Tight Ships

Cost reduction is predicted to supersede all data management initiatives in 2009. But this does not mean a huge decrease in budgets. It simply means significant proportions of budgets will be spent reviewing existing data sources and introducing cost-cutting strategies. Tine Thoresen reports

At the end of 2008, data management vendors often complained it was difficult to close the deals. There were simply no budgets. Then came January and it was a slightly different story. Sales cycles are typically a lot longer than a year ago, but at least there are still budgets. Now, it is all about making the most of the money on the table.

London-based Sean Taylor, director at Deutsche Bank Private Wealth Management, speaking about the reference data market at the Marcus Evans Reference Data in Banking event in London in February, said budgets are being slashed and everyone is fighting for that money pit to get investment in the future. "We're now all seen slightly as pariahs," he said. Other conference-goers also referred to redundancies in development departments and a constant battle to secure the developers.

This, coupled with the fact that sticking to budget is seen as the number-one performance indicator this year, means that projects that do get the go-ahead are often focused on cost-assessment exercises. One example is Danish investment bank Saxo Bank, which has reviewed agreements with vendors, assessed data quality and decided to stop maintaining reference data on instruments that have not been traded for a set amount of time. Data professionals are now saying many of their existing activities are focused on different assessment programs.

And it is the same for consultants. Many consultancy engagements now involve cost-cutting initiatives. Princeton-based Ed Ventura, president at Ventura Management Associates, says companies must understand what they are using the data for and why they have it. "You have to understand your specific business needs and how your business has changed. The data you needed last year may not be the same as what you need this year," and the business need may no longer be there.

In fact, many financial institutions have undergone significant changes in the past year. This should also be reflected in the data. "I think firms have to look at it now. They need to revisit their business process and workflow utilization," says Ventura.

Feeds

One place to start is looking at the feeds. There have been talks about some firms trying to reduce the number of vendors they work with or reduce the number of sources for the same data. "Objectivity is what firms need now," says Ventura. He says it is still important to remember that multiple sources were generally brought in for a reason and that not every provider covers every security type.

This is also why firms are increasingly looking at how to manage their security databases. London-based Daniel Simpson, chief executive of buy-side focused data management company Cadis, says a good half of their customers are looking at improving the cost efficiency of their securities and price masters by populating the databases with data from cheaper vendors. In terms of reference data, firms try to use everything they can from the cheapest data provider and only go to more expensive vendors to fill in gaps, he says.

Some vendors are also said to have introduced more aggressive pricing policies. London-based Brian Sentance, chief executive of Xenomorph, says this could be a good market for some of the newer, niche data vendors that can offer competitive prices, different contractual terms and different technology to deliver the data. "Smaller data vendors may not have some of the overheads that their larger competitors do," he says.

This is also true on the technology side. Sentance says more customers are looking for flexible licensing terms and Xenomorph has offered this for the past couple of years. "When you have institutions that are really focused on value, you need to be able to offer per user licensing at the lower end and site licenses at the larger end," he says.

From a technology perspective, Aite Group estimates in a report that capital markets firms in the US will spend around $40 billion on technology this year, 5% less than in 2008. The number-one priority, according to the report, is to reduce costs. Several of the technologies in the data management space are now starting to generate good cost-saving case studies that could help investment in this area. One example is improving cost efficiency by freeing up regulatory capital. By increasing the transparency and accuracy of instrument data and pricing from front to back office, Xenomorph recently helped a European bank free up EUR10 million of regulatory capital. Sentance says data management risk projects are complex but relatively easy to justify given the direct savings in regulatory capital that can be achieved.

These types of projects are expected to continue to be prioritized. Technology vendors are still closing deals and firms are still focused on improving data quality. The 5% decrease in budgets might not even seem too bad considering what the industry has gone through. Yet, Colorado-based Adam Honore, senior analyst at Aite Group and author of the Aite report, says much of the budget goes on maintaining existing systems. "If that 5% goes to new development, it's a lot," he says. "Firms are looking at how data is being used and what they're paying for," says Honore. "I think you'll see a lot of nice to haves go away."

The same is expected to be true for the data industry. Florida-based research and consultancy firm Burton-Taylor projects that 2009 will be a challenging year for the data industry, with contraction of 1-3%. "The Americas will continue to contract. EMEA will remain flat but be supported by growth in the Middle East and eastern Europe. Asia's growth rate will be significantly less than in recent years but still reach the low to mid single digits, fueled by external investment from Japan and internal investment in China," according to the report.

Yet, it is uncertain how the cost-conscious environment will affect the reference data part of the industry. From a data perspective, the front office has seen significant redundancies and there are fewer players in the market, which is expected to dent the data terminal industry. Data vendors, however, typically claim they are not seeing cost-cutting trends in the reference data market. In fact, Interactive Data, which reportedly has the largest reference data market share, announced record quarterly results for fourth-quarter 2008, with company revenues increasing by 6.6% to $194.1 million from $182.1 million in the fourth quarter of 2007.

London-based Paul Kennedy, reference data business manager at Interactive Data, says: "I believe we are in a cost-containment rather than a cost-cutting environment. Firms are refocusing their spend and improving efficiency. There is real money to be saved in the technology space." The back office is typically operating with manual processes and there is often a large number of staff needed to maintain the data. Historically, the front office was subject to more investment than the back office, according to Kennedy, and this could suggest that the back office will be less likely to be affected by cost-cutting procedures.

The reference data market can also be seen to be more protected from cost reductions than other areas as there is regulatory pressure to maintain good-quality data to reduce risk. Xenomorph's Sentance says there is a conflict in the sense that firms are under cost pressure to reduce the number of data sources used, but investor and regulatory pressure to provide multi-sourced pricing and valuation capabilities.

The regulatory environment is expected to see further change. The UK Financial Services Authority has issued a consultation paper on liquidity risk, and Basel II may also be revamped. Kennedy expects this will continue to drive up the requirement for pricing and reference data as firms need to understand their exposure to hard-to-value assets.

So the cost-conscious environment is not all bad news for reference data. Firms will still focus on regulatory compliance to avoid expensive fines and there is still significant demand for quality data.

But it might not be a bad idea to make some changes. It is time for firms to sort out their silos and ensure they are not paying for things twice. The data industry should welcome the introduction of what some might refer to as common sense.

View the article on the Inside Reference Data website.