I

There's No Such Thing as a Free Lunch

As any investor will tell you, you can't accumulate unless you speculate. And when it comes to financial technology, the same rule applies. In other words, there will always be some kind of economic risk involved when you invest in new technology, or enhance your existing systems.

Minimising this risk has always been an important objective for the financial services industry. But it is now more critical than ever at a time when investment and securities banks are under increasing pressure to control costs while delivering enhanced services in an increasingly competitive marketplace.

One of the most effective ways of protecting your IT investment is to ensure that your systems can scale efficiently in response to changing requirements in different areas of your business. In fact scalability has risen to the top of most banks' list of priorities for a number of reasons. The rapid increase in merger and acquisition activity has hit banks hard at the system level. Many now find themselves in a position where they need to manage a sudden increase in the number of accounts, trades or similar transactions.

At the same time, transaction margins have fallen. The only way to cope with this situation is to increase the volume of transactions passing through the bank. Again, systems need to scale to meet this increased activity. In the past, many organisations, not just banks, have taken a relatively blunt approach to this challenge throwing expensive processing power at the problem. As a result, they have saddled themselves with additional costs including support and the total cost of ownership associated with hardware. This leads to the classic scalability model familiar to most people (see diagram).

Ideally, there should be a constant relationship between the cost and performance of your systems. But in reality, it is extremely difficult to achieve such a smooth relationship. Cost and performance increase in clumsy steps; it's rather like putting your foot down on the gas and lurching from nought to 60 at intervals of 10 miles per hour.

As a result, the majority of banks err on the side of caution, setting their performance limits at a safe threshold but failing to achieve the most efficient investment in technology. Most banks are now frantically trying to tune the performance of their IT engines so that they can achieve smooth acceleration in every area of the business.

Scaling for success
The first thing to remember when it comes to scalability is that there is no such thing as a free lunch. Every further increase in performance requires a disproportionately larger increase in investment. The costs associated with each system will also vary and establishing these figures is essential. Total cost of ownership, implementation effort, support and training all need to be clearly determined.

At the same time, performance metrics must to be identified and then prioritised according to the needs of the application in question. For example, there is an obvious trade off between throughput, which is more important in areas such as batch processing, and latency which is more critical for areas such as an interactive user interface.

The next step is to establish the maximum performance level for each chosen metric and the costs associated with these levels. This needs to be based on the exact business requirements and a clear understanding of the business, technology and operational risks of setting the performance level too high or too low. As part of this process, banks need to ask the following questions:

n What are the initial business needs?

n What are the projected growth rates?

n What's the initial cost?

n What's the initial performance?

n What's the return on initial investment?

n What's the initial system capacity utilisation?

nl What's the incremental cost?

n What's the incremental performance gain?

n What's the cumulative ROI?

nl What's the time between incremental improvements?

n What are the business, technology, and operational risks associated with the scalability path?

By asking all these questions, banks can get a firm grasp on all of the issues that will help achieve a constant relationship between cost and performance.

Scalability in action
Equipped with all this information, what specific actions can banks take to improve the overall scalability of their systems? The most important rule is to continue applying well-understood techniques and best practices, but to manage scalability in the same way that you manage your core business.

Customers who have implemented FTI's StreetEnterprise solution are already starting to see the benefits of this new approach. StreetEnterprise is a complete suite of products including a single integrated operating platform and applications for reference data, portfolio accounting and global corporate actions. These customers anticipate a tenfold increase in transaction volumes as they migrate their transaction processing to StreetEnterprise.

To achieve the increased performance, they could have increased the power of their hardware by a similar factor. While this might have solved the technical problem, it would have been hugely expensive in terms of kit, maintenance, floor space and other elements that contribute to hardware TCO. Instead, they can deploy FTI's Street Accelerator software, which can deliver anything between a 10 and 30 increase in transaction throughput. The lesson here is simple: when it comes to scalability, software is often the better solution.

Looking forward
Scalability will remain an issue for financial services organisations for some time to come. The pace of change in the marketplace is set to accelerate further, while the number of new market entrants with leaner transaction models is set to rise. Mergers and acquisitions have yet to run their course, and banks must be capable of managing an ever increasing number of transactions.

The good news is that in comparison with two years ago, there are many more proven tools and techniques to hand that bring the performance/cost constant closer than ever. In particular, software now offers a far more cost-effective route to true scalability. By working with some of the guidelines; and the software solutions - described above, banks can maximise the performance of their systems, while protecting their investment more safely than ever before.

Dr. Mohan Patel, PhD
CTO & SVP
Strategy & Business Development
FTI