As large-scale replatforming projects continue to stall, a debate has begun around whether providers would be better off with in-house technology instead of relying on outsourcers.
Successful upgrades are critical, but experts have warned legacy issues and lack of capacity to react to growth could also hamper proprietary solutions. Money Marketing has looked at the market to see whether in-house or outsourced solutions have the edge.
Are outsourcers up to the job?
Data published by The Lang Cat in April predicts the market share of platforms using proprietary technology will fall by more than half in the next three years.
According to The Lang Cat, platforms using proprietary technology currently account for 41 per cent of the market, but this is projected to drop to 15 per cent by 2020.
The decrease takes account of the current replatforming projects that are under way but have not yet completed. For example, Fidelity-owned FundsNetwork and Royal London-owned Ascentric are moving from proprietary technology to Bravura, Old Mutual Wealth is moving from its own technology to FNZ and Alliance Trust Savings is replatforming to GBST from proprietary technology.
Transact uses its own technology. In June last year it acquired Integrated Applications Development, the Australian company that builds the software behind its systems. Other advised platforms using proprietary technology include Parmenion and James Hay, as well as Hargreaves Lansdown on the direct-to-consumer side.
Commentators say a driver towards outsourcing is the commoditisation of many of a platform’s core functions, for example, trading and aggregation functionality.
The Lang Cat consulting director Mike Barrett says: “The challenge you are seeing is where firms are constrained with their legacy. Where they have a big book of existing business, to migrate that onto new technology is a significant exercise. The challenge for the firms using proprietary technology is to not find themselves in a state when they grow rapidly or something changes where they need to make significant system changes either for regulatory action or they just grow larger than they can cope with.”
Barrett says Transact and Hargreaves – the two best-known platforms using proprietary technology – need to ensure they do not suffer legacy issues. He says: “Both of those companies seem to be doing well and growing well but they are growing organically and they still have got an exceptional reputation for service being delivered.
“Unless something comes outside that in terms of regulatory change or market change and they stop writing decent flows, then the challenge is to continue that growth and continue using their technology and not find they have got big legacy problems.”
Fundscape chief executive Bella Caridade-Ferreira says a benefit for platforms running their own technology is they do not have to go through major replatforming exercises because the technology is constantly being tweaked and fixed.
She highlights the sustainability of proprietary technology in light of the workload platform software companies are currently facing.
When you are in charge of your own technology, you decide when things are going to be done. When you outsource you might have paid more to get a faster service but it will depend on how quickly they move
As well as the projects already mentioned, FNZ is also managing Aviva’s replatforming and GBST is also working on the Aegon/Cofunds project. It also powers the AJ Bell and Novia platforms.
Caridade-Ferreira says: “If you think about how many projects are going towards FNZ, the question is can it cope with the level of demand? In that situation, when you have got a queue of projects you have got finite resources and numbers of staff it starts to put a lot of pressure on.
“When you are in charge of your own technology, you decide when things are going to be done. When you outsource you might have paid more to get a faster service but it will really depend on how quickly they move and how many people they are upgrading at the same time.”
Money Marketing understands several platforms, including Funds-Network, have sought to agree preferential deals with software providers in order for their project to be at the top of the queue for completion.
Finding a middle ground
Some platforms are choosing to outsource core functions but keep some customer-facing aspects of the platform technology in-house as a point of differentiation.
Pilot Financial Planning director Ian Thomas, whose firm predominantly uses Nucleus, says this split makes sense from an adviser perspective because the platform is able to be more responsive.
He says: “A lot of the functionality around capital gains and client reporting Nucleus has developed itself and it sits on top of Bravura technology.
“They are able to be more responsive to the demands of advisers and end customers by not having to put everything through the external technology provider.”
Does in-house add up?
Commentators have differing views on whether proprietary or outsourced technology is more expensive for a platform.
Barrett says: “From a provider’s point of view you reduce the cost of maintaining the tech itself but you are paying someone else to do it and you will have strong governance and relationship and business analysts around that relationship as well. It is not just a case of passing the buck and letting somebody else get on with it.”
Caridade-Ferreira adds: “When you add it all up there is probably not a huge difference but it is more complex when you have your own technology. If you outsource it all to someone else, you are paying one fee. That is one of the reasons why people do that because they haven’t got the headache of worrying about resourcing.”
As Platforum head Heather Hopkins notes the end goal of pleasing adviser clients will be more important than the exact nature of the technology behind the platform.
Hopkins says Transact, Parmenion and Seven Investment Management, which are all run on proprietary technology, score consistently highly on service, but outsourcer-backed platforms can also meet adviser demands.
She says: “The questions advisers need to ask are whether the platform offers value for money for the investor, offers good service when things go wrong and offers the right tools and functionality.
“Whether the platform uses proprietary technology or outsources is a business decision for the platform.”
Head to head: Outsourced vs proprietary technology
The case for outsourcing
‘There is no need to reinvent the wheel’
The decision on whether or not to outsource technology is very simple and is based on cost, speed to market and keeping up to date as technology advances. What we are talking about is the core administration technology as there are many other areas of technology that may be bought in from outside and bolted on to the core, for example portfolio construction tools.
The core administration elements of a platform are all very similar and are primarily concerned with client administration linked with trading and administering assets .
There is little point in reinventing the wheel and customising the technology to suit your own requirements should not prove too onerous – the enormous bills we are seeing are much more to do with migrations rather than the core build itself – whereas building a platform from scratch is very expensive and involves hiring an IT department with a very broad range of (expensive) skills that are required to support a platform. Speed to market equally should be quick as the technology largely is there already.
Platform technology providers will generally contract to keep the platform up to date with changing regulation and regularly update their platform to keep pace with advances in technology as part of their licence fee. Overall when outsourcing, you are spreading substantial costs amongst numerous users and to a tried and tested specialist. A no-brainer in my opinion.
Bill Vasilieff is Novia chief executive
The case for proprietary technology
‘Shared technology is limited’
For a high-touch service like Transact, the more closely the system matches the service, the easier it is for us to do the high-quality job our advisers and their clients demand. Administration works best when process workflow matches the job we need done. With our proprietary technology, we have aligned system workflow to match process workflow, not the other way around.
While outsourced technology can be somewhat flexible, because it is shared, it must be limited. When that happens you must adapt processes to cooperate with systems limitations and that leads to loss of efficiency and, potentially, to errors.
Another key benefit of our proprietary technology is our ability to adapt rapidly to change. Our in-house technology is updated every month rather
than being “re-platformed” once in a blue moon.
Thus, Transact was the only platform to launch a Lifetime Isa wrapper on day zero.
We have also been able to develop features like online investor authorisation, now being copied by others, because we can set our own agenda.
Does this flexibility come at a price? Is it more expensive? Not as far as we can tell. Our costs of technology and client administration are no higher than they would be if we adopted an outsourced solution.
Our in-house technology has given us a competitive advantage that has been vital to our success.
Ian Taylor is Transact chief executive