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A
large number of investment systems providers have experienced
a precipitous decline in sales over the past several years.
For smaller vendors, revenue decreases mean that company
risk has increased and the threat of ceasing operations
is a possibility. Although vendors that are part of larger
companies give the appearance of safety, they pose a different
risk as large companies discontinue products that are unprofitable
or do not fit into their strategic plans. In either case,
users might have to scramble for a replacement.
There are also less drastic risks that you must consider
because of the subtle changes in vendors' business practices.
As sales have slowed, many vendors have resorted to layoffs
and modified their operating models in an effort to enhance
profitability or reduce losses. Vendors frequently reduce
expenses by cutting back on client services and programming
staff. They treat client services and development as an
expense and keep staff at a minimum. Promised development
for existing clients is frequently replaced by development
efforts for a new client. Reflecting practices all too familiar
in the industry, the President of a leading investment systems
vendor said, "We will provide a level of service
that will result in clients thinking about replacing our
system, but won't."
The increase in vendor risk and the changes in vendor
operating models have ramifications for asset managers in
how they manage risk and deploy staff. Leading asset managers
have developed contingency plans and enhanced support and
development capabilities for vendor systems. The cutbacks
in service personnel and programming staff mean that asset
managers have to take on a larger burden supporting products
or face the wrath of important users. Many firms have added
personnel to provide their own support for systems in the
critical areas of trading, analytics, portfolio management,
and performance measurement.
Furthermore, with products stagnating due to slow and
non-existent development efforts, IT staffs have had to
create workarounds and enhancements to products so that
traders, portfolio managers and analysts can remain competitive.
What should your firm do about vendor risk? Every
firm should undertake an effort to:
1. Understand product and company risk for each vendor.
2. Rank vendors by risk and importance.
3. Monitor each vendor on an ongoing basis.
4. Explore alternatives to current vendors.
5. Calculate replacement and implementation costs for vendors
at risk.
6. Network with other firms using similar products and form
user groups as necessary.
7. Create internal capabilities to support and enhance key
systems.
Best practices dictate that all investment managers
be proactive in understanding and managing the risk of their
critical systems.
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