Low Cost STP? – The Answer Lies With ASP
By Terry Drewett
October 9, 2004

Summary: ASP services are not new, but their potential for the post-trade arena has been underrated until now. They offer a strong and low cost alternative to their deployed solution cousins, thereby providing a low barrier-to-entry for those organizations trying to realize the ultimate STP dream. By Terry Drewett.

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Following the original recommendations in the G30 report of 1989, the securities industry has ploughed millions upon millions of dollars, pounds and euros into trying to achieve that elusive goal called operational efficiency. Some claim that they have actually achieved it, based on their own specific definition of STP - in the current economic climate, achieving an adequate level of return on investment (ROI) in STP terms is perceived by many as the be-all and end-all. However, the STP goal should not be defined solely as an immediate ROI, but as having the longer-term capability to provide the trading desk with more timely and accurate data in order that the subsequent trade is processed without error. This reduces the number of exceptions and eliminates repair costs down the line. While many do not historically view operations departments as a revenue generating area, inefficient post-trade processing will quickly erode any related commission the front office might make.
  
The question has to be asked: Why has it taken STP some 12 years to get to where it is today without, apparently, a consensus being formed on what constitutes the ultimate solution? Many of the so-called barriers are historical, but still undermine the way we think in STP terms today. The top four key obstacles, apart from the high cost, are:

* A lack of systems integration. Despite best efforts, proprietary systems will never disappear. Therefore, it is better to accept that service providers are going to have to work with segregated data silos, and that being adaptable and flexible in this instance is probably better than trying to be revolutionary and starting afresh.

* Little external connectivity. Today, technology should not be seen as a barrier. Any lack of connectivity between vendors and different networks is likely to be as a result of commercial or political reasons, not technology or standards.

* Limited IT resources. Most IT resources will always be allocated to the mandatory projects or those designated as Run-the-Bank, leaving few for STP re-engineering. One CTO of a major German investment bank was quoted as saying that 73% of his IT resources were allocated to this kind of initiative, leaving only 27% for other projects including STP.

* Incompatibility of data formats. While we are beginning to achieve consensus on industry level standards such as ISO 15022, XML and FIX, there are far too many imposed or proprietary standards remaining. Many of these are internal to the organization concerned, but organizations cannot attain the required external connectivity if they cannot communicate with their trading counterparts.
             
Where would a post-trade ASP solution save the industry money? As a reminder, ASPs are a way for organizations to outsource some or most of their processing and IT needs. There is no doubt that they are beginning to make their presence felt. For example, in portfolio management and accounting, a recent Celent Communications survey showed that 10 of the 13 vendors surveyed provided ASP solutions and 33% of installs are now done via ASPs, up from 27% in 2001. This view is supported by TowerGroup, which estimated that ASP spending as a function of outsourcing was 4% in 2002, with that figure expected to double to 8% in 2006, accounting for $2.5 billion in total. In post-trade terms, the lower internal cost of maintenance of an ASP model is also perfect for both the low volume user and new growth areas such as Hedge Funds, as an alternative to investing in new technology.

With traditional STP and middleware solutions, the perception is that annual licensing is the highest cost, particularly for companies with continually changing software or platform requirements. However, a US Department of Commerce study indicates that software license expenditures account for only 30% of the total. The largest share actually represents labor costs, with a further 37% of spending going toward internal IT support staff and 33% earmarked for external software implementation consultants. The ROI argument says that STP is all about cost – not only saving costs but, more likely, what it is going to cost to achieve improved STP. This is one of the reasons why buy-side organizations in particular are allegedly turning to outsourcing the back office as a preferred choice.