A Season of Change

Technology heads at buy-side firms are under immense pressure to make sure every dollar spent is generating the highest ROI possible. To that end, chief investment officers are taking a close look at key applications and, when appropriate, making changes.

But ripping out one application for another is no easy task, as extensive due diligence and integration work mean a serious commitment of time and money is essential for success. However, it should also be said that experts urge executives not to be intimidated by the labor-intensive process of making a change. The alternative of staying on a sub-par system is a far worse alternative, they contend.

Damon Kovelsky, an analyst with Financial Insights, a Massachusetts-based consulting company, says that a good starting point in any such analysis is deciding if your current application has taken you as far as it can. "Try and see how much more automation you can push out of it and if you can't, then it might be time to send out an RFP and look for a new one - but that will cost money."

Kovelsky and Financial Insights Senior Analyst Jin-Chul Kim both say that it will take some spending to find savings. Whether it be finding a new portfolio-management vendor or switching to a different trade-order-management provider, making a change will require an initial outlay of time and money - something firms can't be short-sighted about.

Once a firm has determined that a key application is no longer making the grade, and its vendor contract hasn't left it handcuffed, it's time to check out what's new in the market, as well as trying to learn what a firm's competitors are doing. "Take a close look at your operations and compare that to what is out there, especially if you have been (for example) using the same trade-order-management system for the last four years," says Kovelsky. "Things change."

Kim recommends evaluating all key in-house systems on a rotating basis, so no one application goes unexamined for too long. For example, he says that if a firm has six critical trading and settlement-related applications, it is a good idea to review two of them every year, that means that every six years the firm has done a complete review of all systems. "That way if you need to make changes, you are ready to do so and, on the flip side, it keeps your vendors on their toes."

Kovelsky says that being free to look for another vendor means structuring a contract that doesn't marry a firm to its vendor for life. In general, he says that three to four years is a reasonable time frame. However, Kim says that a firm has to consider that in light of the application. Some applications, he says, have a "useful life" (the number of years an applications is considered to be near the top of the market) that is longer than others. For example, "If the useful life of a system is considered to be 10 years, then it may not be a bad thing to contract out for five or six years. But certainly if the useful life is 18-25 months, then going out three years is a risk," says Kim.

The following cases are examples of asset managers that decided it was time for a change.

EBS ASSET MANAGEMENT
EBS Asset Management, an Ohio-based investment firm with $1.2 billion under management, recently went live on Indata's trade-order-management product, Precision Trading. Indata's product ousted Advent's Moxy, which had functioned as EBS' trade-order-management system for almost five years.

"We're managing a lot of accounts through a lot of different channels and (Advent's) tool set was not compelling (enough) ...to handle that," explains Bernard Holtgreive, principal and portfolio manager at EBS. Holtgreive explains that EBS has specialized needs as a portion of its accounts are "family accounts," or multiple accounts managed as one. This was just one of EBS' account specifications that Moxy could not accommodate, he says.

With a limited trading and compliance capability on Moxy, EBS traders were often forced to perform trading offline and then re-enter data into the system, adding the possibility of costly human error, said Holtgreive. In addition, the system performance was often slow when loaded with data, creating frustration for traders.

While Holtgreive had held off on getting rid of Moxy with the hopes that Advent might customize the system to accommodate for EBS' unique trading requirements, he found that Advent made no effort to customize the system or even promise to do so in the future.

"We regret that we couldn't meet the particular needs of EBS Asset Management, but we do have over 600 firms on Moxy and have to be sure that it meets the general requirements of all of them," says an Advent spokeswoman, in response to Holtgreive's complaints. "(EBS) are clients of ours in other areas and we will continue to cultivate our relationship with them."

EBS selected Indata's Precision Trading because it uses a Microsoft SQL Server 2000 and its open architecture allowed it to integrate with EBS' proprietary customer-relationship-management system.

"The flexibility of Indata, the user-defined fields, the things it handles natively that Moxy does not, the compliance and the portfolio-management tools that Indata has are far superior to the tools that Moxy made available," says Holtgreive.

At a price comparable to Moxy, yet a functionality that exceeded it, switching to Precision Trading far outweighed the business risks and costs inherent in converting trade-order-management systems, Holtgreive says.

HOTCHKIS & WILEY
Hotchkis and Wiley Capital Management, an institutional-equity manager handling $4 billion in assets, recently decided to move off Macgregor's Predator and onto the Charles River Trading System for its portfolio-management needs. The switch was motivated by a desire to gain better compliance functionality in the trading process by using Charles River Development's ComplianceMaster, a product described by David Lara, director of information-technology services with Hotchkis and Wiley Capital Management, as "one of the premier in the industry."

The opportunity for Hotchkis and Wiley to hit the market and examine its options came when Macgregor attempted to upgrade the firm from Predator to the Macgregor Financial Trading Platform. "The upgrade they wanted was significant in our minds," says Lara. "With the kind of effort it would take us to move from the system we were using to the new environment, it would be just as easy to look at a new trading system."

So, with an eye to compliance, Hotchkis and Wiley did just that. An initial list of potential vendors, which included Advent, Eze Castle Software, Financial Models Company, Bloomberg, Charles River Development and Macgregor was shortened to the latter four. From that list, Charles River Development was selected. "We did not choose the cheapest product but the one that fit us best," says Lara.

In addition to enhanced compliance functionality, which Lara says is being acquired more in a proactive spirit then in response to specific regulations, the Charles River Trading System will allow Hotchkis and Wiley to interact with its sell-side counter parts using the Financial Information Exchange (FIX) protocol, something the firm did not do with Macgregor. Currently, Hotchkis and Wiley interacts with about 40 broker/dealers and expects to be communicating with 15 of them using FIX by the end of the year. That, according to Lara, will help reduce the firm's failed trades and manual-exception processing.

These moves are part of a concerted effort by Lara to bring the focus of technological enhancements out of the back office where portfolio accounting is king and into the front office. "Whatever businesses or products we get into, I want to trade on one system and leverage Charles River for whatever we need," says Lara.

Now, the Charles River Trading System will flow trades into Hotchkis and Wiley's accounting system -- FMC's Pacer. The firm also uses FMC's Sylvan product for performance attribution and Pages for client statements.

M&I INVESTMENT MANAGEMENT
M&I Investment Management Corp. and Marshall & Ilsley Trust Company have decided to replace their LongView portfolio-management system with Macgregor's Financial Trading Platform. The firms planned to roll out Macgregor's Portfolio Manager Workstation, Advanced Fixed Income, Compliance, and FIX (financial-information exchange) Network components to users in six offices in the first quarter.

In what can only be described as a super-competitive niche where financial services and technology intersect, the portfolio-management-system space is seeing vendors poach customers from each other almost on a weekly basis.

Here, one vendor's attempt to move its customer onto a new version of its product opens the doors for a review of competing products. And, in this case, the suggestion turns out to be a relationship-ending request.

David Schultz, president of M&I Investment Management Corp., says that his firm hit the market when LongView "recommended" that M&I move to the latest version of its offering. At that time, Schultz says, it was "time to do a complete review of our trading and compliance platform. It was a coincidence that, at that same time, LongView was recommending we upgrade to a new platform."

So, he says, the company did an "internal RFP" and narrowed the potential vendors down to LongView, Charles River Development and Macgregor.

The most salient points, which caused M&I to settle on Macgregor, says Schultz, were that the MFTP could do fixed-income and equity trading, and compliance, on one platform, which was "not the case with LongView." Also, he adds, the system was scalable enough to handle the thousands of accounts that M&I interacts with as part of being in the trust business.

"Our evaluation led us to believe that Macgregor had a more comprehensive package that could handle fixed income, equity, run trading and compliance and assist our portfolio-management team in all aspects of our business better than the other two competitors," explains Schultz.

Macgregor will also work with Metavante, the provider of M&I's trust-accounting system, to develop a link between the two applications. Following the implementation at M&I, Macgregor and Metavante will jointly market the link to their common clients.

In terms of pricing, Schultz says that the finalists came in with very comparable figures and the winner didn't necessarily have the lowest bid, also a common sentiment in the selection of such systems.

Schultz says, when evaluating a potential system, it's paramount to see the particular application at work in a financial institution that has similar functionality and scalability requirements. Only when seeing such systems in action can an executive be confident it will meet the needs of their environment. "It's very important to see the system up and running first," he says.