Effective reference data management is a tough challenge for most financial institutions, but is outsourcing it to an experienced partner a viable option? It appears it is indeed an option that many reference data managers – 95% of those surveyed by Reference Data Review – would consider, signalling a fundamental shift in the attitude towards outsourcing.
What’s driving this shift? What functions and data types would data managers actually consider handing over to a third-party? How does this view differ by sell-side, buy-side and custodian firms? What do data managers believe are the potential benefits and barriers to such an option?
These were some of the questions we set out to answer in our survey of 20 influential data and IT managers responsible for reference data initiatives at institutions in the U.K., Continental Europe and the U.S. The findings of the survey, commissioned by SunGard Data Management Solutions, are now available in a report Reference Data Management – Who Should Handle It?
We found that the drive over recent years to centralise data management efforts in order to meet a multitude of regulatory requirements has highlighted substantial redundancy – not just firm wide, but industry-wide.
Basic functions such as data sourcing and loading are manually intensive, have significant redundancy and are repeated across every institution, with little opportunity for any institution to add value.
We found that it was these basic functions that our surveyed managers would be more willing to outsource. The general rule appears to be the closer to an institution’s entry point the data or function is, the more open respondents were to considering outsourcing. The deeper into the organisation, where the data or functions are more entrenched and proprietary, the more resistance there was to the outsourcing concept (see the report for full details of the functions and our managers’ responses). Similarly managers were more likely to consider outsourcing management of external data, at 66%, while only 40% would consider outsourcing internal data.
Among the many highlighted benefits of leveraging the expertise of a service provider, we found that data managers rated most highly reduced risk and improved regulatory compliance, where 75% and 65% respectively said this would be of primary importance (see Chart, Page 7).
But in addition to the general benefits that come from getting your reference data house in order (outsourced or not), if additional institutions then leverage the same common outsourced functionality, all participants could benefit from the resultant economies of scale.
Taking a more strategic view, buy-and sell-side firms alike are recognizing that distinguishing themselves and focusing their resources on more value-added activities requires “leap-frogging into a new paradigm that eliminates much of the commodity data collection and validation processes”. This is a new way of thinking that could dramatically change the data model and industry dynamics.
The recognition and enthusiasm for such solutions is, however, tempered somewhat by the reluctance of institutions – conservative by nature – to be pioneering and take that leap, preferring for ‘someone else’ to set a precedent for outsourced solutions. So as we speculated in the last issue of Reference Data Review, the news that Banc of America Securities has chosen to outsource its pricing data sourcing and cleansing as well as its terms and conditions and securities identifiers data management to SunGard may be a turning point that helps pave the way (RDR, May 2005).