Evolution of Utilities and Managed Services in Capital Markets
From Cost Control to Innovation
Celent has been closely tracking the evolution of utilities and manged services in capital markets for a long time. In the latest report on this topic published earlier this year, we discuss that the demand for and adoption of the mutualized solutions are growing in capital markets because need for cost reduction and streamlining operations will persist. Utilities are the end goal in this pursuit, and managed services offer a more immediate, and incremental option for firms to achieve the end state, especially relating to expansive parts of operations. This is because different institutions are at different stages of transformation journey with specific needs, budgets, time horizon for planning, and legacy issues to deal with, and all of them may not have the appetite to move to a utility directly.
There is high demand for utilities for point solutions, and we see growing adoption of those solutions. At the same time, more and more banks are increasingly interested in the utility model even for expansive operations such as end-to-end post-trade processing, and working with service providers in charting a path to that end. Adopting utilities with wider scope is more complex, and requires better planning and more resources; therefore, banks are taking a measured approach in adopting them. With the latest developments in the supply side dynamics, and advancements made by the solution providers, we expect to see their adoption accelerate going forward.
Functions In the Mid-Back Office Are Most Likely to Be Mutualized
A specific issue for banks considering mutualized solutions is about future proofing, or adopting a solution that can easily integrate new and emerging technology which has potential to bring in significant operational improvements. With advancements made in new and innovative technology like cloud, robotic process automation, artificial intelligence, and blockchain, banks are keen to adopt them as and when there are mature solutions based on them. It is noteworthy that many of the utility and managed service providers are incorporating these technologies as part of their offerings by testing pilots, conducting proofs of concept, and then taking them into production. This provides a cheaper and less risky options for the industry to pursue technology innovation, because individual firms are less likely to invest significant resources, knowledge, and expertise in innovation in non-differentiating areas.
Furthermore, some of the new technology such as blockchain thrives on network effects, and it is therefore hard to experiment with them at a firm level. We see many initiatives with these technologies are being pursued following the mutualization model through industry groups and partnerships among banks and service providers. The advantages of mutualizing innovation are:
• For budget-constrained firms, usually little amount is spent on innovative initiatives in non-differentiating areas; therefore, sharing the costs of new technology development among peers can have strong network effects.
• Expert technology and solution providers are better positioned to experiment with new technology compared to individual banks. Especially because some of the technologies are still new and unproven, expert providers can better assess their risks and test their resiliency, and incumbent players can develop strategies for incorporating new technology within existing solutions and frameworks.
• Sharing of resources, expertise, and learnings through coordinated efforts can expedite innovation; even in cases of failures critical lessons can be easily transmitted to the ecosystem for future improvements.
These developments are adding a new lever to the mutualization dynamics, where firms are now using mutualization to share not only costs and pains, but also new technology development and innovation. We discuss these developments in details along with analysis of several utility and managed service solution in the report titled Evolution of Utilities and Managed Services: From Cost Control to Innovation.