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The advantages of outsourcing non-core functions have been well documented. By now most financial services executives understand the cost and efficiency benefits to be gained and appreciate the access to top level capabilities that outsourcing can provide. Given the current market downturn and the intense competition for assets among financial service providers, most Tier One firms are reviewing their IT infrastructure and considering farming out functions they feel do not need to be kept in-house. Increasingly, many middle and even front-office applications that were not outsourcing candidates in the past are being added to the list.
While Tier One companies are leaning toward outsourcing critical functions, mid-level financial services firms, are looking to gain essential new functionality from ASP (Application Service Provider) solutions, where the vendor supports, maintains and upgrades the application for the firm. These mid-level companies view ASPs as a way for them to obtain critical new functionality that they previously could not afford to license and support. In short, ASPs offer mid-level financial services firms a competitive advantage in an increasingly tough market.
Order management is a good example of an application well suited to an ASP environment. Today, there are literally hundreds of liquidity sources available worldwide, including ECNs, market makers, exchanges and liquidity networks, to name a few. To achieve best execution for their orders, traders must be able to reliably link to all these external connectivity points. Manual is no longer an option. An order management system is a necessity. An ASP solution evens the playing field for small to mid-level players by providing the same high level of technical sophistication as a licensed solution delivered in-house.
Financial services firms realise, however, that mission critical applications, like order management, cannot simply be housed with a hosting company whose only function is to maintain the box. Just as you would not trust an unlicensed handyman to install the plumbing in your house, a one size fits all hosting company will not necessarily understand the nuances of a critical application.
At the same time, as the popularity of ASPs have risen, so too, have the number of software companies offering these solutions. While these vendors may be knowledgeable when it comes to the particular application, many do not have the necessary infrastructure to support the hosting. When it comes to mission critical applications, like order management, it is essential that the ASP have both the expertise to manage the application and the infrastructure to run the operation.
Selecting a provider
Keep in mind, too, that when entering an ASP relationship, you are fundamentally changing your relationship with the provider from a vendor-client relationship to more of a partnership. You are transferring accountability for the application from an internal IT department to an outside supplier. The relationship will be much closer due to the frequency of contact and nature of the information shared. To be successful, it is imperative that the two organisations match culturally. In fact, it's a good idea to look first to vendors that you already have an existing relationship with.
Another key consideration in selecting an ASP is how the provider handles change management. With outsourcing, you are converting from an in-house proprietary system to a vendor solution. With an ASP, you are interfacing new functionality to an existing process. How much experience does the provider have in large-scale projects? How quickly will the application be up and running? Does the provider have a clear-cut and thorough change management process? The transition should be seamless.
Functionality and links to third parties, such as exchanges, ECNs, clearinghouses and other points of liquidity, are also important considerations. In today's borderless economy, a global provider with an experienced staff is a necessity.
Providers should also offer scalability and security. Scalability is key for those occasions where trading volumes increase. Security is also a concern since in an ASP relationship, the vendor may have access to sensitive company information. Appropriate firewalls, legally binding contracts and nondisclosure agreements are all vital safeguards.
Stability and infrastructure are important as well. How long has the vendor been in business? Will the provider be there to support your needs next year, ten years from now? Is the right infrastructure in place, or does it consist of a server in the company president's office? What's the back up plan? Many small ASPs use third party data centres to host the application. Limit your search to suppliers that have the infrastructure to maintain both the software and the operations. Visit the vendor's data centre. Feel comfortable with the facility.
Finally, consider the reputation of the ASP for service quality. You need total reliability and zero down time. What is the typical response time? Does the vendor offer a 24x7 help desk? What service level guarantees is the provider willing to put in the contract?
To be successful, it is imperative that an ASP be able to manage both the operation and the application. This requires an intimate understanding of the industry as well as knowledge of the company goals and objectives. A company making an ASP decision is, in effect, entering a long term strategic partnership with the provider. The ASP must be completely trustworthy, have a superior infrastructure and more knowledge about the particular application than the firm itself. In short, while cost benefit is obviously important, an ASP should also offer a competitive advantage.
About OM Global Services
OM actually runs its own exchanges. This expertise puts OM in a unique position to provide business operation services to the securities industry. More so than other providers, OM has the practical experience and knowledge base to fully appreciate the complexities involved. And, OM guarantees that the systems it operates will work all of the time.
Using as a base its vast experience as an outsourcing provider for major exchanges, OM has developed an industry leading ASP for its sell-side order management system, OneWorld. The system, one of the fastest on the street, has been benchmarked at 1,000,000 orders and 500,000 trades per day. It enables market participants to receive order flow from customers via FIX networks for the Internet and route that order flow to a broad array of execution points, including the NYSE, ECNSs, regional exchanges, select market makers and other liquidity services.
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