Reposted with permission from Aite-Novarica Group.
Investment firms designing their technology stack historically had a choice: best-of-breed or integrated solutions. Best-of-breed applications offered strong functionality, but firms struggled with integration, upgrades, adding new functionality, and an exponential increase in cost and complexity that often left them stuck on legacy and unsupported versions of software.
Alternatively, integrated solutions were often seen as offering a compromise and delivered something less than best-of-breed functionality. They were also piecemeal solutions offered by a single vendor that masked issues experienced by the firms deploying multiple vendor solutions.
Fast forward to today—a third option has emerged, the single front-to-back platform that is changing the dynamics of the decision by offering a distinct option, defined by its single vendor, single solution, and single data model proposition. According to our analysis, the pendulum that shifted back and forth between the two legacy approaches firmly lies on the extended spectrum with the emerging single front-to-back approach.
This technology strategy aligns with the simplified target operating model sought after by many investment firms. But with the rise of these solutions in a crowded marketplace, how can firms identify a true single front-to-back platform and what benefits does it bring to suggest that it is the final destination for the industry?
What is the true single front-to-back platform of the future?
The all-encompassing platform is distinct from legacy solutions that may have been labeled liberally as front-to-back platforms by marketers. Several features characterize the platform of the future. Buy-side firms can ascertain this by asking simple questions that include the following:
- Is the platform developed using a single code base? This is critical because integrated platforms of the past tended to be multiple solutions stitched together by a single provider. A platform designed to be a front-to-back solution from the start will always have the upper hand.
- Is the solution built natively in the cloud? This is important as the true benefits of a front-to-back platform can only be achieved by a solution that has been built natively in the cloud, with legacy investment solutions most commonly employing a "lift-and-shift" approach that limits the true strength of being in a cloud environment.
- Is the platform capable of supporting multiple books of records or does it have one that serves the needs of many? A significant selling point of the front-to-back platform is the ability to switch between different views of portfolios and holdings instantaneously (e.g., trade data versus settlement date, different currencies, and accounting methodologies).
- Does the system cater to front-, middle-, and back-office needs? The front-to-back platform serves as the foundation for the entire investments and operations function that encompasses the full breadth of functionality from order management, portfolio management and position keeping, post-trade operations, compliance, and accounting to client reporting as well as the full suite of data management capabilities.
- Is the platform open and does it integrate non-core expertise easily? Central to the modern platform is an open-architecture-based application programming interface (API) that allows for bidirectional and seamless integrations with external non-core components, data feeds, and counterparties.
- Is the platform front-to-back for the asset classes traded? Legacy platforms tend to have a bias toward specific asset classes. A true front-to-back platform should have cross-asset support across equities, fixed income, and OTC instruments, and it should support the life cycle of these instruments. The next step for these systems is to be able to support both public and private instruments.
- Does the system cater to unique needs? A true front-to-back platform can be deployed to suit the specific operating models that can be impacted by the scale of outsourcing undertaken by the investment firm. Modularization and microservices enable platforms to be tailored to the individual managers more economically as institutions would just pay for what they require.
Figure 1 highlights the breadth of expanding requirements of these systems and the underlying foundational requirements. This ideal platform brings many benefits over the traditional legacy approaches that can support the business case for migration, even in a time of turbulent macroeconomic conditions.
Firms buy into the front-to-back story.
The challenges asset managers face around continued margin pressure, volatile market conditions, and greater regulatory burden are self-evident in 2022. Many investment managers have pivoted to squarely focus on core competencies of delivering investment outcomes and enhancing client experience.
This means a rethink of their tech operating model that has gone through several evolutions over the last few decades. For example, many firms have completely moved away from in-house software development because it is not a core competency; most firms (95%) are estimated to use third-party OMS capabilities.
Significant challenges remain for firms deploying either integrated or best-of-breed platforms that the single front-to-back platform will help solve for. These platforms can also bring further benefits outside of just technology benefits.
The following benefits help demonstrate why the move to front-to-back technology is the optimum tech operating model:
Firms can overcome the integration cost and challenge: One area seen as a drain of IT resources is integration issues, with the most complex firms having to integrate over 100 applications to support investment operations. Trying to manage the upgrade life cycles of these applications to ensure a single upgrade does not break the entire tech stack compromises the resources necessary to improve the overall solution.
Executives cry foul at the cost of the technology and people required to support integrating applications, and the business also suffers as systems are slow to adapt to market changes due to interdependencies and the amount of money being spent maintaining, but not improving, best-of-breed systems.
Operations and technology divisions account for around 15% to 20% of total costs across asset management functions, making them a target for cost-efficiency programs and rationalization efforts. Technology simplification through the adoption of a front-to-back platform is seen as an ideal option that reduces the IT burden through systems rationalization, allowing firms to refocus investments into core competency areas.
Golden real-time books of record help improve investment and operational alpha: In the best-of-breed approach, data flows in and through multiple systems to update fields such as positions, security masters, and customer data. Changes in one system mean numerous reconciliations that can throw up issues and hinder front-, middle-, and back-office functions from being able to see a unified picture of current-day portfolio and cash.
The ability to be multiple books of records or a single one that can service all needs (e.g., front-office, real-time, and settled cash requirements for accounting purposes) forms the foundation of the modern front-to-back system and alleviates integration and reconciliation pains.
Feedback from multiple COOs suggests that a front-to-back system allows firms to streamline and automate operational processes more easily as all securities are processed and managed in the same platform. This frees up headcount to consider value-added tasks and to help oversee and resolve exceptions. An example of this thought process is below:
- US-headquartered asset manager – “We decided upon a front-to-back strategy, and we are nearing completion of this transformation now. This included replacement of six front- and middle-office platforms and outsourcing our back office. Our front-to-back approach brings about three major changes; the standardization of data across the organization, improvement to the speed of change, and facilitation of greater collaboration across the organization.”
Cloud foundation makes the front-to-back case not only viable but ideal: Integrated platforms available over 10 years ago were largely unattractive. Many buy-side firms were concerned about functional deficiencies, the closed nature of the platforms, and their monolithic architectures. Modern front-to-back technology has closed the functionality gaps relative to best-of-breed applications.
Many can support a real-time data processing environment, and cloud-native solutions appeal to buy-side institutions looking to future-proof their core applications that scale over time with the business. Similarly, programmatic access and open architecture are attractive as they allow for more seamless integration and bidirectional data and transactional flow.
New functionality is delivered swiftly: New approaches to integration, software deployment, and cloud enablement have also started to address new functionality time-to-market issues. Firms historically had to not only wait for the new functionality to be developed, but for it to then go through a long and costly upgrade to implement the new features, often breaking existing integrations in the process. Updates and versions within a cloud-based platform can often be deployed more quickly and more seamlessly to ensure that the latest functionality is delivered consistently to clients.
The final destination is the evolved front-to-back platform.
The single front-to-back system has grown in popularity with many of the top asset managers who historically embraced best-of-breed functionality. Even when assessing functional systems such as trading, risk, performance, or accounting, our research shows that integrated front-to-back capabilities are always listed as a top three selection criteria. As the market becomes more complex, the ideal front-to-back system requires robust capabilities.
The way asset management firms are approaching the best-of-breed vs. integrated solutions decision has been redefined with a third, more viable option with the emerging single front-to-back platforms. The contest between the two legacy approaches has been outdated as investment firms move toward a simplified but open application and data architecture.
The final phase in the evolution of the single front-to-back technology model is that it encompasses both expansion across the full client and investment life cycle and across asset classes, alongside technology modernization that takes full advantage of being built native to the cloud. Momentum is growing behind this framework, but a full industry shift toward the proposed operating model will be moderately paced, as unwinding legacy systems takes time.
The right vendor is essential. Buy-side firms should look for a partner, rather than just a technology provider, that has a clear vision, a sound technology foundation, and a strong service model. To learn more about how front-to-back platforms are shaping the future of the industry, contact me at email@example.com.