outlook discusses some of the options insurers might consider to grow even in the toughest of economies, as well as the obstacles they might have to overcome to keep growing throughout what could turn out to be a very difficult decade ahead. ‘2012 Global Insurance Outlook: Generating growth in a challenging economy takes operational excellence and innovation’, Deloitte, 2012 http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/US_FSI_ Global%20Insurance%20Outlook%202012_011312.pdf Deloitte, 24 pages, January 2012

ACCENTURE TECHNOLOGY VISION 2012: EMERGING TECHNOLOGY TRENDS FOR IT LEADERS

The technology vision report is an outline of the emerging technology trends that forward-thinking CIOs will use to position their organisations to drive growth and high performance, rather than just focusing on cost-cutting and efficiency improvements. Business leaders now accept that their organisations’ future success is bound up with their ability to keep pace with technology. CIOs have to play a key role in helping these business leaders recognise and seize the opportunities enabled by new trends – but the price of progress will have to be paid, along with new risks assumed. Accenture has identified six technology trends that will influence business over the next three to five years: context-based services, converging data architectures, industrialised data services, social-driven IT, PaaS-enabled agility and orchestrated analytical security. ‘Accenture Technology Vision 2012: Emerging Technology Trends for IT Leaders’, Accenture, 2011 http://www.accenture.com/us-en/technology/technology-labs/Pages/insight-accenture-technologyvision-2012.aspx Accenture, 52 pages, January 2012

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

DODD-FRANK: IMPACT ON ASSET MANAGEMENT

The Dodd-Frank Act makes significant changes to the existing financial services legal framework, affecting nearly every aspect of the industry. This summary highlights many of the provisions of the Dodd-Frank Act that matter most to the asset management industry – investments adviser, broker-dealers, registered investment companies, hedge funds, private equity funds and other alternative investment funds. Many of the issues discussed in this summary remain in a constant state of flux and subject to extensive rulemaking efforts well past July 2011, when many rulemaking requirements were due. In reality, very few of the rulemaking efforts required by the Dodd-Frank Act have been completed and regulators have not met many of the Dodd-Frank deadlines.

‘Dodd-Frank: Impact on Asset Management’, Chapman and Cutler LLP, 2012 http://www.chapman.com/media/news/media.901.pdf Chapman and Cutler LLP, 40 pages, January 2012

BASEL III: ISSUES AND IMPLICATIONS WHITE PAPER

The white paper is a summary of key details of the Basel III capital adequacy framework and exploration of some practical implications and considerations for firms to establish an effective and efficient implementation procedure. With the core framework being adopted by the national authorities, the focus of attention is now shifting towards implementation – determining business impact and planning for compliance. There are strong indications that even though the framework in principle is being adopted, actual implementation will become divergent across various jurisdictions. Although the transitional period appears long, the 2019 deadline to complete implementation should not distract institutions from the need to demonstrate capital and liquidity resilience much earlier and meet interim deadlines along the way. This document attempts to summarise the key details of the Basel III capital adequacy framework and explores some of the practical implications and considerations for firms to establish an effective and efficient implementation procedure.

INVESTMENT MANAGEMENT M&A – 2012 OUTLOOK: CLOUDY, WITH SUNNY SPELLS

The investment management sector continues to face a challenging outlook. Markets have been uncertain, distribution models are shifting and regulatory change is adding cost and complexity. For corporate buyers, M&A activity has therefore been selective, with a rigorous focus on strategic rationale. Deal volumes have been muted as buyers and sellers wait for greater clarity on market outlook, and this is expected to continue. However, using M&A remains part of the corporate tool kit, particularly during a difficult climate for organic growth. The current climate simply means it must be deployed more carefully in order to be successful. The Deloitte Outlook focuses on some of the current challenges and opportunities for M&A within investment management and examines some of the likely deal trends and issues within the sector. ‘Investment Management M&A – 2012 Outlook: Cloudy, with sunny spells’, Deloitte, 2012 http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/Industries/ Financial%20Services/uk-fs-investment-management-outlook-2012.pdf Deloitte, 4 pages, January 2012

PENSION FUNDS: OPERATIONAL EXCELLENCE IN FOCUS

This briefing from KPMG outlines some of the challenges faced by pension funds worldwide and how these funds can achieve operational excellence. With the sovereign debt crises around the world and issues concerning liabilities and payments, it is imperative that pension funds have a strategy in place to deal with these challenges. The paper gives various facts and figures concerning pension fund operations and suggests means of optimising these. ‘Pension Funds: Operational Excellence in Focus’, KPMG, 2011 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/frontiers-in-financesupplement-nov-2011.aspx KPMG, 8 pages, November 2011

ALFI REPORT FINDS LUXEMBOURG FUND DOMICILIATION WELL AHEAD

The number of funds domiciled in Luxembourg and their net sales both increased during 2011, according to the latest annual review by the country’s mutual fund trade body. The Association of the Luxembourg Fund Industry (ALFI) found that the number of funds rose by 4.84% to 3,833 last year, while net sales amounted to almost €17 billion. Total assets under management fell by €101 billion, mainly as a result of market depreciation, it added, but remained above €2 trillion, making Luxembourg approximately four times bigger than the UK with UK£550 billion in assets under management and second only to the USA. The figure also keeps Luxembourg well ahead of European rival Dublin, which recently reported that its fund assets had surpassed €1 trillion for the first time. However, regulatory pressures are likely to prove a challenge in 2012, ALFI said. It highlighted the Volcker Rule, a proposal within the Dodd-Frank Act that will restrict US banks, or banks active in the USA, from making certain speculative investments, as particularly worrisome. While US funds are not encompassed by the rule, there is no similar exclusion for non-US regulated funds such as UCITS, it warned. In addition, the association pointed to concerns over the proposed European Financial Transaction Tax, which it said would give rise to multiple taxation at the level of the fund, its portfolio and its investors, thereby negatively affecting the distribution of UCITS outside Europe. ‘ALFI Annual Review’, ALFI 2012 http://www.alfi.lu//sites/alfi.lu/files/files/Publications_Statements/Press_releases/ AlfiPressReleaseJan2012-EN-FINAL.pdf Association of the Luxembourg Fund Industry, 3 pages, January 2012

‘Basel III: Issues and Implications White Paper’, KPMG, 2011 http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/basell-III-issuesimplications.pdf KPMG, 20 pages, December 2011

May 2012

INVESTORS FAILING TO MEASURE GLOBAL POLITICAL RISK

Investors are failing to fully assess political risk in many countries stemming from geopolitical events or rising “resources nationalism”, according to a new report. The Political Risk Atlas 2012, published by consultancy Maplecroft, also found that investors were increasingly exposed to instability in the Arab Spring countries, potential societal unrest and possible regime changes worldwide. The report found that the elevated risk of political violence – particularly heightened terrorist activity and sabotage in Algeria, Egypt, Libya and Morocco – was causing a “serious threat” to oil and gas companies in the MENA region. These risks were vividly illustrated during the Libyan revolution when oil workers had to be evacuated, the report added, while the conflict in Syria has led to a loss of revenue for oil companies, and international sanctions have forced investors to withdraw. According to the report, the majority of growth economies have seen a reduction in political risk, with dynamic and structural risk falling for the BRIC countries, Indonesia, Mexico and the Philippines. ‘The Political Risk Atlas 2012’, Maplecroft, 2012 http://maplecroft.com/about/news/pra_2012.html Maplecroft, 420 pages, January 2012

REPLACEMENT RATES AT EUROPEAN PAYG PENSION PLANS SET TO SHRINK

Replacement rates at European pay-as-you-go (PAYG) pension plans are set to shrink to just 40% of wages by 2060, but the second and third pillars will struggle to offset those losses, new research has found. According to the report ‘European Pension Observatory 2012’, published by consultancy Debory-Eres, the replacement rate in several European countries is set to drop significantly due to increasing demographic pressures. The report cited Italy and Poland, which will see replacement rates drop respectively from 68% and 56% in 2007 to 47% and 26% in 2060. Meanwhile, statistics published recently by the European Commission have shown that one-third of Europe’s current workforce would like to continue working even after reaching legal retirement age. Debory-Eres warned that any measures would need to be implemented soon, as the capitalised pensions savings within the second and third pillars would be insufficient to offset the drop in the PAYG system. ‘European Pension Observatory 2012’, Debory-Eres, 2012 http://www.carmignac.at/_docs/Articlepress/000005/580_Press%20release%20Pension%20 Standards-DE.pdf Debory-Eres, 150 pages, January 2012

New reports published and information considered worth publishing can be submitted for review to: Co-Editor Mette Trier, mette.trier@simcorp.com

Since 1971, SimCorp has been providing investment and portfolio management software and services to the worldâ&#x20AC;&#x2122;s leading investment managers, asset managers, fund managers, fund administrators, pension funds, insurance funds and wealth managers. SimCorpâ&#x20AC;&#x2122;s world-class software and related services provide global financial organisations with the tools they need to mitigate risk, reduce cost and enable growth. SimCorp is a global company, regionally covering all of Europe, North America and Asia Pacific. Listed on the NASDAQ OMX Copenhagen, SimCorp is dedicated to supporting the global investment management industry, its clients and its investors. For more information about SimCorp, please visit www.simcorp.com.