Legacy Systems The Inconvenient Truth and The Cost of Doing Nothing

Report on
Legacy
Systems
The inconvenient truth and the cost of doing nothing
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DATE OF PUBLICATION
September 2013
RESEARCH BY
SimCorp StrategyLab, drawing on 100+ data sources.
SUMMARY
How widespread is the use of legacy systems in the largest buy-side investment management firms? What
are the consequences of using these systems from risk, cost, and growth perspectives? Why are investment
managers not leaving their burning platforms, and what alternatives are available? Get the answers to these
questions and much more in this comprehensive meta-study of legacy systems in the global investment
management industry.
www.simcorpstrategylab.com
Legacy Systems: The inconvenient truth and the cost of doing nothing
Table of Contents
FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
LEGACY SYSTEMS: THE INCONVENIENT TRUTH AND THE COST OF DOING NOTHING . . 11
WHY IS IT RELEVANT TO TALK ABOUT LEGACY SYSTEMS?. . . . . . . . . . . . . . . . . . . . . . . . . . 11
THE ROLE OF IT IN INVESTMENT MANAGEMENT ORGANIZATIONS . . . . . . . . . . . . . . . . . . . 12
LEGACY SYSTEMS VERSUS STATE-OF-THE-ART SYSTEMS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
WHAT IS A STATE-OF-THE-ART SYSTEM? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
LEADING INVESTMENT MANAGEMENT SYSTEMS AND KEY CHARACTERISTICS. . . . . . . . . . 17
THE EXTENT OF LEGACY SYSTEMS IN THE GLOBAL BUY-SIDE INVESTMENT
MANAGEMENT INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
THE DANGERS OF LEGACY SYSTEMS IN INVESTMENT MANAGEMENT . . . . . . . . . . . . . . . . . 23
ALTERNATIVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
IN WHICH DIRECTION DOES DEVELOPMENT GO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
WHAT IS HOLDING THE INDUSTRY BACK? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
About SimCorp StrategyLab

SimCorps private research institution, SimCorp
StrategyLab, carries out extensive research in
the investment management industry to identify
and suggest ways to meet challenges within risk
management and cost control to embrace growth
opportunities, and to share best practices.
The research program is carried out in close
collaboration with internationally-recognized
academics and established industry experts.
As a result, SimCorp StrategyLab is able to provide intelligent suggestions for best practices
that are intended to minimize risk, find ways
to achieve sustainable cost savings, and enable
growth.
Learn more about SimCorp StrategyLab at:
Foreword
Since its creation, SimCorp StrategyLab has
consistently focused its work on growth, risk,
and cost as the key drivers of the global asset
management industry. Among these, risk and
cost have become paramount. Why?
Growth of assets under management (AUM)
continues to present a positive picture, given
global demographic and wealth trends, especially in the high-savings environment most
likely to experience sustained growth going forward. Despite the bright prospects, the battle for
market share will be at least as intense as it has
been in the past, and increasingly dependent on
distinctive and credible value propositions that
can be sustained over time.
Risk management is the second key factor in
safeguarding an asset managers performance
and survival. Legacies of the industrys failure
to protect client interests during the financial
turbulence of 2007-09 are still present in client behavior today. Nonetheless, risk management lessons have been learned and relearned
including difficult domains neglected in the past
such as sovereign risk, systemic risk, and reputational risk. There seems to be a much greater
commitment to consistent and persistent investment in risk control.
Along with the stiff competition for growth and
the demand for attention to risk comes the concern
about the cost-effectiveness of asset management.
As clients force downward pressure on fees while
at the same time asset managers are compelled to
reign in operational costs to remain profitable, cost
control and operational efficiency become critical elements of long-term viability. The impact of
information technology on cost control and risk
mitigation is the focus of this paper.
Given the problems of outperformance in terms of
consistent alpha generation, even in a high AUMgrowth environment, the importance of information- and transaction-system speed, accuracy and
cost is paramount. But exactly which systems are
out there and how they are performing is not easy
to discern. Much of the data that would allow
comparative analysis is proprietary and not readily
shared among firms. Other information is made

available in professional meetings, in trade publications, or anecdotally, which raises doubts as to
accuracy, completeness, and ability to generalize.
This study tries a different approach, made possible by modern search techniques. For this reason alone as well as key findings, the study is to
be recommended. In some cases it reinforces and
sharpens evidence that is already widely shared,
and in others it comes up with some surprises.
The study focuses on IT and specifically the role
of state-of-the-art integrated systems in creating
and reinforcing competitiveness in institutional
asset management. By inference, it highlights
the drawbacks of legacy systems and their degradation over time despite expert management
and maintenance.
The advantages of a single master data source,
leveraging the potential of automation, compressing error-correction requirements, limiting
operational risk, and adapting to new regulatory
requirements were not envisaged when legacy
systems were put in place. All these advantages
come through clearly in the content-search
reported in the study, and it seems likely that the
advantages will persist going forward.
Whether the issues are the pros and cons of outsourcing, or building a compelling business case
to finally replace a legacy system with a modern,
high-performance platform that assures autoadaptation into the indefinite future, this paper
provides valuable perspectives on industry views
and the conclusions that can be drawn from
them. It deserves careful reading and discussion
in the asset management industry.
Ingo Walter
September 2, 2013
President of
SimCorp StrategyLab
Mr. Ingo Walter,
Seymour Milstein
Professor of Finance at
the Leonard N. Stern
School of Business,
New York University.
EXECUTIVE SUMMARY
IS THERE A COMPELLING REASON TO

TALK ABOUT LEGACY SYSTEMS?
In the investment management industry and
related industries, the issue of legacy IT systems
is being talked about more often. The question
is whether the debate has merit or if legacy systems detractors are exaggerating the challenges
of using these systems. In financial services, trillions of dollars of client assets are managed on
core systems developed in the 1980s and 1990s.
Factors such as increased regulation, client
demand for transparency, real-time reporting,
and the ability to support and take advantage of
new growth opportunities have all put pressure
on IT infrastructure that was never designed to
cope with such challenges. One industry analyst put it this way: It (the 1980s) brought the
launch of Windows 1.0 and Apples Macintosh personal computer. It was also the time of Lady Gagas
birth. Windows, Apple and Lady Gaga have moved
on since then, but the securities accounting systems
remain pretty much the same. 1
Investment managers are increasingly confronted
with the decision of whether to continue augmenting outdated, heavily-customized legacy
infrastructure, make the move to a state-ofthe-art investment management system, or outsource. The consequences are real: for investment
management firms and their decision makers,
corporate and career viability are impacted by the
restrictions imposed by legacy systems, making
the issue a relevant one.
As part of its 2013 research program, SimCorp
StrategyLab examined the impact of legacy system
IT infrastructure on buy-side investment managers worldwide. To accomplish this, a meta-study
of analyst assessments, topical blogs/articles,
academic reports, and primary research sources
was made; over 100 sources have contributed to
the conclusions of the study. The vast majority of
sources are from 2012-2013.
For the purposes of the study, a legacy system is
defined as follows:
DEFINITION OF A
LEGACY SYSTEM
An investment management system that
is infrequently updated; and that is often
running on outdated, poorly-documented,
or obscure technologies; and that has difficulty in automating or adapting to business
processes as well as providing a real-time
consolidated overview of the business.
Similarly, a state-of-the-art investment management system is defined as:

DEFINITION OF A
STATE-OF-THE-ART SYSTEM
An investment management system that is
based on cutting-edge technologies; and that
is characterized by a high degree of automated
processes and workflows; and that is continuously updated and sufficiently flexible, adaptable, and scalable to deal with current and future
market requirements.
THE ROLE OF IT IN THE INVESTMENT

MANAGEMENT INDUSTRY
In order to appreciate the impact of legacy systems on investment management organizations,
it is useful to take a step back and assess the role
of IT in the investment management industry.
After all, recent studies indicate that financial
services firms spend on average 9% of revenue on
IT each year. 2, 3
In virtually all investment management institutions, IT operations play a critical role in supporting the business strategy and underpinning the companys competitive advantage. The
primary role of IT is to support the investment
management value chain; an example of the buyside investment management value chain and
the primary processes supported by each element
is given in Figure 1.
Value Chain
Data
Management
Client
Relationship
Management
Investment
Management
Investment
Controlling and
Performance
One means by which IT provides significant

value is that it facilitates the automation of most
processes, particularly in state-of-the-art systems that allow for seamless straight-throughprocessing. The impact of automation cannot be
understated. With the right IT solution, investment managers can now perform in seconds or
minutes what used to take days and even weeks.
Analyst, consultant, and influencer commentary
is unanimous: IT has become an indispensible
tool for any investment management firm and
often provides competitive advantage due to factors such as scalability without commensurate
cost increases, ability to adapt quickly to market
demands, and flexibility to enter new markets,
accommodate new asset classes and financial
instruments, support multiple accounting/tax
frameworks, and so on.
With respect to systems architecture, state-ofthe-art systems are built on a modular, objectoriented architecture that supports integration
with other system components, whereas many
legacy systems are built on fairly rigid, inflexible subroutines or functions that do not relate
to each other. In many cases, legacy systems are
also reliant on overnight batch jobs for updates.
The immediate difference between the two alternatives is that a fully integrated system has one
master data source, which greatly mitigates operational risk and errors arising from data consolidation issues, data cleaning, and so on. This is the
main impetus for the Big Data movement in the
industry, as investment managers seek to lower
their risk and provide transparent and timely
overviews of their business. On the other hand, a
Asset
Services
Investment
Accounting
Fund
Processing
General Ledger
Accounting
Reporting
Management
typical legacy infrastructure involves a number of

disparate data sources and a multitude of interfaces between the systems. With each new addon system, the level of complexity increases logarithmically, with new interfaces, data sources,
and upgrade issues to be considered.
Figure 1: Buy-side
investment management value chain.
Source: SimCorp
StrategyLab.
LEGACY SYSTEMS IN THE INVESTMENT MANAGEMENT INDUSTRY

Using various sources, the study set out to examine the depth and breadth of legacy systems in
the investment management industry. In general,
legacy systems products/vendors share several of
the following characteristics:
B
eing part of a portfolio of several diverse
products offered by the vendor, limiting the
development resources for a particular product line
Being included as part of a subsidiary which
may no longer serve as a core business for the
parent company
Continuing client and staff attrition; low client intent to repurchase
F lat or declining organic revenue growth,
particularly in software license revenues
Chronic underinvestment in research and
development when compared to industry peers.
When looking at the number of investment
management firms running on legacy systems,
a previous 2013 SimCorp StrategyLab report
on cost of operations2 combined with 2012
interviews of 500+ investment managers worldwide by Lindberg International showed that at
least one in four firms are running their core
1 Why Jamie Dimon

and Jon Corzine Couldnt
Find Their Money, Tom
Groenfeldt, January 24,
2013. Taken from http://
blogs.sap.com/innovation/
financial-management/
why-jamie-dimon-andjon-corzine-couldnt-findtheir-money-025710
2 Report on Global
Investment Management
Cost of Operations Survey
2013, SimCorp
StrategyLab,
March 2013.
3 Breakthrough in IT
Banking: McKinsey on
Business Technology,
Number 26, Spring 2012.
business operations on legacy systems. In terms

of IT employees, it can be argued that 30,000+
employees are tasked with legacy system maintenance and upgrade among the top 2,000
buy-side investment management firms alone.
While these firms are obviously not all running on legacy systems, given that the top 2,000
firms collectively manage upwards of US$80
trillion in assets more than the 2012 global
gross domestic product (GDP) it is easy to see
that several trillions of dollars are at the mercy
of legacy systems.
THE DANGERS OF LEGACY SYSTEMS

IN INVESTMENT MANAGEMENT
Clearly, there are many investment managers
dependent on legacy systems, and these systems
are not as efficient as state-of-the-art alternatives. But is this as big a problem as some might
suggest? After all, many investment managers
have been successful despite running on legacy
systems; their IT departments always seem to
find a way to cope with the latest challenges.
Nevertheless, with the pace of market and technological change at unprecedented levels, relentless pressure on operational costs, and cut-throat
competition for client mandates, a tipping point
could be near.
While not the all-consuming tsunami represented by the global financial crisis, the wide use
of legacy systems that were designed to meet the
needs of the previous century may ultimately precipitate a wave that could have the potential to
wipe out much of the recovery made since 2008.
The potential consequences are unpleasant: Loss
of confidence in the industry and its constituents, reputational risk implications for boards
and managements of affected firms, and diverse
operational issues that collectively could pose a
level of systematic risk to the stability of financial
markets as a whole.
Legacy system owners that fail to acknowledge
they are on a platform that can no longer keep up
with the pace of change (also defined as a burning platform) might concider assessing their
situation and understand the threats from various perspectives. The dangers of legacy systems
from the risk, cost, and growth perspectives are
examined below.
The risk perspective

The risk perspective is obvious. Since legacy
systems are unable to automate many standard
processes, manual processes are put into place to
compensate. The bulk of these processes involve
spreadsheet analysis, which inevitably leads to
errors. Spreadsheet errors were said to be the
main cause when J.P. Morgan lost US$6.2 billion in the London Whale incident in 2012,
and in 2010 Harvard University was forced to
adjust a GDP report when spreadsheet errors
provided misleading conclusions. Inadequate
or faulty systems can also create severe reputational risk and, in the worse case, destroy a
business. Recent examples of the former are the
Knight Capital incident, NASDAQs issues with
Facebooks IPO, and UBS loss of US$350 million due to a faulty trading system. The collapse
of MF Global, where company executives could
not find several billion dollars in client assets,
was attributed by bankruptcy trustee and ex-FBI
Director Louis Freeh to the companys failure to
decommission their hodgepodge of legacy systems and adopt more modern systems. As stated
in the Freeh report:
MF Globals collapse was abetted by, among other
things, managements failure to integrate or upgrade
its various technology systems and platforms for
monitoring Treasury Department operations,
liquidity risk, and financial regulatory functions.
These systems were left without proper controls...
[and] lacked the appropriate systems & technology to
conduct accurate liquidity monitoring & forecasting
across the global operation. 4
The key takeaway from various studies is that
operational risk is greatly reduced through utilization of (1) a highly automated investment management infrastructure drawing on (2) a single
source of data. Both of these points exacerbate
the weaknesses of legacy systems and the risks
associated with continuing to use them.
The cost perspective

Legacy systems have more significant cost implications the longer they are used. Aforementioned
2013 SimCorp StrategyLab2 assessment on the
cost of operations found that 56% of legacy system owners planned to increase IT budgets in
the next two years, with 23% increasing budgets by 5% or more, while 60% of state-of-the-art
systems owners planned to maintain or decrease

IT spend. In most cases, the increased spend on
legacy systems is earmarked toward simply keeping up as opposed to innovating.
When looking at the cost implications of legacy
systems in investment management, consulting
firm Deloitte framed the issue as such: A close
examination of how the old systems add cost shows
that it is through their need to access information
that the greatest effort is expended. Every existing
system maintains an interface that has to be updated
to account for every new addition. IT architects
draw up the organization as neat boxes in the hope of
creating a machine that operates with military precision. By the time that legacy systems add in their
exponential interfaces, the diagram looks less like a
military pageant and more like a civil riot. 5
As pointed out by various assessments from legacy system proponents, these systems are quite
cost-effective when all that is asked of them is
to perform the functions for which they were
originally designed. The problem is that over
time, the demands on the system far outweigh
its capabilities. Regulation, asset class coverage,
electronic trading, real-time reporting, and other
factors that were not envisaged at the time the
legacy systems were built have all caused costs
to spiral upwards. The extra costs are incurred as
a result of the manual processes, workarounds,
and ancillary systems put in place to address
evolving market conditions and business processes that the legacy systems lack the flexibility
and adaptability to cope with. Eventually legacy
system owners are faced with untenable cost
burdens.
Ultimately, as new market requirements, business
processes, and workflows continue to manifest
themselves and once-exotic financial instruments
become mainstream, the cost of maintaining and
augmenting legacy systems will be greater than
the cost involved in replacing them.
The growth perspective

One outcome of the financial crisis that everyone agrees on is that the level of competition in
the financial services industry has become more
intense. Investment managers must continue to
generate alpha while under pressure from all
sides: regulators curtailing growth opportunities
with a constant stream of new requirements,

clients pushing for a reduction in fees, fierce
competition for new mandates, and shareholders
and boards demanding lower costs and higher
profits.
Growth can be achieved in a variety of ways.
Common to each approach is the need for an IT
infrastructure that can support the firms growth
initiatives. The investment manager who is able
to get an overview in minutes with a mouse
click or two will be able to react in a much more
timely manner than the ones who wait hours and
even days for their team of spreadsheet analysts
and overnight batch jobs to provide the same
result. In an era where seconds can mean the difference between profit and loss, having the right
IT infrastructure is imperative.
As stated by consulting firm Deloitte in a 2013
review of the capital markets industry: In an
industry as competitive and dynamic as financial
services, any business that ceases to innovate ceases
to grow... These requirements (regulation and client
demand) should demand ongoing and significant
investment in information systems many of which
operate in a patchwork fashion over legacy infrastructures as well as a robust capability to parse
and analyze the underlying data. Firms should
confirm that they have the appropriate resources in
place to develop and enhance these mission-critical
systems. 6
Typically, legacy systems were not built to handle the unique needs of emerging markets, nor
the expansion of asset classes and the complex
processing requirements of instruments such
as derivatives. And to a wide extent they did
not make any provisions for the likes of DoddFrank, EMIR, AIFMD, UCITS, Solvency II,
and much more. This forces companies to add
more ancillary systems and interfaces to the
legacy system, thereby increasing complexity. It
stands to reason that investment management
firms relying on legacy systems are in a much
worse position to capture growth opportunities
than counterparts that are able to scale, adapt,
and automate as needed.
All three perspectives are summed up in this
quote from an editorial on legacy systems in the
Fall 2012 edition of Financial IT magazine: The
4 http://online.wsj.com/
public/resources/documents/
FreehReportonMFG.pdf
(March 2013).
5 Counting Cost:
Decommissioning Legacy,
Deloitte, 2012.
6 2013 Capital Markets
Outlook: Its the end of
the world as we know it,
Deloitte, December 2012.
7 Editors Letter,
Financial IT magazine,
Fall 2012 edition.
problems for the financial services sector that arise

from legacy systems have become critical at the same
time that the IT sector has become able to provide radical and positive solutions. The changes that will likely
take place in the field of financial services IT in the
next five years will be huge relative to those that have
taken place over the last 30 years. Financial services
institutions that make the substantial investment to
take advantage of the solutions that have just become
available will dramatically reduce business risk, lower
operating costs and enhance their ability to grow. 7
ALTERNATIVES TO LEGACY SYSTEMS

What are the alternatives to legacy systems and
how viable are they? There are two primary
options for investment management firms looking to get off the burning platform. For the purposes of this study, use of modern state-of-theart systems and outsourcing of IT operations are
discussed.
State-of-the-art investment
management systems
As with legacy systems, state-of-the-art systems/
vendors share several common characteristics, for
example, they:
l everage modern programming languages
and, in most cases, database types
h
ave 100+ development staff devoted to the
product line
h
ave a fairly limited number of products, in
some cases only a single product
f requently update with new versions
have investment management systems as the
core business of the company/subsidiary
a re adding clients, for the most part (particularly those that are parent companies).
When all is said and done, these are the type
of products that replace legacy systems when the
latter have reached the end of their useful life.
Outsourcing
Rather than face a decision on whether to augment or replace an existing system, some investment management firms opt for the outsourcing
route. In other words, they turn over investment
processing (and the risks entailed) to a third
party. This can be any or all of the following:
business process outsourcing (BPO), knowledge
process outsourcing, financial and accounting
outsourcing, and IT (hardware and infrastructure)

outsourcing.
While most analysts see outsourcing as the fastest growing deployment method going forward,
opinion is divided on the merits of outsourcing.
Cost savings are often countered by the loss of
control and the need for shadow accounting;
there is also evidence of companies that have
outsourced in the past looking to in-source again
in order to reduce costs. This seems paradoxical
given that the primary motivation of outsourcing is to reduce costs. There have also been some
widely publicized examples of outsourcing failures, such as UBS failure to stop a rogue trader
from creating 1.4 billion in trading losses,
largely due to flawed procedures on the part of
an outsourcing vendor. The regulatory authorities have also expressed their concerns about the
ramifications of outsourcing.
Note that if a legacy system owner outsources
various processes to an outsourcer that also runs
on legacy systems, they have merely exchanged
one set of problems for another. Thorough due
diligence is needed before any decision is made
to outsource ones core business operations to a
third party.
WHERE DOES DEVELOPMENT

GO FROM HERE?
In order to assess investment management firms
thoughts on future developments, Lindberg
International asked 500+ investment managers in 2012 about their IT infrastructure plans
going forward. Among the highlights:
E
nthusiasm for outsourcing is waning. Only
8% of investment managers surveyed said
they were strongly considering this option.
Despite the advantages of integrated systems over a collection of disparate systems,
there does not appear to be a shift away
from best-of-breed toward more integrated
alternatives.
In spite of the various issues identified in this
study, only one in six (17%) legacy system
owners are considering a system replacement
within the next two years.
Most industry analysts and consulting firms
release assessments on the general trends
impacting the industry on a frequent basis. There

is consensus on the following:
B
uy-side investment management firms need
to evaluate their IT infrastructure to ensure
it meets regulatory and client requirements.
As noted by KPMG: Indeed, for many firms, it
is proving to be a constant and pressing challenge
to update legacy platforms in order to adapt to this
ever-changing investment environment. 8
I nvestment management firms must prepare
to release new products as passive and alternative investment products encroach into the
active investment space.
Client demand and regulatory compliance
are the top technology investment drivers for
2013.
There is a clear shift toward multi-asset class
portfolio management systems.
The analysts and consultants also have a clear
viewpoint on legacy systems going forward, with
replacement being high on the agenda. CEB
TowerGroup offers the following: Replacing
legacy systems will soon become a fundamental
requirement for FSIs seeking to retain or to regain
marketplace leadership 9 while PricewaterhouseCoopers states: When the needs of the business
profoundly change, many support systems struggle to
adapt. Nowhere is this truer than in IT. We believe
that many of these struggles stem from IT functions
seeking future success with old ideas. 10
WHAT IS HOLDING THE

INDUSTRY BACK?
It seems to be clear that legacy systems are not
the way forward when it comes to resolving what
seems like the Gordian knot of issues facing
the industry. Even when the decision makers
at investment managers with legacy systems in
place have an epiphany and realize that something needs to be done, there is often an extreme
reluctance to replace the outdated legacy infrastructure with something more up to date.
There are a number of reasons for this reluctance,
both on operational and personal levels. On the
operational side, legacy systems are inextricably
intertwined, and turning off all or part of the
legacy system may have unforeseen and unintended consequences. Changes to legacy systems are often not completely documented and
new resources may not be familiar with older

programming languages and development techniques. Different parts of the system may have
been developed by separate teams using a variety
of programming languages and data formats,
leading to an extremely customized infrastructure
where a consolidated overview is at best difficult
to achieve. With the lack of documentation and
legacy programming expertise, decommissioning a legacy system must be very thoroughly
considered and planned accordingly. It is not a
simple process. Budget constraints and the time
and resources to put together a business case also
play a role. However, the decision maker must
also consider the fact that legacy systems put the
company in a situation where long-term corporate viability is an issue.
The human element also plays a role. Career
viability of individual persons can play as important a role in the decision as corporate viability.
Most IT decision makers, particularly if they
were involved in the decision to implement the
legacy system and its add-ons, are less inclined
to realize that a major overhaul of their systems
is necessary. Staff that maintain the system see
any new, automated system as a threat to their job
security, since automated processes could mean
job losses for those performing manual processes.
Fear and uncertainty only last for a short while;
there must be an ambition for improvement and
long-term viability before an investment management firm is compelled to act. It is human
nature to stick with what is known rather than
undertake a comprehensive system replacement.
These concerns are understandable: a system
replacement can be a daunting task. A lot of time
and resources are needed to select the appropriate
replacement system and implement it in parallel
with the decommissioning of legacy infrastructure. However, the alternative is worse; the cost
of doing nothing can end up being very expensive. In the absence of external factors, a stateof-the-art system will always put the investment
manager in a better position for innovation, risk
mitigation, and cost reduction than a legacy system. The litany of case studies on state-of-theart vendor and consultant websites concerning
benefits of legacy replacement provides ample
evidence of this fact.
8 Financial Services
Industry Insights, KPMG,
March 2013.
9 Sourcing, Resourcing, or
Outsourcing: Globalizing
Operations in Financial
Services by 2015, CEB
TowerGroup, July 2011.
10 Nine new rules of IT
Strategy for Asset Management, PricewaterhouseCoopers, October 2012.
10
CONCLUSION
This meta-study set out to answer the question:
Why is it relevant to talk about legacy systems?.
The quick answer is that legacy system owners
are putting their corporate viability in jeopardy
the longer they rely on infrastructure that was
not designed to meet current market conditions.
The wealth of evidence against continuing to use
legacy systems is overwhelming, and this study
provides a small sample of this evidence. The list
of reasons to get off of the burning platform that
legacy systems represent to the investment managers who use them is long. Legacy systems were
designed for simpler processes in an era where
the amount of data and knowledge was much
lower than it is today. An article in the Harvard
Business Review suggests that the amount of
knowledge doubles every four years.11 If a legacy
system is from the 1980s, 1990s or even the early
part of the 2000s, there is a lot of knowledge the
legacy system is unable to accommodate. Not to
mention regulation, new products, asset classes,
and instruments.
Another factor is the time required to implement the change. As Canadian composer Neil
Peart stated: If you choose not to decide, you still
have made a choice. The time frame from the initiation of the buying process to vendor selection
and ultimately going live in production on a new
system will take the better part of two years. As
anyone following the buy-side investment management industry can attest to, a lot can and will
happen in two years. Delaying the decision to
move off of legacy systems any longer will have
unforeseen and likely negative consequences.
11 The coming of knowledge-based business, Stan

Davis and Jim Botkin,
Harvard Business Review,
September-October 1994.
Among these consequences is the fact that competitors who can react much faster with less
resources, lower risk, and greater accuracy will
win the cost battle versus an investment manager
reliant on manual processes and an agglomeration of various systems. The competitors will also
seize growth opportunities, as they can introduce new products, efficiently comply with new
regulation and reporting requirements, as well
as satisfy client demand for transparency and
lower tolerance of risk. All of these factors add
up to a legacy-system-based investment manager
eventually losing its client base to better-placed
alternatives.
On a personal note, business and IT decision

makers also have a reputational risk to consider.
Think back a hundred years ago when the Titanic
was considered unsinkable. The officers on the
bridge were held liable for ignoring the obvious warning signs and vaingloriously sailing to
their doom; a parallel can easily be drawn when
it comes to retention of outdated legacy systems.
The investment manager should not look too hard
toward the legacy system vendor for assistance.
Most legacy system vendors have down-prioritized enhancements in these products for years,
preferring instead to cash in on the maintenance
revenue stream while minimizing investment in
the product.
At the end of the day, the corporate viability of
an investment manager using a legacy system can
and will be called into question. As the financial
crisis showed, no investment management firm
is too big to fail. Investment management firms
must decide if their current IT infrastructure
is capable of meeting their needs right now, let
alone in the future.
LEGACY SYSTEMS: THE INCONVENIENT TRUTH

AND THE COST OF DOING NOTHING
WHY IS IT RELEVANT TO TALK
ABOUT LEGACY SYSTEMS?
Is the legacy system debate much ado about
nothing or is there a deeper rationale behind
it? Many financial services institutions (FSI)
are running investment management systems
based on source code and business logic created
to match the market conditions of the 1980s and
1990s. As noted by analyst Tom Groenfeldt in a
blog on SAPs website: It (the 1980s) brought the
launch of Windows 1.0 and Apples Macintosh personal computer. It was also the time of Lady Gagas
birth. Windows, Apple and Lady Gaga have moved
on since then, but the securities accounting systems
remain pretty much the same. 1 As a reminder,
these are the same type of systems that caused
widespread trepidation among FSIs in the late
1990s as Y2K approached. That particular crisis was averted, but new crises and the resulting fallout have put investment management
firms under far greater scrutiny than even two
or three years ago.
Many investment management firms are
inclined to say so what? They have already made
workarounds and add-on solutions to get by in
the past and will do so again in future. Across all
industries, an IT Web article 2 cites studies from
Gartner stating that 60% of the worlds corporations are running on legacy infrastructures and
further cites an International Data Corporation
(IDC) study stating that there are 200 billion
lines of operational legacy code, with another
five billion added each year as new add-ons and
workarounds are created. Another blog article
on legacy systems states: These systems touch each
of our lives every day... They run all sectors of our
economy. They are our silent and occult crumbling
infrastructure. 3 The inference is that much of the
world is running on outdated technology and
that things will just get worse.
Is the situation really that dire? When looking
at the investment management industry, total
assets under management (AUM) are again at
pre-crisis levels and on the surface of things,
the industry is coping quite nicely. However, the
general consensus is that the unabated pace of

regulatory change coupled with far more stringent client demand for transparency and timely
reporting is stretching the capabilities of legacy
systems beyond the breaking point. Investment
management firms running on systems that are
not designed to accommodate continuous change
to established industry paradigms face an interesting choice: continue to develop workarounds
and add-ons to compensate for deficiencies in the
core investment management system (IMS) or
incur a certain degree of interim risk, cost, and
potential business disruption by replacing the old
IMS with a state-of-the-art solution.
This conundrum continue augmenting the outdated core system or make the move to a stateof-the-art solution capable of adapting to todays
market conditions and those of the future is
the focus of this study. The bottom line is that
a financial services institutions IMS solution
is either a catalyst for growth and competitive
advantage or a hindrance to each. For IT and
business leaders, the term legacy can be taken
in two contexts: one to describe the IT infrastructure and the other to describe the leaders
impact on the organization. In the investment
management world, the two are often inextricably linked. Delve into the study to see what
distinguishes a legacy system from state-of-theart alternatives as well as the ramifications of the
cost of doing nothing.
Methodology
This document is a meta-study of topical academic literature, industry analyst assessments,
other secondary research resources, and primary
research consisting of interviews with 500+
buy-side investment management institutions
worldwide. The aforementioned interviews were
conducted by market research firm Lindberg
International in 2012. All sources used are outlined in the bibliography at the end of the study.
Note that while the overwhelming majority of
the academic literature and analyst/blog opinion
on FSI legacy systems is focused on the banking
11
12
Value Chain
Data
Management
Figure 2: Buy-side
investment management value chain.
Source: SimCorp
StrategyLab.
Client
Relationship
Management
Investment
Management
Investment
Controlling and
Performance
Asset
Services
Investment
Accounting
sector, this study concentrates primarily on the

buy-side investment management segment of
financial services.
THE ROLE OF IT IN INVESTMENT

MANAGEMENT ORGANIZATIONS
Before embarking on an assessment of legacy
systems and their alternatives, it is useful to
set the scene with respect to the importance of
information technology (IT) in buy-side investment management organizations. As both the
financial markets and technology have evolved
over the past decades, IT has moved from an
ancillary function to a mission-critical component of the business. The role of IT in investment management organizations is described in
the following paragraphs.
From a budget point of view, IT operations
are a vital component. The 2013 SimCorp
StrategyLab cost of operations study 4 (survey was
conducted by The Nielsen Company in 2012)
shows that on average, IT budget spend consumes 9% of revenue. This is commensurate with
a 2012 McKinsey and Company 5 study showing the same 9% figure for financial services
institutions.
In virtually all investment management institutions, IT operations play a critical role in
supporting the business strategy and underpinning the companys competitive advantage. As
mentioned previously, an investment management organizations IT infrastructure is either
a catalyst for growth and differentiation or a
hindrance.
The primary role of IT is to support the buy-side
investment management value chain. One means
by which IT provides significant value is that
it facilitates the automation of most processes,
Fund
Processing
General Ledger
Accounting
Reporting
Management
particularly in state-of-the-art systems that allow

for seamless straight-through-processing. The
impact of automation cannot be understated.
With the right IT solution investment managers
can now perform in seconds or minutes what used
to take days and even weeks. Analyst, consultant,
and influencer commentary is virtually unanimous: IT has become an indispensible tool for
any investment management firm and often provides competitive advantage due to factors such as
scalability without commensurate cost increases,
ability to adapt quickly to market demands and
flexibility to enter new markets, accommodate new
asset classes and financial instruments, support
multiple accounting/tax frameworks, and so on.
An example of the buy-side investment management value chain and the primary processes supported by each element is given in Figure 2.
From a systems architecture point of view, legacy
systems tend to be fairly rigid constructs, with
little flexibility for expansion or integration. In
many cases, legacy systems are also reliant on
overnight batch jobs for updates. Integration
is typically achieved by means of interfaces
between any number of products, data formats,
and programming languages.
The difference is exemplified when comparing Figure 3 and Figure 4, the first of which is
a diagram of an integrated buy-side investment
management system from SimCorp StrategyLab
(Cap Gemini 6 also provides a useful diagram of
an integrated investment management system
in their 2011 New Age Portfolio Management
Systems assessment) and the second an example
of a legacy system infrastructure from a study
of legacy systems by St. Andrews University 7 in
Scotland.
Full Integration Between Components Single Data Source

Front Office
Middle Office
Back Office
Portfolio Modelling and Analysis
Performance Measurement
Investment Accounting
Order Management
Performance Attribution
Fund Accounting
Client Reporting
Risk Analysis
Match and Settlement
Pre-trade Compliance
Risk Modelling
Cash and Securities Management
Post-trade Compliance
Corporate Actions
Collateral Management
Book of Records (IBOR, ABOR)

Market Data: Access to market data
Master Data Management
TECHNOLOGY PLATFORM AND INFRASTRUCTURE
Figure 3: Example of a truly integrated investment management system. Source: SimCorp StrategyLab analysis.
Program 1
File 1
Program 4
Program 2
File 2
File 3
Program 5
Program 3
File 4
Program 6
File 5
File 6
Program 7
Figure 4: Example of legacy application system infrastructure. Source: Legacy Systems, Dr. Ian Somerville, St. Andrews
University, 2000.
13
14
The immediate difference between the two

alternatives is that the truly integrated system
has one master data source, which greatly mitigates operational risk and errors arising from
data consolidation issues, data cleaning, and so
on. This is the main impetus for the Big Data
movement in the industry as investment managers seek to lower their risk and provide transparent and timely overviews of their business.
As shown above, a typical legacy infrastructure
involves a number of disparate data sources and
a multitude of interfaces between the systems.
With each new add-on system, the level of
complexity increases logarithmically, with new
interfaces, data sources, and upgrade issues to be
considered.
In a separate report, PricewaterhouseCoopers
(PwC) outlined the Big Data issue as follows:
One problem many managers are encountering is
that they have multiple legacy systems, often with
different technology platforms, to collect and disseminate information. Gathering the data as needed
out of such legacy systems can be inefficient and is
typically not subject to scalable enhancements. Some
data systems, especially those that record transactions
related to complex derivatives products, entail manual entries or workaround products. 8
Succinctly stated, it would behove investment
managers to obtain and maintain the infrastructure required to cope with the frenetic pace of
new requirements imposed by clients, regulators,
and the markets. More than likely, gone are the
days when manual workarounds or similar can
meet the needs for scalability, adaptability, transparency, and more.
LEGACY SYSTEMS VERSUS

STATE-OF-THE-ART SYSTEMS
As this report is focused on legacy systems and
the ramifications of using these, it is worthwhile
to define exactly what is meant when referring to
a legacy system and its alternatives.
Broadly speaking, investment management systems can be categorized as having legacy characteristics, state-of-the-art characteristics, or
a blend of both. For the purposes of this study,
emphasis will be placed on legacy systems as
opposed to state-of-the-art systems.
What is a legacy system?

There are any number of definitions of a legacy
system, both within the financial services sector and other industries. A Google search for a
definition of legacy systems within the search
results for financial services yields close to
200,000 hits. For the purposes of this study,
commonly used definitions have been distilled to
provide a concise definition of legacy systems as
they pertain to the buy-side sector of the investment management industry.
Commonly used definitions

When evaluating the depth and breadth of
information on legacy systems, some definitions
emerge as ubiquitous. From a software vendor
perspective, IBM offers the following definition:
Legacy refers to existing IT assets that have been
deployed in the past. These assets could have been
installed anywhere from yesterday to twenty years
ago, and in many cases, the legacy investment is running critical business processes. Legacy software and
applications are often considered to be a cash cow
for the enterprise, generating unusually high profit
margins and thus, are responsible for a large amount
of a companys operating profit. This profit typically
far exceeds the amount necessary to maintain the
legacy asset, and the excess is sometimes used by the
company to fund other strategic initiatives. In addition, legacy software or applications may have come
into the enterprise as a result of a merger or acquisition. In many cases, the people responsible for development and management of the application are no
longer responsible for its life cycle. 9
Legacy systems suffer from

declining client bases and low
client intent to repurchase,
and often run on obscure,
outdated technologies.
From a software/systems perspective, there are

common elements when reviewing the definitions
put forth by the academic community, industry

analysts, vendors, and the blogosphere. These
include:
S
ystems that have been designed, implemented, and installed in a radically different
environment than that imposed by the current IT strategy. 10
S
ystems that run on obscure programming
languages and/or databases.
As a result of the above, systems where qualified development resources are scarce and in
many cases expensive.
S
ystems that were typically developed several
years ago (and have not undergone a significant re-architecting since). In some cases, the
systems have been developed more than 20
years ago.
Systems where the myriad of changes made
since initial implementation are not completely documented, particularly in the case
of proprietary systems or extensively customized off the shelf systems.
When observing systems/vendors that apply to
these definitions, we can conclude that these
share several of the following characteristics:
B
eing part of a portfolio of several diverse
products, limiting the development resources
for a particular product line
B
eing included as part of a subsidiary which
may no longer serve as the core business for
the vendor and its parent
Suffering from client and staff attrition
G
enerating flat or declining organic license
revenue growth
Receiving chronic underinvestment in research
and development compared to industry peers.
The definition used throughout

the study
In addition to the above traits, there are certain
nuances to consider when applying the designation legacy system to software solutions designed
to serve buy-side investment managers. The most
pertinent of these is the lack of flexibility/adaptability (which drives the need for manual workarounds in response to change), client attrition,
and minimal ongoing investment in research
and development (R&D).
With these factors in mind, this study defines a

legacy system as follows:
infrequently updated; and that is often running
on outdated, poorly-documented, or obscure
technologies; and that has difficulty in automating or adapting to business processes as well
as providing a real-time consolidated overview
of the business.
For the most part, legacy systems are centered
around the back office.
The typical business model of a

legacy system vendor
In general, a legacy vendor follows a cash cow
business model. In brief, they acquire products
with a mature client base from other vendors and
are able to earn substantially higher profits from
revenue streams such as maintenance. Profitability
is increased when costs such as research and
development (R&D) are minimized, although
such a strategy tends to result in client attrition,
as the systems eventually no longer meet market requirements. A legacy vendor often ends up
with a portfolio of disparate products running
on a variety of technologies and programming
languages, with varying levels of integration
between the products.
Legacy system vendors

increase profits by drawing
on client bases for maintenance revenue while
underinvesting in R&D.
In other cases, former flagship products are put

into cash cow mode as the vendor decides to
focus its core efforts into another industry segment or product line. The common characteristic of legacy vendors is that they generate most
of their revenue/profit from maintenance and
related services and, when compared to their
peers in the industry, underinvest in R&D.
15
16
Many in-house built solutions are

also legacy systems
Legacy systems also include many in-house/proprietary systems. These systems were typically
developed several years ago for a specific purpose
or process. As processes have evolved, add-ons,
workarounds, and system expansions have been
made, often resulting in an unwieldy infrastructure asked to do far more than the original design
intended. An added complexity is that many of
the changes are not completely documented,
making it difficult for new IT staff to familiarize
themselves with the system. Depending on when
the in-house solution was first built, the impending retirement of those who originally developed
the solution also looms as an issue, particularly
if obscure programming languages and databases
are deployed. In the case of in-house systems,
the business needs to ask itself if scarce resources
are better allocated to its core competency of
alpha generation as opposed to maintenance and
updates of proprietary IT systems.
WHAT IS A STATE-OF-THE-ART
SYSTEM?
While a Google search for a definition
of legacy systems within the search results
for financial services yields close to 200,000
hits a related search for definition of state-ofthe-art systems also within the search results
for financial services comes back with one
million hits; and adding the term buy-side
reduces the number to 65,000. The takeaway
is that there are a large number of mentions of
state-of-the-art systems, even when narrowed
down to the buy side.
State-of-the-art systems vendors share several of
the following characteristics:
Leverage modern programming languages
and, in most cases, database types
H
ave 100+ development staff devoted to the
product line
H
ave a fairly limited number of products, in
some cases only a single product
F
requently update with new versions
Have investment management systems as the
core business of the company/subsidiary
A re continuously adding clients, for the
most part (particularly those that are parent companies).
When all is said and done, these are the type

of products that replace legacy systems when the
latter have reached the end of their useful life.
The definition used throughout

the study
A state-of-the-art system is basically the opposite of a legacy system. A state-of-the-art system
is based on modern, widely available programming languages and databases, architected using
a modular structure and a minimum of disparate
data sources, and is a system that is continuously
updated to meet market requirements. For all
intents and purposes, a state-of-the-art investment management system is:
based on cutting-edge technologies; and that
is characterized by a high degree of automated
processes and workflows; and that is continuously updated and sufficiently flexible, adaptable, and scalable to deal with current and future
market requirements.
The typical business model of a

state-of-the-art system vendor
A state-of-the-art system vendor will have a
relatively small number of products (or families
of products), each of which receives appreciable development resources and R&D budget.
In general, state-of-the-art system vendors put
at least 15%-20% of annual revenue back into
product development and release new versions
of their products on a frequent basis. State-ofthe-art vendors tend to differentiate themselves
by providing functional superiority coupled with
a high degree of automation. For those vendors
that support multiple components of the buyside investment management value chain (i.e.
the front, middle and back office), a key element
of the business model is the level of integration
between functional components (e.g. the middle and back office) and the single source of data
used throughout the application.
The most comprehensive state-of-the-art systems offer front-to-back (enterprise) capability,
although this is not a pre-requisite for state-ofthe-art status. The distinguishing characteristic
of state-of-the-art vendors is the leveraging of
technology to quickly adjust/scale to meet the
fluctuating requirements of clients, regulators, and
Vendor
Product
IMS Products
Offered
by Vendor*
2012 R&D
Spend as %
of Revenue
Programming
Language(s)
Database(s)
Supported
Clients
in 2009
Advent
Geneva
19%
C#,C++, .net
Proprietary
24211
~30012
Calypso
Calypso
n/a
Java
Oracle,
Sybase
11014
DST
HiPortfolio
15% in
201017
Cobol, C++
CTree,
Pervasive
Eagle
Star
n/a
C,C++, .net
Misys Sophis
VALUE
n/a
SimCorp
SimCorp
Dimension
SS&C
Pacer
SS&C****
(Thomson)
Clients
in 2012
Product
Staff
Client
Consider to
Repurchase**6
1100***13
78%
12515
70016
n/a
19118
130+19
550***20
38%
Oracle,
MS SQL
n/a
14421
500***22
92%
.net
Oracle
8023
9024
350400***25
n/a
22%
C#, C++, APL
Oracle
150+26
18027
110028
81%
60+
9%
Fortran, C,
Visual Basic
Proprietary
12029
n/a
1484***30
56%***
Portia
60+
9%
C++, .net,
ActiveX
MS SQL,
Sybase
300+31
200+32
14033
48%
SunGard
Asset Arena
GP3
50+
12%
Python,
C++, L4G
Oracle,
Sybase
n/a
n/a
18034
47%***
SunGard
Asset Arena
Invest One
50+
12%
Cobol, Java
IBM DB2,
Oracle
n/a
n/a
n/a
47%***
* Based on review of vendor websites, May 2013. Refers to distinct investment management system product lines as opposed to components thereof.
** Respondents were asked which systems they would consider for their next core system purchase. Consider to repurchase expressed as the percent of clients of a given
product that would consider the incumbent system again.
*** Refers to all products provided by the vendor.
**** SS&C acquired Portia from Thomson Reuters in May 2012.
the market with a minimum of manual processing

required. Unlike their legacy brethren, state-ofthe-art vendors are adept at gaining new clients
while holding on to the ones they already have.
LEADING INVESTMENT MANAGEMENT SYSTEMS AND KEY

CHARACTERISTICS
In order to compare and contrast the leading
buy-side investment management solutions
globally, a variety of sources were consulted,
including company websites and financial filings, press releases, independent analyst reports,
and primary research conducted by Lindberg
International in 2012. All sources used are
detailed in the bibliography at the end of the
report. For the sake of brevity, the list of products shown in Table 1 was selected based on the
following criteria:
P
resent (client base) in at least two of the
regions Europe, Asia, and North America
Clients in at least two of the following sectors: fund management, insurance asset
management, pension fund management,
and discretionary asset management
At least 50 clients on the given solution
At least one-third of the client base is buyside focused
Capable of basic back office functions such
as portfolio accounting
The product is targeted primarily towards
clients with at least US$1 billion AUM,
preferably higher.
This results in ten products offered by eight
vendors as shown in Table 1. Note that this list
is meant to be indicative rather than exhaustive. A brief description of each product follows the table.
Table 1. Leading
investment management systems and key
characteristics.
17
18
Note that Table 1 and the subsequent analysis are confined to specific product lines and
do not imply that any other products offered
by the vendors share similar characteristics.
In addition to vendor websites, the information below drawn from independent sources
(including analyst reports and primary
research) reflects the status as of when various
reports were published, and may not necessarily reflect metrics as of September 2013, when
this report is published.
Advent Geneva
Targeted primarily toward hedge funds, Advent
Geneva has added roughly 50-60 clients since
2009. Advent Geneva caters to clients from
under US$1 billion AUM to Fortune 500 companies. Over 100 developers support Advent
Geneva. Advent Geneva is part of a relatively
concentrated portfolio of products, with broad
back office functional coverage. Advent spends
almost 20% of revenue on R&D, covering seven
major product lines. For the most part, serving buy-side investment managers is Advents
core business. Most of Advents client base is
in North America, where the company is based
(California, USA).
about 550 employees in DST Global Solutions.

The percentage who are R&D staff is not public.
Eagle Star
Eagle Investment Systems is a subsidiary of Bank
of New York Mellon (BNY Mellon). Their primary products are Eagle STAR (buy-side back
office system), Eagle Access (SaaS-based buy-side
back office system), and Eagle PACE (data warehouse and analytics). Eagle STAR client numbers are fairly stagnant, although Eagles Access
product line has made good progress in recent
years. Over 100 developers are devoted to the
STAR product. Eagle is predominantly in North
America and to a smaller degree in other Englishspeaking markets. Clients come from various
industry segments.
Misys Sophis VALUE

Sophis was acquired by Misys plc in late 2010,
which was in turn acquired by venture capital
fund Vista Equity Partners in June 2012. Sophis
VALUE is the companys buy-side product line.
Sophis is based in France, with the majority of
clients in Europe. Roughly 150 developers work
on Sophis products, which include RISQUE for
the sell side and the iSophis SaaS-based solution.
Calypso
SimCorp Dimension
Calypso offers a product of the same name, both

to the buy side and sell side. The company itself
is based in California, USA and is privately held.
About a third of the client base is buy-side clients.
Calypsos strength is in derivatives processing, the
primary focus area for the company. Calypso has
made modest gains in its client numbers, adding
about 15 total over the past three years. Calypso
has about 200 developers working on the product.
Calypso offers a front-to-back solution with the
bulk of clients in North America.
SimCorp is a publicly-traded company based

in Copenhagen, Denmark. The company offers
one product, SimCorp Dimension, which is
exclusively targeted toward buy-side investment managers, typically with AUM of 15
billion or more. Key industry segments served
are investment funds, discretionary asset management, insurance, and pension. SimCorp
spends 20%+ of revenue on R&D every year on
SimCorp Dimension and employs 400 developers for the SimCorp Dimension product.
Most clients are in Europe although there is a
significant and growing client base in both the
North American and Asian markets.
DST HiPortfolio
HiPortfolio is the flagship product of DST Global
Solutions, a subsidiary within the financial services and healthcare division of US-based DST
Systems Inc. Since the parent company does
not split out R&D budgets for products, it is
uncertain how much DST spends on R&D.
Most clients are in Europe and Asia. In 2010,
DST Global Solutions had 1,100 employees
and just over 100 developers. According to its
Wikipedia page (May 2013), the company has
SS&C Pacer
This was a product acquired from vendor FMC
in the mid-2000s. The product was architected
in 1978, with web enablement in 2007. Based
on their 2011 form 10-K filing with the US
Securities and Exchange Commission, 35 SS&C
indicated that the company had about 250 development staff to support SS&Cs 60+ products; it
was not indicated how many of these were dedicated to the Pacer product line (the 2012 10-K
states 528 R&D employees; the difference is primarily due to the GlobeOp acquisition in 2012).
Similarly, SS&C has one of the lowest R&D
spend rates (as a percentage of revenue) in the
industry, consistently spending less than 10% of
revenue on R&D. 36
SS&C (Thomson) Portia

SS&C acquired Portia from Thomson Reuters in
mid-2012. Comparing press releases from 2010
and 2012 shows that the client base (300+ to
200+), AUM managed (US$15 trillion to US$10
trillion), countries with clients (45 to 40) and
employees dedicated to the product (150+ to 140)
have all suffered a degree of attrition. Thomson
released version 10.0 of Portia in September
2009; version 11.0 came out in September 2011;
and SS&C released a new version of Portia in
April 2013. It is unclear how many of the 140
employees are in R&D functions. In addition, SS&Cs recent US$900m acquisition of
GlobeOp and some smaller acquisitions of
third-party fund administrators could indicate
the company is diversifying its core business to
include fund services as well as software.
SunGard GP3
SunGard GP3, also known as Asset Arena
GP3 Edition, has been in the SunGard product portfolio for at least the past 10 years (first
mention of the product is in SunGards 2002
10-K annual report filing to the US Securities
and Exchange Commission). 37 SunGard is a
US-based privately owned company with interests in a number of industries, most notably the
public sector, education, availability services,
and financial services. The GP3 product is one
of over 50 financial services software products
offered by SunGard. As with SS&C, much of
SunGards product portfolio was generated by
acquisition. There are no figures with respect to
R&D by product line; Sungards 2012 annual
report states that 12% of financial services revenue is allocated to R&D.
SunGard Invest One

SunGard Invest One, also known as Asset Arena
Invest One or simply Asset Arena, is Sungards
flagship product, sold primarily in English
speaking markets. Invest One has clients in each
of North America, Europe, and Asia-Pacific. The

product caters to both third-party administrators (TPA) and asset managers/funds. Sungard
does not make public the number of employees
or developers working on the Asset Arena Invest
One product line.
THE EXTENT OF LEGACY SYSTEMS

IN THE GLOBAL BUY-SIDE INVESTMENT MANAGEMENT INDUSTRY
With the importance of IT infrastructure
articulated, legacy and state-of-the-art systems
defined and several key vendors profiled, the
next step is to determine to what degree legacy systems permeate the industry. To accomplish this, the report first calculates the global
assets under management (AUM), the number
of firms and employees serving the investment
management industry, and finally the extent
of legacy systems in the industry. These factors
are combined to estimate the scope of legacy
systems with respect to IT personnel resourcesdeployed and AUM managed by firms running
these systems.
Assets under management

The size of the global investment management
industry expressed as assets under management
(AUM) varies depending on the source consulted. McKinsey and Company pegs the 2012
AUM of the global asset management industry
at 38 trillion, 38 similar to the results of a study
(roughly 42 trillion) 39 by the European Fund
and Asset Management Association (EFAMA),
while another study by TheCityUK 40 puts the
AUM for funds alone (insurance, pension and
mutual funds) at US$84 trillion and the overall market at US$120 trillion. There are several
other studies with amounts varying from 40
trillion (US$50 trillion) all the way up to 120
trillion (US$150 trillion).
While determining the size of the global investment management market is a matter of methodology and preference, a useful proxy is provided by
TheCityUK report, which itself draws on a number of independent sources. As mentioned above,
conventional investment management assets
accounted for US$84 trillion in 2012 while alternative assets (sovereign wealth, exchange traded
funds, hedge funds, private equity, and private
wealth) make up the remaining US$36 trillion.
19
20
Average Number of FTEs per US$1bn in AUM

Region
Assets under Management (AUM)
Overall
North
America
EMEA
Asia
Less than
US$1bn
US$1bn
US$5bn
US$5bn
US$10bn
More than
US$10bn
Front Office
11.12
7.28
9.81
22.75
27.03
8.06
6.01
4.50
Back Office*
13.03
8.20
9.50
31.04
32.75
8.02
9.29
4.61
1.17
1.13
0.97
1.36
1.21
1.00
1.55
1.02
Functional Area
Ratio Back-to-Front
By Strategy
Functional Area
Quantitative
Equity
Long/Short
Fixed Income/
Credit
Global Macro
Distressed
Securities
Ratio Back-to-Front
1.10
1.18
1.25
1.26
1.34
*Back office includes: Back and middle office, risk management, and legal and compliance functions.
Table 2. Average
number of full-time
employees (FTE) per
US$1 billion in AUM.
Source: Global Hedge
Fund and Investor
Survey 2012, Ernst &
Young.
In terms of industry sector, the report estimates

that:
I nsurance asset management accounts for
about US$25 trillion AUM. According to the
Insurance Investment Institute, 41 American
insurers managed US$7 trillion in 2012 while
Insurance Europe 42 estimates European
insurers managed 7.5 trillion (US$9 trillion)
in 2010.
M
utual funds collectively managed US$24
trillion in 2012, as corroborated by the
Investment Company Institute. 43
Pension funds worldwide managed approx imately US$35 trillion in 2012. This is
consistent with a 2012 Towers Watson report
estimating that pension funds in major markets managed US$28 trillion in 2011.44
In terms of sovereign wealth, TheCityUK
and Sovereign Wealth Institute 45 estimate
2012 AUM at US$5.2 trillion, an increase by
8% from 2011. Sovereign wealth funds have
been steadily increasing in terms of AUM
each year since 2002, with the exception
of 2008 to 2009. Almost 80% of sovereign
wealth fund AUM is managed in Asia and
the Middle East.
On an overall basis, there is a fairly clear growth
pattern irrespective of absolute AUM figures,
methodology used, and so on. Global AUM
grew steadily from 2003 to 2007, where the

financial crisis caused global AUM to drop in
2008. It is only in 2011/2012 that AUM is again
at or near 2007 levels. To put the US$84 trillion
in conventional investment management assets
managed into perspective, the IMF estimates
that the 2012 global GDP from all countries
worldwide is US$72 trillion.46
Number of firms and employees

Another question that arises is how many firms
are managing the vast pool of AUM? There are
tens of thousands of fund companies, insurance
asset managers, pension funds, discretionary
asset managers, and other alternative investment
managers serving millions of clients. According
to Towers Watson, 47, 48 the top 500 investment
managers (asset management and pension) had
$74 trillion AUM in 2011, or just under twothirds of global AUM. The top 100 group alone
manages over US$50 trillion. It is therefore likely
that at least 75%-80% of global AUM is controlled by the top 2,000 investment management
firms worldwide.
In terms of employees, according to a 2012
Ernst & Young report, 49 hedge funds with over
$1 billion in AUM have about 10-15 employees
per billion dollars AUM (complete breakdown
shown above in Table 2). While there are almost
10,000 hedge funds worldwide, an Ernst &
21
The United States Has The Worlds Largest Mutual Fund Market
Percentage of total net assets, year-end 2011

8%
Other
Americas
13%
African and
Asia/Pacific
49%
United States
30%
Europe
Total worldwide mutual fund assets:

$23.8 trillion
Young survey of 100 hedge funds accounted for

US$700 billion AUM. According to the Hedge
Fund Journal, 50 there were 35 US hedge funds
with over $10 billion in AUM. These companies
alone account for over US$500 billion in AUM,
indicating most of the larger hedge funds worldwide are in the US. Doing the math shows that
5,000 employees are working with the largest
hedge fund organizations.
In the US market, the 2012 Investment
Company Institute (ICI) Factbook 51 shows that
in 2011, there were 16,500 fund companies and
159,000 employees managing US$11.6 trillion in
AUM (the same source puts global fund AUM at
US$23.8 trillion). A breakdown of fund AUM is
shown in Figure 5.
Extrapolating the US numbers to the rest of the
world gives roughly 13 employees for every billion managed. This is consistent with the Ernst &
Young data showing that the average number of
employees per billion AUM is around 10-15 for
firms managing US$1 billion or more.
Other than a 2012 EFAMA study 52 stating that
there are 85,000 employees at asset managers in
Europe, there are no distinct studies showing the
number of employees specifically for the discretionary asset management segment or the insurance asset management segment. Using the figure
33
Domestic equity funds
12
World equity funds
25
Bond funds
23
Money market funds
Hybrid funds
Total US mutual fund assets:

$11.6 trillion
of 13 employees per billion managed in the fund

segment, and applying it to the $49 trillion AUM
in 2012 from the fund and insurance segments it
can be argued that over 600,000 employees are
working at these firms.
On the pension fund side, there is also a paucity of information concerning the number of
employees working at these funds. Applying the
same 13 employee per billion to the US$34 trillion managed by pension fund managers would
suggest that there are approximately 400,000
employees.
On an overall basis, it can be argued that there
are more than one million people employed by
investment managers worldwide managing more
than the monetary equivalent of the worlds
GDP in 2012. Based on findings from the 2013
SimCorp StrategyLab cost of operations study, 53
an average of 13% of all employees at investment management firms are employed in the IT
department, suggesting about 130,000140,000
IT employees in total.
The extent of legacy systems in

the industry
So how widespread is the use of legacy systems in
the industry? There is plenty of literature available on banking/sell-side systems but little on the
buy side. To investigate this issue among others,
Figure 5: ICI geographical breakdown

of mutual fund assets,
end 2011. Source:
Investment Company
Institute http:
//www.ici.org/
pdf/2012_factbook.pdf
22
Roughly one in four buyside investment managers

are running their core
business processes on
legacy systems.
Lindberg International conducted a 2012 survey of 500+ buy-side investment managers in 16

countries in Europe, North America, Australia,
Hong Kong, and Singapore. The respondents
were business or IT decision makers from buyside investment managers specializing in one or
more of the fund management, insurance asset
management, pension fund, and discretionary
asset management segments with 2011 AUM of
at least 5 billion.
The 2012 Lindberg International survey 54 shows
that more than 25% of respondents are using
investment management systems that exhibit
several legacy system characteristics as described
earlier. A SimCorp StrategyLab study 55 (in
cooperation with The Nielsen Company) on the
cost of operations released earlier in 2013, where
a survey of 125 buy-side investment management
IT/operations decision makers showed that about
40% were running on legacy systems.
It is therefore likely that at least one in four
buy-side investment managers are running their
core business operations on legacy systems. As
established earlier, there are probably 130,000
140,000 employees serving in IT functions at
investment managers worldwide. This means
that at these firms alone, there are upwards of
30,000 employees whose primary functions
are to maintain and augment legacy system
infrastructure.
Legacy system impacts industry

feedback
As investment managers uncover the deficiencies of their legacy systems, particularly when
changes to existing workflows/processes are
required, various add-ons and workarounds
are imposed. This exponentially increases the
complexity of the IT infrastructure and makes

any changes difficult, as there are a number of
data sources and product interfaces to consider.
In short, legacy systems create a series of problems and erode competitive advantage. This contention is corroborated by recent feedback from
investment managers. As witnessed by a 2012
Ovum survey of 65 banking/investment management executives in Europe: 56
7 5% are still using outdated core banking
systems, affecting their ability to accelerate
growth.
80% said that outdated core banking systems
were causing them to struggle to bring new
products to market quickly.
75% face difficulties getting access to timely
data, and close to two-thirds feel that existing
systems do not support regulatory change.
55% are focusing on increasing wallet share
within the existing client base, with only
20% trying to achieve growth through new
customer acquisition.
79% said that the complexity of IT, combined with insufficient expertise within the
business, was a major barrier to core system
replacement.
This is corroborated by 2012 polls of investment
managers in the North American market, where:
Half of the 75 buy-side executives polled
indicated that their current systems could
not support the launch of new products in a
timely fashion. 57
4 0% could not support all major asset classes
in one portfolio accounting system. 58
56% of 100 buy-side executives polled believed
that their current systems could not accurately
record all of the events in the transaction
lifecycle. 59
45% of firms have accounting systems that
cannot support the entire book of business. 60
63% of firms regularly experience data reconciliation errors. 61
4 0% of respondents are not confident that
the data received from disparate systems is of
sufficient and consistent quality.
22% of firms state it takes several days to
determine exposures/performance of all holdings while 8% stated it would take weeks. 62
Those firms that are suffering from issues like

the ones named above will likely have trouble
seizing competitive advantage and ultimately
retaining their current customer base versus
those who are focusing on their core competency alpha generation rather than diverting
time and resources to overcome the deficiencies
of their IT infrastructure.
THE DANGERS OF LEGACY SYSTEMS

IN INVESTMENT MANAGEMENT
When the discussion about legacy systems
starts up, one might be inclined to ask: What
is all the fuss about? After all, many investment managers have been successful despite
running on legacy systems; the IT department
always seems to find a way to cope with the latest challenges. Nevertheless, with the pace of
change at unprecedented levels, relentless pressure on operational costs, and cut-throat competition for client mandates, a tipping point
could appear to be near.
If use of legacy systems continues unabated, the
impacts are likely to reach beyond individual
companies and affect the industry as a whole.
It is generally agreed that the global financial
crisis (GFC) of 2008 and beyond was spawned
by a combination of dubious business practices,
inadequate regulatory oversight and control,
lack of transparency, and a far greater tolerance of risk than could reasonably be expected.
These facts are known, and since the GFC,
regulators have been focused on imposing
regulations, controls, and sanctions to ensure
that the crisis does not repeat itself. In parallel,
investors are demanding far greater degrees of
transparency and risk control, which combined
with regulation and other market forces compel investment management firms to change
the way they do business.
But what if these measures are not enough?
While not the all-consuming tsunami represented by the GFC, the wide use of legacy systems
that were designed to meet the needs of the previous century may ultimately precipitate a wave
that could have the potential to wipe out much
of the recovery made since 2008. The potential
consequences are unpleasant: Loss of confidence
in the industry and its constituents, reputational
risk implications for boards and managements of

affected firms, and diverse operational issues that
collectively could pose a level of systematic risk to
the stability of financial markets as a whole.
To borrow from a Tom Clancy book of the
same name, the use of legacy systems presents
a clear and present danger to the financial
services industry. Taking its point of departure from actual examples coupled with expert
opinion, this section examines the danger of
legacy systems from the risk, cost, and growth
perspectives.
The risk perspective

The operational risk perspective is obvious. As
legacy systems are unable to automate many
standard processes, manual processes are put
into place to compensate. The bulk of these
processes involves spreadsheet analysis, which
inevitably leads to errors. In fact, a meta-study
of spreadsheet error rates cited in the April 13,
2013 Marketwatch section of the Wall Street
Journal determined that 88% of spreadsheets had
some form of error in them. 63 Even the hallowed
halls of ivy are not immune: A widely-cited 2010
treatise on GDP and public debt ratios from
Harvard University was found to have reached
erroneous conclusions due to a calculation mistake in one of the spreadsheets.
With error rates at this level, the operational risk
associated with manual spreadsheet analysis is
beyond prohibitive, particularly when analysts
are under time pressure to deliver the figures
needed by internal and external stakeholders.
One example is J.P. Morgan: The US$6.2 billion
loss incurred as part of the London Whale incident in 2012 is attributed in large part to an error
in one of their Value at Risk (VaR) spreadsheet
models and failure to automate processes as recommended. 64, 65
Indeterminable discussions and analyses have
been made concerning the failures of Lehman
Brothers and Bear Sterns in 2008, including the
fact that many buy-side institutions took weeks
to determine their counterparty and related
exposures as a result of these failures. Other
high-profile failures attributed to inadequate
systems in 2012 include the Knight Capital
fiasco, NASDAQs handling of Facebooks IPO,
23
24
and UBS losing US$350 million due to a faulty

trading system.66
Probably the most damning indictment of legacy
systems in a business failure in recent times came
from ex-FBI Director Louis Freeh, who in his role
as bankruptcy trustee prepared a report on the
MF Global debacle in the United States. Simply
put, one day the company could not find several
billions of dollars in client assets and senior executives could not get requested overviews of positions, exposures, and the like in a timely manner.
As stated in the Freeh report from April 2013:
MF Globals collapse was abetted by, among other
things, managements failure to integrate or upgrade
its various technology systems and platforms for
monitoring Treasury Department operations,
liquidity risk, and financial regulatory functions.
These systems were left without proper controls even
as the Company substantially expanded its proprietary trading under (former CEO) Corzine... lacked
the appropriate systems and technology to conduct
accurate liquidity monitoring and forecasting across
the global operation. 67
In other words, legacy systems can and do introduce unacceptable levels of operational and in many
case reputational risk, where in the worst case the
investment manager is forced into bankruptcy. An
anonymous quote states it best: Explaining the
unknown by means of the unobservable is always a
perilous business.
At a general level, CEB TowerGroup offers the
following perspective:
Other areas in which technology is perceived to be
important for reducing operational risk are corporate
actions, portfolio accounting, and the middle-office
functions. These choices are understandable. Manual
processing in these areas such as faxing trades and
corporate actions notifications or maintaining portfolios in the absence of an appropriate software solution that supports portfolio accounting unquestionably introduces an unacceptable level of operational
risk that results in financial losses. 68
In 2011, McKinsey and Company drafted a comprehensive assessment of risk IT and operations
in the financial services industry. Among the
findings/recommendations:
The ability to achieve an integrated view of

exposures for major risk types is essential.
Standardized data across trading desks,
asset classes, product classes, counterparties
and legal entities that can be readily and
rapidly aggregated without extensive manual
intervention is fundamental.
Th
e Risk IT architecture should be sufficiently
flexible, and Risk IT infrastructure sufficiently
modular; to keep in step with the changing
needs of supervision and the business. 69
PricewaterhouseCoopers weighs in with the
following: Some firms have underinvested in
technology, have not consolidated or integrated
systems after mergers or continue to use manual
processes. Failure for these functions to perform as
expected places asset managers at multiple risks,
including higher costs due to inefficiency or errors,
losses because of problems with execution, unmet
client expectations and regulatory violations that
can result in reputational damage and financial
losses. 70
The level of risk goes beyond operational issues
particular to a firm or the reputational risks run
by its management. From an employee perspective, those maintaining obsolete IT systems
may find their skills outdated. This is compounded by the fact that if their firms decide to
replace manual processes with state-of-the-art
systems, these employees may find themselves
1) redundant and 2) possessing skill sets no
longer in demand elsewhere.
Another viewpoint to consider is the risk to
board members serving the owners of firms
running on legacy systems. Regardless of corporate gover nance measures put in place, an
unstable foundation in this case an outdated,
inflexible IT infrastructure may undermine
the firms ability to execute these measures and
similar requirements. It might be of interest to
most board members to investigate the technology underpinning firms investment management operations and understand what (if any)
restrictions the IT infrastructure is imposing on the business. Similarly, with as many
as one in four firms entrusting their business
operations to legacy systems, this might fuel a
future increased interest from regulators and
legislators.
The cost perspective

McKinsey and Company indicates that in the
financial services industry, an average of 9% of
total revenue is spent on IT 71 a figure that is
markedly higher than in most other industries.
Similarly, in an October 2012 study of IT investment trends in the financial services industry,
Celent 72 estimated that on the buy side, 80% of
IT budgets are devoted to maintenance of existing
systems while only 20% is spent on innovation,
support of new products, and similar initiatives.
The Celent report goes on to say that there has
been a state of underinvestment in IT in the
buy side for years and, in the face of todays
more stringent market requirements, this pattern of chronic underinvestment is no longer
sustainable. In another study released the same
month, PricewaterhouseCoopers opines: When
IT strategy lacks flexibility is not permitted to
develop it the resulting dysfunction can be paralyzing. It prolongs a cycle of persistent underinvestment, poor operating practices and resulting skepticism about the value of IT. 73
Consulting firm Deloitte chimes in with the following: A close examination of how the old systems
add cost shows that it is through their need to access
information that the greatest effort is expended.
Every existing system maintains an interface which
has to be updated to account for every new addition.
IT architects draw up the organization as neat boxes
in the hope of creating a machine that operates with
military precision. By the time that legacy systems
add in their exponential interfaces, the diagram
looks less like a military pageant and more like a
civil riot. 74
As do many others, consulting firm KPMG also
has a standpoint on the issue: It is also likely
that investors demands for increased transparency
around investments and risk management will lead
to increased operational infrastructure costs, resulting in a profitability squeeze throughout the investment management industry. Another byproduct of
this new and more rigorous set of regulatory regimes
will be the increased need for firms to efficiently and
effectively manage the resulting Big Data related
to clients, investments and compliance. Investment
managers that have not already done so would be
well advised to leverage advances in technology in
order to better handle the impending exponential
growth in data management requirements (particularly related to their risk and compliance functions)
as well as to help reduce the associated costs. 75
Buy-side investment managers are facing pressure
on every front. They are compelled to spend more
to maintain their IT systems despite relentless
efforts to reduce overall operational costs.
Meanwhile, fees and other revenue streams are
under attack. So what makes the most sense?
Spend more on antiquated systems to keep up?
Spend more to bring infrastructure up to date?
Or spend less to increase short-term profitability,
but risk falling by the wayside in the medium and
long term, as better-equipped competitors usurp
ones market share?
There is no quick and easy answer to this dilemma.
Take the case of the US Federal Government. An
article on ZD Net refers to a 2010 study showing that almost half of the US government IT
budget is spent on maintaining legacy systems.76
In absolute terms, this equaled US$36 billion in
2010 alone. To put that number into perspective,
the US government spend on legacy IT systems is
more than the 2010 GDP of 102 countries (54%
of all countries) in the IMF database.77 Expressed
another way, the 2010 GDP of Costa Rica, Serbia,
and Lithuania were all about the same as US
government spend on legacy systems.
Buy-side IT managers dont spend as much as
the US Federal Government, but they do spend
a lot. Ovum anticipates worldwide IT spend for
the institutional asset management segment to
be US$10.6 billion in 2013.78 Where legacy system spend is concerned, there is no readily available figure, as the estimates of industry pundits
and academics are based on diverse methodologies, data sources, and market definitions. Some
insights into legacy system spend can be gleaned
from the recent report on the cost of operations
for buy-side investment managers prepared by
SimCorp StrategyLab in cooperation with The
Nielsen Company. 79 A key finding of the report
showed that 56% of legacy system owners were
set to increase IT budgets with 23% planning
to increase IT budgets by 5% or more while
60% of those running on more modern state-ofthe-art systems said they planned to maintain
or even decrease IT budget spend, in spite of
25
26
Planned Changes in IT Budgets

50%
Legacy
45%
State-of-the-art
40%
% of respondents
35%
30%
25%
20%
15%
10%
5%
0%
Increase
5%+
Figure 6: Changes in
IT operations spend
planned by legacy
system versus state-ofthe-art system owners.
Source: Report on
Global Investment
Management Cost
of Operations Survey
2013, SimCorp
StrategyLab, March
2013.
Increase
1%5%
Same
Decrease
1%5%
many new regulatory and market requirements.

The IT budget predictions from that report are
reproduced in Figure 6.
For the most part, legacy system owners are
increasing spend simply to keep up with market
requirements. Only a small portion of the spend,
if any, goes on innovation.
The Internet is rife with vendors, consultants, and
related parties extolling the virtues of their system offerings and how they can help reduce costs
versus legacy systems. As pointed out by various
academic studies and assessments from legacy
system proponents, legacy systems are quite
cost-effective when all that is asked of them is to
perform the functions for which they were originally designed. Therein lies the crux of the problem over time, the demands on the system far
outweigh its capabilities. Regulation, asset class
coverage, electronic trading, real-time reporting, and other factors that were not envisaged at
the time the legacy systems were built have all
caused costs to spiral upwards. The extra costs
are incurred as a result of the manual processes,
workarounds, and ancillary systems put in place
to address evolving market conditions and resultant business processes that the legacy systems
lack the flexibility and adaptability to cope with.
Issues with data cleansing consolidation, integration of disparate systems, asynchronous upgrade
Decrease
5%+
schedules among system vendors, resources to

maintain old and/or little-used programming
languages, and so on, all lead to untenable cost
burdens for legacy system owners.
Ultimately, as new market requirements, business
processes, and workflows continue to manifest
themselves and once-exotic financial instruments
become mainstream, the cost of maintaining and
augmenting legacy systems will be greater than
the cost involved in replacing them.
The growth perspective

One outcome of the financial crisis that everyone agrees on is that the level of competition
in the financial services industry has become
more intense. Investment managers must continue to generate alpha while under pressure
from all sides: regulators curtailing growth
opportunities with ineluctable requirements,
clients clamoring for a reduction in fees, fierce
competition for new mandates while fending
off competition for the mandates already held,
and shareholders/boards demanding lower
costs and higher profits.
Growth can be achieved in a variety of ways.
Among these, investment management firms
can merge with or acquire complimentary firms,
enter new geographies, gain clients through lowcost leadership, support new instrument types
and asset classes, diversify into new markets, and
the old-fashioned way of simply outperforming

the competition and gaining new client mandates as a result.
Common to each of these approaches is the
need for an IT infrastructure that can support
these growth initiatives. The investment manager who is able to get an overview in minutes
with a mouse click or two will be able to react
in a much more timely manner than the ones
who wait hours and even days for their team
of spreadsheet analysts and overnight batch
jobs to provide the same result. In an era where
seconds can mean the difference between profit
and loss, having the right IT infrastructure is
imperative.
A 2012 assessment of the global asset management industry by the Boston Consulting Group
shows that flexibility is a paramount pre-requisite to growth and innovation: In an environment of increased competition and scarce opportunities, asset managers must roll out new products
and services and quickly adapt to new markets and
client segments...experience shows there is significant variation in players ability to balance traditional business efficiency with flexibility and innovation...Straight-through-processing in operations
increasingly becomes a requirement for traditional
products so that added value for operations teams
can support innovation and development in new
markets...managers that are able to master flexibility with discipline will gain a rare competitive
advantage. 80
On the issue of mergers and acquisitions and
how legacy systems can impact any growth
opportunities arising from this, McKinsey
and Company offers the following: The problem (integrating legacy systems) is most acute in
organizationally complex firms that have grown as
a result of mergers and acquisitions and today have
several business lines and business units. These firms
typically have a fragmented architecture with a high
number of interfaces and legacy applications. At its
core, the accretion of legacy systems from M&A is
often the result of political compromises made during these corporate events...sometimes firms agree to
a best of breed approach; even if this succeeds and
identifies the best applications, they do not often fit
well together. A best systems/worst architecture paradigm can be the unintended result. 81
With a series of incompatible, technology diverse

and otherwise disparate legacy systems providing
the backbone of a merged investment manager,
far more resources are spent on workarounds,
manual processes, and the like as opposed to
innovation. On the subject of innovation and
growth, as stated by Deloittes recent review of the
capital markets industry, innovation is analogous
to growth one must be in place to facilitate the
other: In an industry as competitive and dynamic
as financial services, any business that ceases to innovate ceases to grow. Extensive product innovation
will likely be more difficult in the short term as new
demands for transparency will both take time to operationalize and will reduce product margins. For capital markets firms, the focus on innovation may shift,
even if just temporarily, from product to process as the
industry adapts to a new regulatory environment...
Regulations prescribing improved trade monitoring
certainly put pressure on the industry. At the same
time, clients continue to emphasize the need for best
execution at the lowest cost. These requirements should
demand ongoing and significant investment in information systems many of which operate in a patchwork fashion over legacy infrastructures as well as a
robust capability to parse and analyze the underlying
data. Firms should confirm that they have the appropriate resources in place to develop and enhance these
mission-critical systems. 82
There is an abundance of case studies and other
examples where buy-side investment managers
were prevented from realizing their growth
ambitions due to legacy system limitations
and resolved the issue by acquiring a more modern investment management system. A perusal
of state-of-the-art system vendor websites and
the ecosystem of consultants and partners that
surround them will quickly confirm this.
Typically, legacy systems were not built to handle the unique needs of growth markets such as
Asia and Latin America. Nor did they take into
consideration the expansion of asset classes and
the complex processing requirements of instruments such as derivatives. And to a wide extent
they did not make any provisions for the likes
of Dodd-Frank, EMIR, AIFMD, UCITS,
Solvency II, and much more. This forces companies to add more ancillary systems and interfaces to
the legacy system, thereby increasing complexity.
It stands to reason that investment management
27
28
firms relying on legacy systems are in a much worse

position to capture growth opportunities than their
counterparts who are able to scale, adapt, and automate as needed.
An article in the inaugural edition of Financial
IT magazine in late 2012 captures all three perspectives quite nicely, where the lead editorial
focused on legacy systems in the asset management industry:
The problems for the financial services sector that
arise from legacy systems have become critical at
the same time that the IT sector has become able to
provide radical and positive solutions. The changes
that will likely take place in the field of financial
services IT in the next five years will be huge relative to those that have taken place over the last 30
years. Financial services institutions that make the
substantial investment to take advantage of the solutions that have just become available will dramatically reduce business risk, lower operating costs and
enhance their ability to grow. 83
when firms outsource some of their business processes

(data maintenance, back up, customer relationship
management), (2) knowledge process outsourcing (KPO), when the process outsourced involves
knowledge-related activities, such as IT support
for customers, web development, research, and
information gathering; (3) finance and accounting
outsourcing (FAO), where firms outsource financial
processes such as account keeping and auditing; and
(4) IT outsourcing, which involves subcontracting
certain information technology functions (infrastructure, software development, maintenance and
support) to third party service providers.
The primary alternatives

to legacy systems include
state-of-the-art systems
and outsourcing.
ALTERNATIVES
What are the alternatives to legacy systems and
how viable are they? There are two primary
options for investment management firms looking to accelerate their business and concentrate on
their core competencies, which presumably do not
include detailed workarounds, manual processes,
and complex integration and data consolidation.
For the purposes of the study, use of modern
state-of-the-art systems and outsourcing of IT
operations are viewed as the primary alternatives
to legacy systems. As state-of-the-art systems
have been discussed earlier, the remainder of this
section is focused on the outsourcing alternative.
Outsourcing
Rather than face a decision on whether to augment or replace an existing system, some investment management firms opt for the outsourcing
route. In other words, they turn over investment
processing (and the risks entailed) to a third party.
In their 2012 assessment of IT spending trends in
the securities and investment industry, Celent 84
synthesized the functions investment management firms are apt to outsource:
The most common types of outsourcing functions
include (1) business process outsourcing (BPO),
Note that outsourcing is not necessarily the panacea it is often made out to be. While a degree
of operational risk is transferred from the investment manager to the outsourcer, there is also
a loss of investment control. As discovered by
Ernst & Young in a 2012 survey on innovation
in the asset management industry: Several firms
described their relationship with select outsourcers
as more like that of a business partner than a third
party, directly providing additional input into the
innovation process. However, 33% of respondents
felt that outsourcing actually inhibited innovation
rather than drove it under circumstances of significant regulatory change, stressed market conditions or
complexity. Many firms expressed irritation at the loss
of control. In the outsourced scenario, they tell us that
outsourcers were sometimes slow to respond to the pace
or depth of change requests, that change requests were
expensive and that there was a lack of engagement
when modeling extreme event risk. 85
Outsourcing is not always commensurate with
reduced costs. A 2011 survey of the Australian
market by consulting firm Investit 86 found that
the difference in costs (expressed as basis points
of AUM) for those who outsourced were not
markedly different (four basis points on average

for in-sourcers and three for outsourcers). Typical
motivation for outsourcing is to focus on the core
business (73% of respondents) while those who
declined the outsourcing option cited specialized knowledge/capabilities in-house (53%) and
retain flexibility/agility (58%) as the primary reasons for not outsourcing. Adapting to the pace
of change and having multi-national outsourcing
organizations adapt to local market conditions
and regulation are also seen as areas of concern.
The SimCorp StrategyLab Report on Global
Investment Management Cost of Operations
Survey 2013 surveying 125 investment management firms worldwide yielded comparable
results. Those respondents outsourcing at least
half of their applications had IT budgets of 3.0
basis points. Respondents with at least half of their
applications on premise had IT budgets of 2.2 basis
points. The basis points for pure on-premise versus
those outsourcing at least one application area were
virtually identical at 2.4 points. 87
Consulting firm Deloitte also points out that
many firms are looking to insourcing as a means
of reducing costs. This may seem counter-intuitive
given that one of the primary drivers of outsourcing is cost reduction. The report notes: Though
insourcing is a small trend as compared to the global
outsourcing juggernaut, given the maturity of the outsourcing industry, we are seeing more and more clients
wrestling with the question of whether an outsourcing deal that isnt meeting expectations should be retendered or insourced. 88
In general, the analyst and consulting communities are vociferous promoters of outsourcing;
one report after another is released stating that
outsourcing is growing far more rapidly than any
other deployment option. CEB TowerGroup
indicates that outsourcing will account for 23%
of all FSI IT budget spend versus 18% in 2011,
a compound annual growth rate of more than
11%. 89 Celent states that outsourcing can lead
to cost savings of 20%-40% (largely due to offshoring). 90 The Financial Times even saw fit to
run a special feature on IT outsourcing, 91 where
it was stated that a third of CIOs would spend
up to 25% of their IT budget on outsourcing
(note that the CIOs came from a variety of industries). Several other local and regional consultants
corroborate the fact that outsourcing is growing,

typically faster than other deployment methods,
and will continue to do so.
While outsourcing may seem to be an attractive
way to reduce costs and transfer operational risk,
asset management firms need to have a contingency plan in place to deal with any disruptions/
failures at the outsourcing vendor. Probably the
most publicized case of outsourcing failure in
recent times was the UBS rogue trader who lost
1.4 billion for the company with bad trades.
The companys risk IT infrastructure picked up
the trades but slipshod and damaging procedures
at their outsourcing vendor in India caused the
warning signals to be overlooked. As noted by
Business Standard in November 2012, this is the
third instance when outsourcing of key oversight jobs
by global banks (British giants HSBC and Standard
Chartered being the other two) to India has come
under the regulatory scanner abroad for ineffective
controls against suspicious financial transactions. 92
The UKs Financial Services Authority (FSA)
issued an open letter to CEOs of asset managers
in December 2012 expressing their concerns. 93
The letter reads in part:
Some firms appear to rely on the fact that the outsource service provider is a large financial institution which regulators might look to rescue using
public funds. We are concerned that this approach
lacks prudence and is inconsistent with the FSAs
policy of allowing such organizations to fail.
Some firms rely on taking activities back in house.
We are concerned that any transfer would take
many months and we do not believe firms would
immediately have the capacity and abilities
required.
Some firms rely on being able to transfer outsourced
activities to another provider. We are concerned
about the considerable operational challenges inherent in a transfer as well as the probability that this
could not be implemented swiftly enough to protect
customers if an outsource provider were to fail. A
plan to transfer to another provider may not necessarily be a realistic option due to concentration risk
in the supply of certain activities.
In the right situation, outsourcing is a tangible and
viable option that will provide a certain degree of
benefits. Investment managers need to evaluate
29
30
the degree to which they are willing to transfer

control (and operational risk) to a third party with
the compliance, innovation, reporting, and data
consolidation issues that will inevitably follow.
Technology is also an issue with the outsourcing provider. If an investment manager transfers
investment operations from its own legacy system to that of the outsourcer, they have simply
exchanged one problem for another. As with most
procedures, a healthy dose of due diligence is
needed before changing operating or deployment
models, especially when entrusting crucial elements of the business to external parties.
IN WHICH DIRECTION DOES

DEVELOPMENT GO?
This study looks at the direction of IT development in the investment management industry
from three perspectives. The first perspective is
the current and future IT strategies as related by
investment managers, the second is general industry trends as noted by the analyst community, and
the third is legacy system-based feedback from the
analysts and consultants. Each of these perspectives is outlined in the following sections.
Current and future IT strategies

In order to gauge the IT investment climate, in
2012 Lindberg International asked 500+ buyside investment management firm decision makers as to their current and future IT strategies.94
Among the highlights:
I n terms of long-term IT strategy, the proportion of respondents favoring a front-toback enterprise model (integrated solution
from one supplier) (26%) is about the same as
those preferring a core system with add-ons
(33%) and pure best-of-breed (32%). Only
9% prefer an in-house developed solution. The
key takeaway is that almost 60% of respondents prefer a more integrated solution.
W
hen asked what they thought other companies primary long-term strategy would be,
each main option received an equal 32% (inhouse received 5%).
From a deployment point of view, 54% of
respondents favor a pure on-premise model
over the long term, with 18% open to ASP/
Hosting, 10% to Cloud Services, and the
remainder with other options or no answer.
There is no functional area across the buy-side
investment value chain (e.g. portfolio management, trading, compliance, risk, performance, accounting, settlement, reporting,
collateral management, data management,
and fund management) where more than 25%
of respondents use some form of deployment
other than on-premise.
Going forward, less than 8% of respondents
plan to change their current deployment
model in any functional area.
16%-17% of legacy system owners plan to
replace their systems within the next two years.
In general, it does not seem that investment
managers are going to turn to outsourcing to
resolve the various challenges identified previously. It is also notable that there does not seem
to be any shift away from best-of-breed systems
toward more integrated alternatives, given the
issues raised by disparate data sources, conflicting
upgrade schedules, and the need for real-time,
transparent reporting. For the most part, those
who plan to outsource have already done so and
are most likely to outsource additional application
areas. And despite the gamut of issues with legacy
systems, only one in six owners thinks it is necessary to replace them anytime soon.
General trends in development

When it comes to trends in development, most
analysts and consultants release their annual
lists of the hot topics for the upcoming year just
in time for Christmas. If one gathers enough of
these lists and tries to amalgamate them, the
top 10 list will often consist of 20-30 items.
Notwithstanding this, there are some areas
where the industry pundits are in harmony.
There is consensus on the following:
B
uy-side investment management firms need
to evaluate their IT infrastructure to ensure
it meets regulatory and client requirements.
KPMG expresses the issue as follows: One
of the more often-overlooked aspects of operational due diligence is the need to perform an
external audit of Information Technology (IT)
infrastructure on a periodic basis to ensure the
companys IT infrastructure is robust enough to
handle the demands associated with the growing
complexity of instruments and markets. Indeed,
for many firms, it is proving to be a constant and
pressing challenge to update legacy platforms in
order to adapt to this ever-changing investment

environment. 95
Investment management firms must prepare
to release new products as passive and alternative investment products encroach into the
active investment space. In their 2013 top 10
trends in Capital Markets,96 CEB TowerGroup
notes: On the buy side, pressures from passive
vehicles as well as alternative investment strategies, is compelling the active management industry to expand into new products. Implications
to offering new investment products will be felt
across the entire IT stack, with pre-trade technologies being impacted the most.
C
EB TowerGroup also notes that client
demand and regulatory compliance are
the top drivers of technology investment
in 2013. Compelled by various stakeholders,
capital markets firms are disclosing more information more frequently. Clients and shareholders are also demanding greater insight into the
business workings of financial institutions, asking questions they never asked before. That helps
explain why among all survey participants, client demand ranked (96%) as the top external
factor impacting IT strategy for 2013, ahead of
cost pressures and regulatory compliance. 97
Client servicing is the top overall IT investment
priority for the buy side, driven by demand for
more transparent, more frequent, and more accessible reporting by investors and regulators. 98
Th
ere is a clear shift toward multi-asset
portfolio management systems. A January
2013 article in Forbes magazine outlines
why this is pertinent: Portfolio systems
are at the heart of a buy-side firms ability to ensure effective portfolio management.
A holistic portfolio management function is
mandatory for investment management firms
to rebuild revenues, gain back client trust, and
strengthen risk and operational controls. To
avoid high investments in IT, asset management firms will need to improve consolidation,
uniformity, and communications within subsystems to achieve greater trading and operational efficiencies. Furthermore, the increasing
compliance and regulatory requirements add
pressure on firms operating portfolio systems
to adopt a fast track route to highly automated
systems and services. The growing number of
asset classes has led asset management firms to
select multi-asset portfolio management systems
with integrated processes, tools and technology

to improve the performance of their bottom-line
and gain competitive advantage in a market in
which the only constant is change. 99
Legacy systems are no

longer able to handle the
demands of todays market
and the demands that are
sure to follow in the future.
Development is heading
inexorably towards stateof-the-art systems.
Viewpoint on legacy systems

going forward
The analyst and consultant companies have all
looked at the issue of legacy systems and are
in general agreement that legacy systems must
be removed in favor of integrated, multi-asset
class state-of-the-art systems. As noted by CEB
TowerGroup: Replacing legacy systems will soon
become a fundamental requirement for FSIs seeking
to retain or to regain marketplace leadership 100 and
Firms have to change from supporting asset classes
separately to a multi-asset-class approach, and technology vendors whose products provide a single solution for all asset and product types must demonstrate
their capabilities. Investment managers must be
proactive in improving their operations, whether
through technology or restructuring, rather than risk
the reproach of their clients or regulators. 101
In a 2012 report on IT strategy for the asset
management industry, PricewaterhouseCoopers
addressed the issue quite succinctly:
As asset management firms continue to adjust, we
would expect Information Technology, a function
that has always dealt with cutting-edge developments, to respond to these shifts (impact of regulation, new products, growth opportunities, etc.) in
kind. In many cases, this has not happened. When
31
32
the needs of the business profoundly change, many

support systems struggle to adapt. Nowhere is this
truer than in IT. We believe that many of these
struggles stem from IT functions seeking future success with old ideas.
Technology leaders have often been too slow to adapt.
While there are many explanations for why this is
happening, the result can lead to IT holding back
a firm rather than serving as an enabler. In these
types of firms, IT is inward-looking, and its priorities, debates and workflows are out of tune with
the larger organizations strategic prioirties. While
business lines are debating products and asset classes,
IT is debating Ruby vs. Python...At worst, IT
becomes an impediment to progress slow, inflexible, expensive and not offering what business line
executives want. 102
WHAT IS HOLDING THE INDUSTRY

BACK?
It seems to be clear that legacy systems are not
the way forward when it comes to resolving
what seems like the Gordian knot of issues facing the industry. Even when the decision makers
at investment managers with legacy systems in
place have an epiphany and realize that something needs to be done, there is often extreme
reluctance to replace the outdated legacy infrastructure with something more up-to-date.
There are a number of reasons for this reluctance.
As noted by Somerville in his study of legacy
systems: 103
Keeping legacy systems in use avoids the risks of
replacement but making changes to existing software
usually becomes more expensive as systems get older.
Legacy software systems that are more than a few
years old are particularly expensive to change for
several reasons:
1. Different parts of the system have been implemented by different teams. There is, therefore, no
consistent programming style across the whole
system.
2. Part or all of the system may be implemented
using an obsolete programming language. It may
be difficult to find staff who have knowledge of
these languages and expensive outsourcing of system maintenance may be required.
3. System documentation is often inadequate and outof-date. In some cases, the only documentation is the
system source code. Sometimes the source code has
been lost and only the executable version of the
system is available.
4. Many years of maintenance have usually corrupted the system structure, making it increasingly difficult to understand. New programs may
have been added and interfaced with other parts
of the system in an ad hoc way.
5. The system may have been optimized for space
utilization or execution speed rather than written for understandability. This causes particular
difficulties for programmers who have learned
modern software engineering techniques and
who have not been exposed to the programming
tricks that have been used.
6. The data processed by the system may be maintained in different files with incompatible structures. There may be data duplication and the
data itself may be out of date, inaccurate and
incomplete.
Adding up all of these factors makes a replacement project somewhat precarious. Turning
off all or part of the legacy system may set off
an unintended sequence of events that could
cripple the business. With the lack of documentation and legacy programming expertise,
decommissioning a legacy system must be thoroughly considered and planned accordingly. It
A variety of issues are holding the industry back from

replacing legacy systems,
most notably the complexity and effort required to
decommission interwoven
and incompletely documented IT infrastructure.
Personal issues such as reputational risk and job security
also play a role.
is not a simple process. Budget constraints and

the time and resources to put together a business
case also play a role. However, the smart decision maker must also consider the costs of doing
nothing as their legacy systems put the company in a situation where long-term corporate
viability is an issue. As stated by Deloitte on the
subject of decommissioning legacy systems: If
there is pushback on an individual decommissioning
case and the argument that no systems are approved
for that area is used, then a quick look in the rear
view mirror is well justified. How many areas of the
enterprise have been left untouched by new requirements over the past few years? Its a safe bet that the
answer to that question is none. Back that question
up with a follow-up. How many of the most important investments of the past year were anticipated
and scheduled just a few years ago? 104
A YouTube animated video on the Burning
Platform 105 posted in July 2012 captures the
mindset of many investment management
organizations. On a burning oil platform in
the middle of the ocean, should you stay on
board and eventually die, or leap a hundred
feet into the frigid water below and have a
greater chance of survival. The video presents
a professors interviews with CEOs on business transformation and why the CEOs are
compelled to change their infrastructure. The
findings moved from reasons such aggressive
competition, weaker financials, client pressure
on fees, lower levels of staff engagement, and
so on toward more personal issues such as my
reputation is on the line, Im starting to feel
like an imposter, and nothing I do is working. Fear and a sense of urgency are desirable
motivators for change, but change is ultimately
driven by personal ambition. If there is no sense
of ambition then there is no driver for change;
fear and urgency are short-term motivators that
quickly pass in the absence of ambition (both
on behalf of themselves and their companies).
As stated by Nietzsche: He who has a why to
live can bear almost any how. Legacy system
owners must have a burning ambition to get
off of the burning platform, or they will not be
compelled to act.
The human factor also comes into play in
other ways. While drawn from the banking
sector, an April 2013 article in Computer

Weekly hits the nail on the head: CIOs at
banks lack the job security required to transform
IT by replacing legacy systems that have been in
place for decades. IT heads at banks are lucky to
get two years in the job, so to take on a multiyear project as complicated as legacy replacement
is seen as professional suicide... Eventually banks
will have to replace core systems or they could see
costs increase dramatically and could face pressure
from more agile competitors. 106
Another human issue is the threat to IT
departments imposed by new systems. Entire
ecosystems have been built around the legacy
infrastructure and established IT fiefdoms will
not surrender their status without a fight. In
many cases, the introduction of a new, automated system is analogous to the introduction
of robots on the assembly line. The staff that
do the manual processing will see their existence threatened and react accordingly. To these
departments, legacy system replacement seems
like Armageddon to many of the staff and a
potential career killer among the IT leadership.
Collectively, this leads to state of inertia and
ultimately the cost of doing nothing, becomes
prohibitive as the legacy systems become more
outdated and complex to manage. As noted
above, a sense of urgency must be converted into
a sense of ambition and ultimately action.
The concerns are real: a system replacement can
be a daunting task. A lot of time and resources are
needed to select the appropriate replacement system and implement it in parallel with the decommissioning of legacy infrastructure. However, the
alternative is worse. In the absence of external
factors, a state-of-the-art system will always put
the investment manager in a better position for
innovation, risk mitigation, and cost reduction
than a legacy system. The litany of case studies on
state-of-the-art vendor and consultant websites
concerning benefits of legacy replacement provides ample evidence of this fact.
CONCLUSION
This meta-study started off with the question
Why is it relevant to talk about legacy systems?
The quick answer is that legacy system owners are
putting their corporate viability in jeopardy the
33
34
longer they rely on infrastructure that was not

designed to meet current market conditions. The
wealth of evidence against continuing to use legacy systems is overwhelming; this study has provided a small sample of this. The list of reasons to
get off of the burning platform that legacy systems represent to the investment managers that
continue to use them is long. Legacy systems were
designed for simpler processes in an era where
the amount of knowledge was much lower than
today. An article in the Harvard Business Review
suggests that the amount of knowledge doubles
every four years.107 If the legacy system is from
the 1980s, 1990s or even the early part of the
2000s, there is a lot of knowledge the legacy
system is unable to accommodate. Not to mention regulation, new products, asset classes,
and instruments.
Another factor is the time required to implement
the change. As Canadian composer Neil Peart
stated: If you choose not to decide, you still have
made a choice. From the initiation of the buying process to vendor selection and ultimately
going live in production, installing a new system
will take the better part of two years. As anyone
following the buy-side investment management
industry can attest to, a lot can and will happen
in two years. Delaying the decision to move off
of legacy any longer will have unforeseen and
likely negative consequences.
Among these consequences is the fact that
competitors who can react much faster with
fewer resources, lower risk, and greater accuracy will win the cost battle versus an investment manager reliant on manual processes and
an agglomeration of various systems. The competitors will also seize growth opportunities
as they can introduce new products, efficiently
comply with new regulation and reporting
requirements, as well as satisfy client demand
for transparency and lower tolerance of risk. All
of these factors add up to a legacy system based
investment manager eventually losing their client base and competitive advantage to betterplaced alternatives.
On a personal note, business and IT decision
makers also have a reputational risk to consider.
Think back a hundred years ago where the Titanic
was considered unsinkable. The officers on the
bridge were held liable for ignoring the obvious
warning signs and vaingloriously sailing to their
doom. A parallel can be drawn when it comes to
retention of outdated legacy systems.
The investment manager should not look too
hard towards the legacy system vendor for assistance. These vendors have been down-prioritizing
enhancements in the product for years, preferring instead to cash in on the maintenance revenue stream while minimizing investment in the
product.
At the end of the day, the legacy system-based
investment managers corporate viability can and
will be called into question. As the financial crisis showed, no investment management firm is
too big to fail. Investment management firms
must decide if their current IT infrastructure
is capable of meeting their needs right now, let
alone in the future.
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48 P&I/TW top 300 analysis (year end 2011),
Towers Watson, August 2012. http://www.
towerswatson.com/en/Press/2012/09/
Growth-slows-for-largest-pension-funds
49 Global Hedge Fund and Investor Survey
2012, Ernst & Young, 2012. http://
www.ey.com/Publication/vwLUAssets/Global-hedge-fund-and-investorsurvey_2012/$FILE/CK0582_Global-HFSurvey-2012.pdf
50 US 50: The Largest US Managers, Hedge
Fund Journal, 2012. http://www.thehedgefundjournal.com/sites/default/files/hfjus50-2012.pdf
51 2012 Investment Company Factbook,
Investment Company Institute http://www.
ici.org/pdf/2012_factbook.pdf
52 Asset Management in Europe: Facts and
Figures, EFAMA, May 2012. http://www.
efama.org/Publications/Statistics/Asset%20
Management%20Report/Asset%20
Management%20Report%202012.pdf
gies-2012-10-03 (October 2012).

58 Ibid.
news/2012/03/simcorp-survey-exposesweaknesses-in-buy-side-accounting-systems
(March 2012).
60 Ibid.
61 http://www.euroinvestor.dk/
nyheder/2012/12/05/simcorp-buyside-poll-exposes-inaccurate-portfoliovaluations-asset-and-exposure-trackingerrors/12157482 (May 2012).
news/2012/01/simcorp-survey-reveals-buyside-lack-of-confidence-in-data-quality
(January 2012).
63 http://www.marketwatch.com/story/88of-spreadsheets-have-errors-2013-0417?link=MW_popular (April 2013).
64 http://baselinescenario.com/2013/02/09/
the-importance-of-excel/ (February 2013).
54 Results from interviews of 500+ business

and IT decision makers at buy-side investment management firms in 16 countries
worldwide. The interviews were conducted
by Lindberg International on behalf of
SimCorp in 2012.
65 United States Senate Permanent Committee

of Investigations, JPMorgan Chase Whale
Trades: A Case History of Derivatives
Risks and Abuses, March 15, 2013 hearing. http://s3.documentcloud.org/documents/623882/jpmorgan-chase-whaletrades-a-case-history-of.pdf

66 http://www.theatlantic.com/business/
archive/2012/08/software-runs-the-worldhow-scared-should-we-be-that-so-much-ofit-is-so-bad/260846/ (August 2012).
56 Banks still handicapped by IT

legacy, Computer Weekly, May
11, 2012. http://www.computerweekly.com/news/2240150122/
Banks-still-handicapped-by-IT-legacy
67 http://online.wsj.com/public/resources/documents/FreehReportonMFG.pdf (March
2013).
57 http://www.marketwatch.com/story/
simcorp-poll-points-to-back-office-failure-to-support-portfolio-growth-strate-
68 The TowerGroup Operational Risk

Assessment Survey: A Focus on Investment
Management, CEB TowerGroup,
December 2010.
37
38
69 Risk & IT Operations: Strengthening

Capabilities, McKinsey and Company, June
2011. http://www.mckinsey.com/~/media/
mckinsey/dotcom/client_service/risk/pdfs/
iif_mck_report_on_risk_it_and_operations.ashx
70 Top Issues for Asset Managers, PricewaterhouseCoopers, April 2012. http://www.
pwc.com/en_US/us/asset-management/
investment-management/publications/assets/
pwc-top-issues-for-asset-managers.pdf
71 Breakthrough in IT Banking: McKinsey on
Business Technology, Number 26, Spring
2012.
72 IT Trends and Spending Implications for
the Securities and Investments Industry,
Celent, October 2012.
73 Nine new rules of IT strategy for asset
management, PricewaterhouseCoopers,
October 2012. http://www.pwc.com/
en_US/us/asset-management/investmentmanagement/publications/assets/pwc-newit-strategy-rules-for-asset-management.pdf
74 Counting Cost: Decommissioning Legacy,
Deloitte, 2012. http://www.deloitte.com/
view/en_AU/au/insights/browse-by-service/
actuarial/115b96872971a310VgnVCM2000
003356f70aRCRD.htm
75 Financial Services Industry Insights,
KPMG, March 2013. http://www.kpmg.
com/Global/en/IssuesAndInsights/
ArticlesPublications/industry-insights/
Documents/industry-insights-download.pdf
76 http://www.zdnet.com/blog/serviceoriented/study-us-government-spends36-billion-a-year-maintaining-legacy-systems/6505 (retrieved May 2013).
77 http://www.imf.org/external/pubs/ft/
weo/2013/01/weodata/weoselgr.aspx
(retrieved May 2013).
78 Ovum: Financial Markets Technology
Spending Through 2017: Location
Segmentation, Daniel Mayo, January 2013.

(www.ovum.com)
80 Global Asset Management 2012:
Capturing growth in adverse times, Boston
Consulting Group, September 2012. (www.
bcg.com)
81 Risk & IT Operations: Strengthening
Capabilities, McKinsey and Company, June
2011. http://www.mckinsey.com/~/media/
mckinsey/dotcom/client_service/risk/pdfs/
iif_mck_report_on_risk_it_and_operations.ashx
82 2013 Capital Markets Outlook: Its the
end of the world as we know it, Deloitte,
December 2012. https://www.deloitte.
com/assets/Dcom-UnitedStates/Local%20
Assets/Documents/FSI/US_FSI_2013_
Capital_Markets_Oulook_111212.pdf
83 Editors Letter, Financial IT magazine,
Fall 2012 edition. (http://copyschool.com/
upload/Sub-Editing_-_Sample_1_AH.pdf)
84 IT Trends and Spending Implications for
the Securities and Investments Industry,
Celent, October 2012.
85 Whats new? Innovation for Asset
Management 2012 survey, Ernst & Young,
September 2012. http://www.ey.com/
Publication/vwLUAssets/Innovation-forAsset-Management/$FILE/Innovation-forAsset-Management_EH0100.pdf
86 The Future of Investment Operations in
Australia, Investit, November 2011. (www.
investit.com)
87 Report on Global Investment Management
Cost of Operations Survey 2013, SimCorp
88 From Bangalore to Boston: The Trend of

Bringing IT Back In-House, Deloitte,
February 2013. (www.deloitte.com)
89 Outsourcing: Vendor Analysis, CEB
TowerGroup, September 2012. (www.
towergroup.com)
90 Is Full Applications Outsourcing Back on
the Table in Financial Services?, Celent,
September 2011. (www.celent.com)
91 The Connected Business: Financial Times
Special Report, Financial Times, 11 June
2011. (www.ft.com)
92 India outsourcing failure blamed for
$2.3 billion loss by UBS trader, Business
Standard, 26 November 2012. http://www.
business-standard.com/article/pti-stories/
india-outsourcing-failure-blamed-for2-3bn-loss-by-ubs-trader-112112600421_1.
html
93 http://www.fsa.gov.uk/static/pubs/ceo/
review_outsourcing_asset_management.pdf
(December 2012).
94 Results from interviews of 500+ business
and IT decision makers at buy-side investment management firms in 16 countries
worldwide. The interviews were conducted
by Lindberg International on behalf of
SimCorp in 2012.
95 Financial Services Industry Insights,
KPMG, March 2013. http://www.kpmg.
com/Global/en/IssuesAndInsights/
ArticlesPublications/industry-insights/
Documents/industry-insights-download.pdf
September 2013.
99 http://www.forbes.com/sites/tomgroenfeldt/2013/01/16/outdated-enterpriseaccounting-platforms-are-a-hazard-woodbine/, January 16, 2013.
100 Sourcing, Resourcing, or Outsourcing:
Globalizing Operations in Financial
Services by 2015, CEB TowerGroup,
July 2011.
101 The TowerGroup Operational Risk
Assessment Survey: A Focus on
Investment Management, CEB
TowerGroup, December 2010.
102 Nine new rules of IT Strategy for Asset
Management, PricewaterhouseCoopers,
October 2012. http://www.pwc.com/
en_US/us/asset-management/investmentmanagement/publications/assets/pwc-newit-strategy-rules-for-asset-management.pdf
103 Legacy Systems, Dr. Ian Somerville, St.
Andrews University, 2000 http://www.
cs.st-andrews.ac.uk/~ifs/Resources/Notes/
Evolution/LegacySys.pdf
104 Counting Cost: Decommissioning
Legacy, Deloitte, 2012. http://www.
deloitte.com/view/en_AU/au/insights/
browse-by-service/actuarial/115b96872971
a310VgnVCM2000003356f70aRCRD.htm
105 http://www.youtube.com/
watch?v=Tfn6vD4yyC4
96 Top 10 Technology Initiatives in Capital

Markets 2013, CEB TowerGroup, April
2013. (www.towergroup.com)
106 Bank legacy systems will remain until

CIO life expectancy increases, Computer
Weekly, 04 April 2013. http://www.
computerweekly.com/news/2240180815/
Bank-legacy-systems-will-remain-untilCIO-life-expectancy-increases
97 Capital Markets Technology Outlook:

2013 Agenda Poll Results, CEB
TowerGroup, March 2013.
107 The coming of knowledge-based business,

Stan Davis and Jim Botkin, Harvard
Business Review, September-October 1994.
98 Business Trends: Global Financial Markets

Technology Investment Strategies, Ovum,
39
0913
ADDRESS AND CONTACT DETAILS

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iwalter@simcorpstrategylab.com
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Legacy Systems The Inconvenient Truth and The Cost of Doing Nothing

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shared among firms. Other information is made

IS THERE A COMPELLING REASON TO

Similarly, a state-of-the-art investment management system is defined as:

THE ROLE OF IT IN THE INVESTMENT

One means by which IT provides significant

typical legacy infrastructure involves a number of

LEGACY SYSTEMS IN THE INVESTMENT MANAGEMENT INDUSTRY

1 Why Jamie Dimon

business operations on legacy systems. In terms

THE DANGERS OF LEGACY SYSTEMS

The risk perspective

The cost perspective

systems owners planned to maintain or decrease

The growth perspective

with a constant stream of new requirements,

problems for the financial services sector that arise

ALTERNATIVES TO LEGACY SYSTEMS

outsourcing, and IT (hardware and infrastructure)

WHERE DOES DEVELOPMENT

impacting the industry on a frequent basis. There

WHAT IS HOLDING THE

new resources may not be familiar with older

11 The coming of knowledge-based business, Stan

On a personal note, business and IT decision

LEGACY SYSTEMS: THE INCONVENIENT TRUTH

general consensus is that the unabated pace of

sector, this study concentrates primarily on the

THE ROLE OF IT IN INVESTMENT

particularly in state-of-the-art systems that allow

Full Integration Between Components Single Data Source

Portfolio Modelling and Analysis

Match and Settlement

Cash and Securities Management

Book of Records (IBOR, ABOR)

The immediate difference between the two

LEGACY SYSTEMS VERSUS

What is a legacy system?

Commonly used definitions

Legacy systems suffer from

From a software/systems perspective, there are

put forth by the academic community, industry

The definition used throughout

With these factors in mind, this study defines a

The typical business model of a

Legacy system vendors

In other cases, former flagship products are put

Many in-house built solutions are

When all is said and done, these are the type

The definition used throughout

The typical business model of a

C#, C++, APL

the market with a minimum of manual processing

LEADING INVESTMENT MANAGEMENT SYSTEMS AND KEY

about 550 employees in DST Global Solutions.

Misys Sophis VALUE

Calypso offers a product of the same name, both

SimCorp is a publicly-traded company based

SS&C (Thomson) Portia

SunGard Invest One

of North America, Europe, and Asia-Pacific. The