With George Rosenberger, Managing Director, Head of Trading Services, Connex
Today, firms continue to use outsource providers to create value for their businesses. It is not that every firm is still in a mass cutting phase, but a lot of big firms have cut pretty deep and no longer have the resources to quickly complete new projects. We’re starting to see programs and initiatives in our space that used to get approved very quickly now taking longer to get off the ground. Firms are starting to implement a formal review process where procurement groups have become a business committee that analyses whether or not a project is viable and a strong enough bet for firms to invest resources toward development. That tells us that there are finite resources available at sell-side shops to get things done. They’ve had to cut so many people over the last few years to maintain profitability and market share, and in many instances it’s obvious that they have now cut too deeply to properly address their evolving business needs.
When the market is doing well, everybody is bullish and new expenses are not heavily scrutinised. When business slows down, everybody retools and focuses on expense reduction. However, I think this last downturn has been so dramatic that it has caused many firms to formally implement procedures that they didn’t have before. These new procedures relate to new development items, how they get rationalized, approved, onboarded, and ultimately how resources are allocated to them. And, for better or for worse, depending upon your perspective, the trend is here to stay.
The nature of our industry is that our clients continuously and increasingly demand new tools and services. If we need to slow down development of new functionality for existing clients in order to be compliant with changing regulations or to deliver tools to new clients, existing client relationships may begin to deteriorate. Clients will demand that firms get more done with less. And, the way to do that is to outsource. Regardless of whether it’s onshore/offshore outsourcing, firms continue to see the value in outsourcing to a knowledgeable provider who can create value for their firm. Often outsource providers offer access to dedicated resources that have expertise in a particular market/segment. That expertise, coupled with their scale, often allows firms, who leverage outsource partners, to get on par with their bigger competitors.
In recent years, there has been an increase in need assessments that are now conducted within big firms. The challenge for firms is that now all new projects go through ROI analysis and need sign off at the committee level to get done. Part of the analysis is to decide whether it is a core competency for their firm. Then they bid internal resources against external. Recently, we were competing against one of our prospect’s internal development teams. The firm was looking for bids to analyse whether we could get their project done cheaper, faster and with better results. We have an edge when competing against internal resources. Development is what we do professionally so we understand the resources, the investment and the effort required to initiate and finalize a project. Competing against internal stakeholders and development teams is opening up doors to prospective clients who would otherwise not necessarily consider outsourcing as an option.
The client relationship
Obviously, we want to try and bid for as much work as we can. If firms are now opening up those channels of communication with us and initiating a dialogue with new outsourcing partners, that’s great for us and great for the outsourcing industry as a whole. Certainly every client is different. The size of the firm is relevant because of their resource availability and/or the quality of resources is always important, and we along with other providers need to adjust our services to meet the specific requirements of clients of all shapes and sizes. The mid-tier brokers and smaller brokers have always had the mind-set of outsourcing their initiatives because they don’t typically have their own technology. Unlike the bulge bracket firms, the second and third-tier brokers don’t have the resources, the personnel, or the cash to build these things directly. As a result, they white label technology from other solutions providers. And, the bigger banks and broker-dealers that thought that they could deliver projects better on their own originally are now seeing the value in outsource providers as their internal resources are scaled back, and/or working on other initiatives.
Earning new business depends on the type of relationship we have with clients. Is it a pure software development relationship, or do we also have a hosting and support relationship with them as well? What we started to see was that we began to get development work from clients who we initially started a relationship with by hosting and supporting software for them. We also have relationships with clients where we initially built software for them and they hosted it, and then later in the engagement, we end up hosting it for them as well.
We often like to start a relationship, with a new client, through a limited engagement whereby clients “try before you buy”. A client can see how we, as their outsource provider, deliver and what our service level is like over time. Do we live up to our reputation? What type of product do we deliver? How is our support model different from other providers? Is it a timely billing cycle? Once firms are comfortable with all of those things, they often leverage us more. We regularly find that we initiate a relationship providing one particular type of business, product or service, and it quickly grows into other opportunities that we did not initially discuss as part of the engagement. Later in the relationship, there is ultimately more trust between us and our clients. We are increasingly finding that building trust with clients leads to greater opportunities.
New uses for the data
Our core business is FIX connectivity and risk management. That is still the foundation and why clients come to us. But once a client is onboarded, we start to do more customized development work for them. We can build custom MIS reports and business intelligence studies to help clients grow their business.
Today, we are showing clients powerful information that they have never seen before. They can use it in a variety of different ways. With our consultative approach, we work with clients to deliver reports that show which clients are trading, how they’re trading, and what they are trading. Once clients have the data, it is of course limitless in terms of the number of data points that they can leverage to their advantage. We can create custom MIS reports that help clients look for new revenue opportunities, which of their clients are using what execution tools, which clients were sold nine different strategies and only use two, etc… We have the ability to deliver valuable data to our clients that they can use with their clients to create greater revenue opportunities. By delivering the valuable insight and data to clients, relationships continue to grow organically. And, as clients continue to work with us they notice how much value we add.
The right type of provider
With outsourcing, clients should closely consider the type of provider that they are looking to use for particular initiatives. There are niche providers and general providers. With some providers you have geographical issues with multiple time zones that make it challenging to firms. There are often critical details lost in translation between the groups. If a client selects the wrong provider for their needs, it can lead to a disappointing engagement. Furthermore, the switching costs are high. There can also be commercial costs for switching from the current provider as well as timing risk. Building on this idea of organizational trust is critical because, in our space FIX is the lifeblood of trading firms. In order to get a large firm to trust us to handle their FIX connectivity, we have to convince them that we will treat them with the utmost care and the same attention to detail that we would our own business. This is why clients have to rely and leverage providers’ existing clients to get referrals. Firms should look at the longevity of the provider’s business, how long have they been in the space and take a close look at their track record for their engagements with their clients. Doing research is an important step in selecting a provider.
What is next stage for outsourcing?
There’s always going to be a need for vendor outsourcing. Broker-dealers trade and some of them provide equity while others provide research. None of them are in business to manage technology and development. Technology is a means to an end to deliver on a business goal. In that respect, there’s always going to be a need for more technology, and what we offer is specialized technology for a specific part of your critical business functions. FIX and risk management is often underserviced by internal stakeholders. We understand it through and through, and we provide state-of-the-art outsourced FIX connectivity and FIX-related services to our clients. Our team are experts in their respective fields and understand the nuances required to manage and build out newer and better products and services for our clients year after year.