Tracking the TCO of Market Data
Expert Opinion – The total cost of market data is often unknown, or poorly or inaccurately calculated. With data budgets still under pressure it is hardly surprising that organisations consuming market data see market data TCO as a priority.
If there is one positive outcome emerging from the economic climate of the past few years, it is that the credit crisis highlighted systematic failures in how assets are valued and marked-to-market, especially more complex derivatives. National and international bodies are now addressing the problem by forcing to follow more reliable valuation processes, which consequently adds another factor to the multiplicity of market data feeds. As you may know market data spend can run into tens of millions of dollars annually, but these figures only cover the direct cost of using data. In reality, the total cost is between three and five times the initial purchase price. This statistic alone is concerning enough, but in reality most firms have little idea of exactly how to measure the total cost of ownership (TCO) for market data.
Cut duplication, cut spend One essential part of a TCO analysis is auditing existing usage. This should identify both where duplicate or redundant market data are being used, and ways to reduce those duplications. This involves checking entitlements and corresponding invoices from any source of market data that you pay for. Particular care must be taken to ensure that licenses from suppliers cover any data distributed outside the firm, as the pricing models of vendors are rarely transparent. But duplication doesn’t only occur at the level of data acquisition. If your data management architecture has evolved over time, there could very well be areas where data requirements have been addressed using multiple data sources. Taking a closer look at this might identify where this occurs and could lead to more consolidation by e.g. using less vendors and/or data feeds.
What to include in TCO TCO has been discussed in IT circles for many years. But in relation to market data, the market has no clear definition of which costs should be included in this calculation. The direct cost element of TCO should not simply be the cost of data purchased from the market: it should also include costs incurred from less transparent activities. Some other direct costs also need to be included in an assessment of annual TCO, such as data management project costs and data management software, which may require significant initial capital spend followed by recurring maintenance costs. There is also an ongoing cost for new data, which sometimes seems to increase at the whim of the vendors. The good news is that we from Screen have the expertise and proprietary methods in-house to measure all these costs!
The cost of hidden costs In any TCO analysis, there will also be indirect costs. Poor or incomplete data will have an enormous effect and be a drag on a firm’s profitability. How these costs are measured is open to interpretation, but they may include: elements of reputational risk, where invalid data use reflects badly on the organisation; cost of restitution if invalid or stale data is not identified before being used in good faith by clients or downstream systems; and extraordinary staffing costs, where data re-loads and revaluation are required to correct errors. These indirect costs will always be hard to measure and may need to be estimated, but it is imperative that they are factored in wherever possible. There may even be internal political aversion to highlighting such costs, but if they are not identified and estimated, they are unlikely to be addressed and dealt with; and it is key to any business that hidden costs must be addressed. With cost control now as important to profitability as generating additional revenue, an essential step that firms must take.
If you need any help with identifying and controlling the TCO of your market data, please do not hesitate to contact us.