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Software Vendors Play The Integration Game

By Andrew Webb

The dirty little secret about risk management systems is that the million-dollar price tags on high-end software are only a fraction of the real cost of getting a system up and running. In spite of this, vendors have been content to focus on producing their products, leaving the lucrative integration work to systems integrators.

C*ATS and Algorithmics, however, have both recently announced that they would form new consultancy/integration groups in order to provide enhanced project management support on risk management system implementations. But the subtext for vendors in general seems to be "To hell with cherries, let's have some cake.”

There's certainly something for risk management vendors to sink their teeth into. According to a recent report from Meridien Research entitled "Vendor-Provided Risk Technology Solutions,” more than 80 percent of the expenditure on enterprise-wide risk implementation is for integration and data storage. "Though the figures were hardly a great secret, I don't think they had fully sunk into the vendors' consciousness before,” says Debbie Williams, the report's author. Others have put the integration figures even higher than that, typically leaving the vendor with a relatively paltry 10 percent of the total project budget in software license fees.

New revenue sources are particularly attractive to software companies, which are under considerable pressure to sustain growth. As a software product line matures, license fees start to play a smaller part in the picture and service-type revenue becomes more important.

This situation is exacerbated in the case of risk management vendors, who may be looking at a relatively finite market. Although sales of enterprise-wide risk management systems have been brisk in the last few years, how many banks of any size still need them? Risk management vendors have the choice of moving ever further down the size scale of banks to find new client sales (until they reach the banks that do not have the budget to pay for systems), or looking for revenue elsewhere.

And there may be more than just potential revenue behind these initiatives. "That's only part of the story,” says Mark Gaunt, director of TCA Consulting in London. "Having spoken to a few suppliers on this issue, there is also the strong feeling among suppliers that in order to improve the speed and focus of the implementation projects, they need to provide additional assistance. They see that there is a definite requirement for consultants who are expert in the business issues and implementation best practice and not just product specialists.”

"To improve the speed and focus of implementation projects, suppliers feel they need to provide additional assistance.”
Mark Gaunt
director, TCA Consulting, London

One of the attendant fringe benefits for vendors that follow this route is an improvement in the quantity and quality of client contact. Not only do they stand a better chance of a faster (and higher quality) implementation of the product, but they are also in a stronger position to pick up added value sales in areas peripheral to the main project.

"Vendors also need to be closer to the consultancy business to check that their products are being implemented with sufficient expertise,” says Wolfgang Porada, vice president and director of risk management solutions architecture at AMS. "They obviously have a vested interest here, as an incompetent implementation ultimately reflects badly on the system vendor. It is important that a vendor can say ‘This firm really knows the product and has done a good job with it at X bank.' Vendors need to be careful, however, not to get drawn too far into the consultancy and integration role and [hence] find themselves swamped by the scale of a task outside their particular expertise. Nevertheless, some smaller vendors, such as Integral, have been happy to buck this trend on smaller projects.”

Curiously enough, conflict of interest doesn't seem to be much of an issue here—even for the banks. "We're obviously aware of the potential consultancy conflict engendered by initiatives such as those of C*ATS and Algorithmics,” says the head of risk management IT at a major U.S. investment bank. "We're also aware of who's in bed with whom. Superficially I think that those with multiple relationships pose less of a potential problem than those with exclusive ones, however much concentrated product expertise that may give them. Having said that, any consultancy that sells a bank the wrong risk management product simply to keep a vendor relationship sweet is cruising for big trouble. By now, there's enough in-house competence at major and mid-sized banks to be able to spot them from doing this a mile off. They might get away with it once or twice further down the tree, but I certainly wouldn't recommend it as a long-term business model.”

Although taking on a bigger role may help both client and vendor, it's nevertheless a tricky tightrope to walk. The vendors clearly need to avoid taking on more than they can deliver. The sheer scale of some projects would simply swamp their resources. But they still need enough influence to ensure that project dates are met and that the projects are pushed hard enough.

"Any consultancy that sells a bank the wrong risk management product simply to keep a vendor relationship sweet is cruising for big trouble.”

This last point has become particularly germane as the distractions of Year 2000 and EMU have taken a substantial toll on the IT resources of banks. It's no secret that there are already quite a few risk management projects around the world that have slipped into suspended animation or simply ground to a halt. As vendors are often paid their license fees on the basis of "live” software, they have every incentive to ensure that it gets up and running. If they have an active role as consultant/integrator, it's easier for them to ensure that the project at least stays simmering on the back burner, rather than being fed to the cat.

Different strokes

C*ATS and Algorithmics are taking markedly different approaches to their consulting initiatives. While C*ATS has formed its own specialist consulting group (C*ATS Consulting), Algorithmics has opted for a more open-ended solution with a partner program that includes AMS, Deloitte & Touche Consulting Group, Ernst & Young, and IBM's Securities & Capital Markets division.

C*ATS, however, has made it out of the blocks first. In an interesting distortion of the space-time continuum, the company announced the formation of C*ATS Consulting and the completion of the new venture's first consulting project at Bank of Montreal simultaneously. The project appears to have validated the approach with a successful data integration and software test on a tight three-month schedule that led to a bank taking a CARMA license. C*ATS Consulting is also capitalizing on the experience of vice president Finn Christensen, who spent several years as a director of the risk management system integration practice at Fusion Systems.

Algorithmics argues that it is gaining nothing other than charging its partners a nominal fee for a formal certification of competence in its technology, as consultants and integrators already pay for the training that they receive from Algorithmics. It will, however, allow the company to ensure that there will be a pool of expertise available that is specifically qualified in its product technology.

Despite its acquisitive tendencies, Infinity (previously SunGard Capital Markets) has so far resisted the temptation to jump on this particular bandwagon. According to a spokeswoman at SunGard, "Despite our larger family, we currently have no plans for initiatives of this sort and will retain our current arrangement of informal relationships with consultants and integrators.” Given that the bulk of SunGard Capital Markets' Panorama sales have been made to clients with existing SunGard systems, integration has hitherto been less of an issue than for other vendors. Whether this will remain the case now that Renaissance and Infinity Financial Technology have joined the club is another matter.