Technology infrastructure for financial service firms has become frustratingly complex. Although senior managers understand that simplifying technology and operations will be essential to future success, it’s not easy to find a starting point amongst the morass of systems that make up their ecosystems. As executives try to map out strategies for simplification, Broadridge recommends they follow a process that works through their organizations on two vectors: horizontally and vertically.

In financial services, operational complexity has been a by-product of growth. Firms deploying a new asset class or expanding into a new geography are prone to utilizing a new application for the new business. Historically, it hasn’t made sense for, say, a US-based firm entering Japan to reconfigure its existing technology to accommodate the new market. There are just too many variables and market characteristics that differ from jurisdiction to jurisdiction, or from asset class to asset class. Rather than going through the cumbersome process of trying to extend an existing equity solution to support futures and options, for example, it’s historically been easier to buy or build a new system focused on the specific needs of the business. Multiply that process across the many businesses of a global firm and again across the front, middle, and back-office operations and you will start to get a picture of the spaghetti-bowl of applications that makes up many firms existing ecosystems.

The net results of this ad-hoc approach are complexity, inefficiency, and risk. Day-to-day operational inefficiencies that bleed time and money from organizations are bad enough. But today, financial institutions are starting to prepare for the movement to T+1 and the eventual shortening of the settlement cycle to T+0. In that environment, there is simply no room for operational inefficiency. Meanwhile, as data gains importance, fragmented and siloed ecosystems that impede data management and traceability are becoming less viable.

The only answer is to reduce complexity by simplifying—a process that is best approached along both horizontal and vertical vectors.

In the simplest terms, horizontal simplification means consolidating processes and systems across asset classes and geographies. That might mean moving from 10 or 20 existing order management systems to 1 or 2 for the entire global enterprise. That same concept can be applied to hundreds of functional capabilities for any firm. Another example might be position management, one of the most fundamental capabilities for any firm. Although position management drives many activities across the trade lifecycle (finance and accounting, inventory management, risk management, and collateral optimization, etc.), there are few reasons for the capability to be duplicated across multiple systems in the organization. Instead, there could be a single point at which positions are captured and maintained for all asset classes and geographies across all the firm’s business needs.

Firms can look across the entire trade lifecycle to identify other functional capabilities, calculations and events that appear repeatedly but could potentially be consolidated. In this process, the 80-20 rule usually holds true. Although asset classes and geographies have unique characteristics, 80% of the underlying data and functionality can usually be consolidated and harmonized. Anything close to that level of simplification creates tremendous opportunities for horizontal consolidation.

Simplifying systems and operations on a horizontal vector makes it easier for firms to also simplify vertically. While horizontal simplification consolidates individual functional capabilities across asset classes and geographies, vertical simplification streamlines and integrates individual capabilities across the entire lifecycle, from front- to middle- to back-office and from order execution to clearing and settlement.

Every order captured by an order management system creates transactions and events that must traverse scores of middle- and back-office applications, from position, risk and collateral management to confirmation, settlement, and accounting. In many cases, the data and event flow then reverse course, with information traveling from back-office to front to ensure that the desk has the most real-time view of activities as possible. Every one of those “hops” from application to application requires an interface. Each interface requires a messaging protocol to facilitate the data transfer, and potentially an ETL layer, which must all be maintained and managed as part of the RTB budgets. With vertical integration, instead of building these individual point-to-point interfaces, firms wrap their ecosystems with a common messaging layer and API framework, that uses an enterprise-wide data model. This is the catalyst for creating a highly interoperable ecosystem that has a lower cost of maintenance and a much higher rate of reusability. When combined with the horizontal simplification strategy, firms can achieve much higher rates of data traceability and access, meaning that they not only get to cost and risk reductions, but they also get to leverage their data to drive real-time business insights, while improving client engagements.

Across both vectors, simplification is about more than technology. While it might be technically possible to consolidate systems or functions, firms must always take the human element into account. Simplification and consolidation require changes in behaviors and workflows. Since today’s fragmented systems often require specialized support and subject matter expertise, it’s likely that different functional capabilities are supported by different teams. As a result, systems consolidation could potentially require staff reeducation and training.

Despite these challenges, simplification is not only worthwhile, it’s inevitable. In addition to delivering efficiency enhancements required for shortened settlement cycles, horizontal and vertical simplification will play a key role in financial institutions’ ongoing data transformation. By enhancing data traceability, simplification will advance operational and business strategies rooted in data analytics and AI. Achieving those gains will require a sweeping upgrade of institutions’ existing technology infrastructure. We examined these critical topics in more detail in other installments of our Simplification Series.