Demystifying TCO and the opportunity for savings

REUTERS/Toru Hanai
DEMYSTIFYING TCO AND THE
OPPORTUNITY FOR SAVINGS
BY PARAS SIDAPARA
NOVEMBER 2014
The capital markets landscape has changed
dramatically in the six years since the global
financial crisis (GFC). It’s been a period of
unprecedented change, driven largely by a
regulatory juggernaut. The number of new
regulatory alerts issued has grown exponentially
year on year since 2008, sapping resources
that could otherwise be deployed on revenue
generating tasks. Coupled with this, market
participants have had to grapple with huge
increases in data volumes and new data sets.
At the same time, the use of increasingly advanced analytical
tools and methods for performance measurement has become
critical, itself driven by regulatory requirements around the
accurate reporting of risk management processes. But while risk
management and keeping the regulators on side is obviously
critical, particularly in light of the major fines that have been
levied against some of the largest investment banks in the in
the last twelve months, broader, enterprise-wide cost control
is a challenge that cannot be ignored. Clarity on total cost of
ownership (TCO) is essential.
Despite capital markets firms embracing cost control and reduction,
there is little transparency on technology spending. As Paul Rowady
points out in his latest TABB Group study ‘Benchmarking TCO:
Fueling the debate,’ “You cannot control what you do not measure.”
The focus to date has largely been on tactical cost reduction, but
in the landscape of increasing regulation and data volumes, you
can only cut the cloth so much before the clothes no longer fit.
Understanding the full TCO picture, and then looking for new
ways to manage and reduce this is key.
Moreover, CIOs and their teams aren’t simply being asked to
manage with less, they’re being tasked with doing more, and
to become champions of innovation inside their respective
organisations. They need to be able to not only assess the
TCO of existing solutions, but also to make comparisons with
new delivery models and new, disruptive technologies.
2 DEMYSTIFYING TCO AND THE OPPORTUNITY FOR SAVINGS
What to measure?
The TABB report maps out the components that make up TCO.
There are four in total: data and analytics, software and processing,
hardware and infrastructure, and last but certainly not least,
human capital. Human capital is the piece of the puzzle that has
typically been missed in many analyses to date. Crucially, though,
this represents the biggest opportunity for savings, with a 3:1 ratio
versus non human capital costs (hardware, software and data),
according to Rowady.
The siloed nature of many capital markets participants means that
their technologies, the infrastructure and the teams that support their
trading capabilities are so fragmented that they find it difficult to know
what they’re spending. This is compounded by the failure to factor in
the human capital element, not to mention overlooking the costs of
some of the underlying infrastructure and networking support.
DISCOVERY
Rowady’s research uncovers insightful figures, most notably that
capital market firms are spending on average $461,000 per front
office employee, per annum, on technology. This number may raise
some eyebrows, and the research certainly breaks new ground
in terms of putting a figure on TCO for the first time. However, if
you scratch below the surface, you could argue that this number
in reality should be larger. By his own admission, Paul points out
some limitations of the study and areas for further exploration.
The figures are based on a survey of 10 tier 1 participants,
including a number of global banks with significant retail arms
to their business. The net impact of this, is that the significant
headcount associated with these businesses, brings a number of
the technology spend averages down, impacting the final figures,
almost unquestionably bringing the overall average down. It’s a
small aside: the key point is that tech spend here is high, and
offers big opportunities to find savings.
NEW BUSINESS MODELS
THE REALITY FOR CUSTOMERS
Typically, firms have relied on vendors for data, hardware and
software. They have looked to derive value and competitive
advantage from how their people have configured these various
assets, building out and configuring their own infrastructure in the
search for alpha. However in the years since the GFC, managed
services have come to the fore. Vendors like Thomson Reuters
offer managed service solutions, managing the hardware and
infrastructure in hosted facilities and providing the experts that
can optimise and deliver these complex environments as efficiently
as possible.
Using a framework consistent with that presented in the TABB
report, Thomson Reuters has been working with a number of clients
to build an accurate picture of their TCO to date and what savings
could be delivered through a managed service. The complex
and often fragmented nature of these systems means that this
measurement is extremely difficult. However, one tier one client
verified that an Elektron Managed Services solution could deliver
19.2% of savings versus their current deployed client model.
This efficiency comes in a number of forms, with the drivers for
managed services focused on delivering a reduction in TCO, the
ability to move from a capex to a more predictable opex funding
model, the opportunity to scale requirements up and down and to
reduce the time it takes to bring new solutions to market. Crucially
this gives the ability for banks to reallocate resources to more value
adding activities, thereby removing the burden and complexity of
managing these largely commoditised systems. Managed Services
not only help to deliver TCO savings, they crucially also give the
CTO, CIO and CFO the transparency and predictability on
spending they are lacking today.
ELEKTRON MANAGED SERVICES
The TABB Group report sets out a framework to define managed
services, from consulting services, hosting and co-location, through
to managed infrastructure and a fully managed service. This stack
of services reflects those that Thomson Reuters has been delivering
through its Elektron Managed Services offering for the last five years.
It’s a business that has grown consistently fast over that period, and
today has over 420 live customers across its 19 data centres.
The Thomson Reuters approach is validated by this latest TABB
research. The 3:1 ratio of human capital to non human capital costs,
coupled with the cost of a front office technology seat averaging
more than three times that of a middle office and more than
15 times a back office seat, make delivering front office services
through managed services a compelling option.
The important aspect for everyone involved is that this is just the
start of the story. As the TABB report comments, not all use cases
are appropriate for a managed service, but as acceptance grows the
client base will do so too, delivering economies of scale that benefit
the whole.
In addition, the lines of what can be transferred outside an
organisation and into a managed services environment are
moving. Elektron Managed Services today offers data and
analytics, platforms, connectivity and infrastructure as fully
managed services. But the real opportunity lies in turning these
service centres into market data ecosystems, where third party
applications sit in the same centre as the customer and the data,
delivering a menu of solutions in a cost effective way.
Capital markets firms are getting used to measuring and
reporting many different aspects of their operations. Taking the
same approach to their technology total cost of ownership can open
up a range of opportunities for them to reshape their businesses
to fit the post GFC environment. Managed services are the key to
unlocking those opportunities.
Paras Sidapara
Global Head of Managed Services, Enterprise, Thomson Reuters
DEMYSTIFYING TCO AND THE OPPORTUNITY FOR SAVINGS 3
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