Technology Management in Financial Services

Technology is now firmly embedded in most parts of our western civilisation and nowhere more so than in financial services. The industry simply could not exist without it. Therefore by inference, any systemic failure or determined attack on our financial services industry today is likely to be aimed at technology and, if successful, has the capacity to bring most of the day-to-day activities of our civilisation to a standstill. Ergo what technology we use, how we use it and how we manage it are all critical issues for the industry and critical concerns for everyone who is a beneficiary of its work. It should be self-evident therefore to anyone in financial services that these issues must be continually reviewed and discussed. We can’t afford the consequences of not doing so.

I mentioned in the Introduction that technology today evolves quickly and that management of technology evolves more slowly. The rather indirect association to biology was intentional. Technology language today has adopted many terms from the biological sciences, some of which we are unfortunately only too aware of, for example, viruses. We can continue the metaphor to good effect here by using the concept of morphology, or the analysis of form and structure, to help us begin to think about how a fast moving organism like financial services can be controlled and managed effectively by a slow moving one like management theory.

The single most important message of this chapter is that technology does not stand alone outside the influence of its users or its creators. Often the siloed approach of many financial services firms leads to the view that technology is something ‘over there’, somehow outside the system, outside the rules that govern everyone else. We are users of technology, ‘they’ are the producers of technology and never the twain shall meet. We all sit within the same system. We are all part of the same environment and that environment acts like a self-regulating system with reflexive effects caused by events outside our control as well as those within it.

In this chapter we will review not only the basic issues of technology management such as cost, delivery and quality, but also some of the more peripheral issues such as the convergance and geopolitical influences, attention to which can make the difference between good technology management and excellent technology management.

The best all round phrase I can think of to establish whether any given technological deployment is going to succeed is ‘appropriate response’. This term encapsulates many themes. The easy ones are However, as we’ve seen, there are ‘hidden extras’ which bring an adequate strategy to the level of an exemplary or ‘best-practice’ strategy. These include There may be others. The intent here is not to be exhaustive, especially given the scale and scope of the world’s financial services industry, but to point the way and open up new areas of strategic thought.

So far, the discussion in this book has been a fairly high-level overview of technological concepts in the financial services industry. Now, in order to contextualise the issue and really dig into discussing the benefits of managing and implementing technology, we will focus on what have traditionally been the three basic divisions of a financial services company and how technology plays a role in the way each of these areas functions. The terms front, middle and back office have traditionally been used to describe how assets are managed from end to end within the financial services community. Traditionally because, these days, in the age of outsourcing and ‘best-of-breed’ suppliers, the front, middle and back offices may in fact all belong to different organisations.

One of the most visible signs of technology deployment in financial services is the way in which interconnectivity has thrived in the last few years. Communications have improved both in quality and volume both on the retail and wholesale sides of the industry. In retail, mobile telephony is forming the core of convergence for many banks with television, once the expected winner, being a poor third. In wholesale, the industry cooperative Society for Worldwide Interbank Financial Telecommunications (SWIFT) continues to dominate although few recognise its multiple roles in the industry, and its foothold in the US geographically and in funds from a market perspective are still embryonic.

Open source is software that can be accessed and used, free of license restrictions. The reputation of these products and solutions has increased over the last twenty years to the point that the end product of open source efforts are now accepted as deployable within major businesses throughout the globe. The financial sector is one among many that use these products. However, as with any software from whatever origin, care must be taken in selecting a suitable product to meet the needs of the business. This chapter looks at open source and the issues that surround its use.

There’s a reason why most mainframe systems today are called ‘legacy’. Distributed processing is now so in-built into our way of life that large number crunching mainframes are somewhat of an anachronism. Having said that, the retail financial services sector needs massive processing capability to deal with many millions of transactions per day.

Buying solutions is increasingly a viable option. It has many advantages over building your own solution and not many of the disadvantages. That said, there are disadvantages and, in the same way as building a solution requires an honest assessment of the risks, so too does buying a solution.

Bureau is the middle ground in the technology acquisition stakes. Building a solution gives you complete control over your business process. The problem is you may be out of date with your competitors and your build may not be very good and it will be expensive to maintain. Buying a solution gives you the opportunity to get the best of breed but you may be spending money on things you don’t need in the vendor’s solution, you are always subject to changes in the vendor’s product that may have no relevance to your needs, notwithstanding their financial stability. Bureau is often seen as the perfect solution. Define a business process. Select those elements that you are good at and implement them internally. Identify what you are not good at or cannot do and bring in expertise to fill the gap.

Outsourcing is one of the most misunderstood terms or rather misused terms in modern business practice, merely because no-one really defines what they mean by it nor why they think they may or may not need it. Commonly, outsourcing is used where the process to be outsourced is ‘not core to the business’. If this was a true statement then there would never have been buy or build solutions in the first place. The fact is that this reason is completely spurious. Whatever is required to understand what a customer wants and get it to them for a profit is, by definition, core to the business. The reality is that outsourcing is more often applied to an activity or process that no-one can be bothered to spend much time on, isn’t seen as ‘exciting’ or that the firm is just so inefficient at that some third party can do it cheaper. This may seem like I’m not a fan of outsourcing — quite the contrary. It is just that I see more outsourcing deals done for the wrong reasons with the wrong set of benchmarks than I do almost any other business activity.

One of the problems associated with delivering value from any technology is the environment in which it exists, the speed with which it is deployed and the effect it has on pre-existing technologies. In this latter case, the environment of speed of deployment or innovation, can be, respectively, so sensitive and so quick as to create a shock or disruptive effect. The effect is felt negatively for those firms on the receiving end and (usually) positively for those creating the disruption. This, it has to be said, is a generalization. It is by no means certain that any given disruptor will successfully manage a new technology’s emergence. For every successful social network, there have been many failures. As I said at the very beginning of this book, several marketing and business issues must be present at the same time for a new principle to succeed. Equally, sleeping giants can easily be awoken by the advent of an unforeseen threat and if the threat is not robust enough, the larger firm can be reinvigorated either to kill the technology as was the case in the video tape format wars, or, from greater resources, take over the disruptive technology to its own advantage.

Documentation is not often cited as a method of delivering value in and of itself. I disagree. While documentation is normally reserved for the process control, its effective use can materially improve the speed with which any given deployment delivers value into the business. From a longer-term perspective it can also reduce costs because audit trails of activity and reasoning are clear for management.

There are those that would place testing and quality control at the top of the technology management agenda and there is no doubt that these two issues do take up a disproportionate amount of time and money in financial services. What is so surprising therefore is that so many financial services firms get it so wrong in placing the issues in context, understanding the difference between them and usually in implementation.

We’ve spoken a few times about the need to benchmark value in technology management. This is an entirely different concept from benchmarking the nuts and bolts of a deployment such as a software application. The latter can be done to a large extent numerically — does the application do what its supposed to do, if not to what extent does it not fit the requirement? What are its metrics in terms of response speed? and so on. All these can be identified and measured. I have to say, however, that even in this area, practice is polarised. One European bank has a 6-month test cycle for new software which costs €150,000 each time an application enters the pipeline. New vendors must submit to this test routine even before their software is delivered into a user acceptance testing (UAT) phase. Any change made or fault identified is logged and any fixes that are required must be built into a new version and resubmitted into the 6-month test cycle. This gives you a very clear picture of the level of conservatism in financial services. Another company I came across, a software vendor, had no quality control at all for the first ten years of its existence. Bugs found by clients were reported, fixed by the programmer that wrote the original product, tested by the same programmer, documented by the same programmer and released to the client by the same programmer. As a result, because different clients found different bugs, essentially this company was writing code ‘on the fly’ and maintaining over twenty different variations of the same product since the programmer couldn’t fix the problem in someone else’s code.

There are a plethora of regulations that affect the use of technology in financial services: in the front office, on the buy-sell side of the business, the Markets in Financial Instruments Directive (MiFiD) ads well as SEPA, the Single European Payments Area; in the back office, not with the force of regulation, but of best practice, the Giovannini group works to create a level playing field on the securities side of financial services.

The contemporary business environment is totally reliant on its IT systems. Technological developments have not only made many forms of business activity more effective and efficient, they have created new forms of business. This applies to rational as well as ‘new’ markets. The birth and growth of the information economy has radically changed the way we run our lives. No sector has benefited from technology as much as the financial sector. Financial services are now inconceivable without the pervasive support of IT and communications. Local and global activities in near real-time, essential for oiling the wheels of all business activity, rely completely on the success of IT systems. It is no surprise, then, to find that the link between business interest and IT development is strong. This link is key to shaping the vital interface between business aspiration and IT reality, it defines the scope and central place of the concept of IT governance.

This book has been fairly wide ranging in its scope, which fairly mirrors the state of the industry and its management today.