Investing in IT systems is a big decision for any company. Within the financial services industry, it is becoming widely accepted that the continuing regulatory burden will increase demand for technologies that can help companies reduce costs and improve customer service.
Regulation has been a huge focus of late but companies must not lose sight of other external forces when analysing their IT investment strategy. The fact that the UK will eventually join the euro zone is one such consideration.
The current low levels of the stockmarket are having a significant impact on the ability of providers to invest in product innovation, sales support and policy servicing.
The state of the world economy, negative returns on equities, and increasing regulatory pressures are creating huge pressure for fundamental change to the business models currently employed within our industry. Over the next few years we are likely to enter a new world paradigm that is characterised by low costs, simple products, fewer product types and low margins.
Technology is set to play a central role in this new environment. Automation is going to be fundamental if the industry is to meet the required objectives of manufacturing simple products, distributing them via multiple distribution channels and servicing them effectively, all at low cost.
The demand for technology born out of business necessity is high, but currently the overall business environment is preventing many companies from allocating the necessary investment.
Some would argue that the euro is just another headache and, in light of the specific industry pressures, now is not the time to be thinking about the effect it will have on IT systems. Many estimates predict that we will most likely enter the euro zone within five to seven years. The temptation must be to push the euro down the corporate agenda in favour of tackling the challenges posed by the new depolarised world.
However, the euro cannot be ignored and now may be precisely the right time to invest in new IT systems that meet the demanding requirements of the new world and the euro.
In his review, Ron Sandler specifically referred to providers' legacy systems being inhibitors to change. This, in conjunction with CP121, has focused minds on the challenges of creating a truly integrated, end-to-end distribution process that enables providers to take simpler products to market more efficiently via multiple channels. Legacy systems could be made to do this but it would be expensive and probably not an effective long-term solution. The legacy systems that are hindering this process are the same legacy systems that are at present unable to cope with the euro.
The euro provides exactly the nondiscretionary catalyst for change that Y2K offered companies four years ago. By taking a proactive stance now, UK providers have another opportunity to replace the very legacy systems that potentially could affect their ability to survive in the 1 per cent world.
Was Y2K a missed opportunity? Rather than replacing their legacy systems, most financial services companies chose to ensure that their existing systems were able to cope with Y2K. This was probably a cheaper option at the time but companies are left with these same legacy systems that will soon require further heavy investment if they are to be effective in coping both with new world business models and with the euro.
Investment during the 1990s in new administration systems that were Y2K compliant, flexible enough to cope with the demands of our changing industry and euro-compatible may have been more cost-effective in the long term.
Considering that many back-office admin systems date from the 1960s and that some providers have as many as 17 core IT systems, converting them to work in euros potentially represents a crippling cost.
New systems do not come cheap either. So providers must decide wisely and prudently whether money should be put into supporting an old legacy system or contributing towards the costs of a new platform that will support both the euro and new world business models.
A further consideration is that the likely costs of adhering to the new regulations proposed in CP121 are going to be high.
Earlier this year, Aifa commissioned the Financial Technology Research Centre to carry out an analysis of how CP121 will affect the use of technology in the industry. The headline finding was that meeting the demands of CP121 could increase life industry IT costs by up to £1bn just in the first year.An attractive option must be to find a solution that can deliver euro capability and CP121 compliance and this can only mean investing in new technology.
Providers can start addressing these issues today. The euro zone already exists and a recent Marlborough Stirling survey found that 75 per cent of industry respondents do not expect there to be widespread changes to the CP121 proposals after the consultation phase. It seems that in both cases what we see is likely to be what we are going to get.
The time is right to start developing technology-enabled methods of doing business in the new world. Providers may even decide that it is quicker and easier to close their existing operations and ringfence them while opening up a new company under the same brand, that runs on new flexible admin systems that are euro-compliant.
However it is done, the immediate business benefits build a strong case for replacing legacy systems with new admin systems capable of supporting standardised products with high levels of automation.
The inevitability of euro conversion reinforces this argument and should help providers when they are considering their IT investment strategy.