Cloud computing in financial services: a reality check

A rapid shift in attitude towards cloud computing is happening within the financial services industry. A recent Gartner survey (1) found that cloud is the top priority for global FS CIOs, yet the hype surrounding the topic often suggests otherwise. IBM’s Nick Davis cuts through the noise to answer the question – what is really happening with cloud computing in the financial services sector?

What is all the fuss about?In technical terms, a cloud computing platform automatically assembles, connects, configures and reconfigures virtualised technology resources to accomplish business goals.

In business terms, it eliminates the constraints of where physical IT resources are located or what specific technologies they employ. This enables the rapid, low-cost formulation and deployment of new business services and new partnerships.

Although the technology is still immature in many places, cloud is a top priority for organisations that need to continue a long-term focus on efficiency and boost their growth strategy by becoming more flexible and agile, supporting new business models, markets, channels and products.

Speed is of the essence

The financial services industry today is a mixture of both opportunities and challenges, including exponential growth in emerging markets, shrinking operating margins, a tighter regulatory framework, and competition from new market entrants. To tackle this complexity, businesses need to find new and more creative ways to increase their agility, efficiency, cost-effectiveness and responsiveness. As the pace of change grows, financial services companies will need to move ever faster to deploy new products and services.

As an enabler of innovation and a catalyst for change, cloud computing promises to play a significant role in the banks’ efforts to reinvent their business and operating models in the coming years. Indeed, the same Gartner survey says that 39 per cent of those surveyed expect that more than half of all their transactions will be supported via cloud infrastructure and software as a service (SaaS) by 2015.

This tallies with my own experience working on cloud business development in the financial services sector for IBM – uptake is on the rise. I have found many financial services companies are initially utilising cloud computing for test and development – this represents a relatively low-risk workload for organisations, while offering significant potential for rapid ROI. However, a lot of my conversations with individuals often turn quite quickly to questions about security, so I will deal with this issue first.

Cloud computing can solve security issues

Many concerns about cloud are not well-founded. That is not to say that organisations should not plan their cloud implementations carefully, taking into account the compliance, data management and security policies. However, many of the common concerns about cloud apply equally to technologies already in use, and yet do not seem to have stopped anyone from using them. In fact, there are important issues that can be solved by storing data and applications in the cloud.

For example, the growing Bring Your Own Device culture in the workplace can create a real headache for IT teams. In one sense, it is helpful for employees to bring in their tablets and smartphones if they work better (and are happier) on these devices, but crucially, if company data is on a personal device, there are some serious questions to be answered: Is the device secured to a level that complies with company policy or the regulatory environment? Who owns that data? How can compliance be enforced? How secure is data if the device is mislaid or stolen?

A well-implemented cloud solution can solve these problems by holding the data in a much more secure environment (eg a data centre) than a personal device, and allowing access through a secure connection like a VPN. This can kill several birds with one stone. No data is stored on personal devices, ensuring the organisation retains full control over its data while enabling compliance and security policy to be enforced – with the added perk of allowing the CEO to show off his new tablet in meetings! If, on top of this, there is a need for extra security platforms for mobile devices, many of these can be hosted in the cloud too.

By choosing a trusted partner to deliver its cloud services, a business can take steps to be sure that their critical systems and data are protected by the right mix of consultancy, software, hardware, and managed security services.

The real risk of cloud

One of the biggest and yet most understated risks around cloud computing is the risk of being left behind by non-adoption. Cloud models enable competitors to appear almost overnight, without needing heavy capital investment in infrastructure and IT. Moreover, cloud enables business agility – the ability to rapidly change direction in response to market forces, and to re-provision resources quickly from shrinking market sectors or business lines.

Some of the specific benefits of a cloud model that help companies to grab a foothold in a market so rapidly are:

• Self-service IT – hardware, software and applications can be deployed almost immediately from a menu of services
• Automatic provisioning – capacity that scales automatically with demand – an elastic IT platform that can cope with spikes in demand without human intervention or increased administrative costs
• Standardised environment – enabling simultaneous service deployment and upgrades for all users, regardless of location

The recent cloud deployments by NASDAQ and CME (NASDAQ Data-On-Demand and CME DataCloud) are good examples of this. The exchanges have experienced multi-faceted benefits, driving down the cost of managing exponentially increasing levels of market data while reaching new potential customers and generating revenues from that data. Furthermore, levels of automation have increased and the data is managed in a transparent and regulatory compliant manner at less cost.

The case for public, private and hybrid clouds

Taking a template-style approach to cloud deployment is not likely to deliver an IT system that supports the strategic goals of an organisation. Particularly in financial services, it is important to balance the cost and flexibility benefits of a public cloud with the regulatory requirements around data in the industry, and the need to keep critical systems running to avoid the dreaded cost of downtime.

A hybrid model is often deployed within financial services to ensure redundancy and optimal performance. Critical applications and data are run from a private cloud and elasticity and burst capacity are provisioned through a public cloud partner. This model enables the security of a private network for the most sensitive work and information such as trading systems, while also enabling cost-effective solutions for less critical data and application such as end of life data for archiving.

Another model is to develop a private cloud to meet specific business goals and to recoup some of the costs by selling that same service to other businesses with similar needs.

For example, an insurer might develop a private cloud-based case management system to reduce their IT overheads and business agility. This cloud could enable a consistent experience for customers and employees globally, as well as enforcing business processes – ensuring regulatory compliance and transparency. It is very likely that this case management system would work well for another insurer with a focus on a different segment of the insurance market or a business in a completely unrelated sector. Neither business could justify the investment in their own private cloud, but would be interested in purchasing a case management solution that is already tried and tested by an industry peer. This opens up a potential new revenue stream for the originator of the cloud-based system.

A technology of empowerment

In conclusion, it is crucial to weigh the risks of cloud in a logical manner. While it is vital – as with any IT deployment – to be prepared for any potential issues arising from adoption, itis also important to balance possible pitfalls against the lost opportunities and cost of not implementing cloud.

The debate around cloud computing has often focused on security, but to fixate on this alone is perhaps to miss the opportunity to redefine IT in a way that is more agile, more strategic and more effective at delivering quality resources to employees.

The market leaders of the future will be exploiting this technology to its full potential: using it to empower employers, to get closer to their customers, and to rapidly roll out products and service to meet changing market conditions in a way that has not been possible with legacy IT models.

1. Gartner Says Cloud Banking Can Drive ‘Creative Destruction’ in the Banking Industry

2013 Predictions: What comes after the financial services industrial revolution?

4 December 2012

2013 Predictions: What comes after the financial services industrial revolution?

Tony Tarquini, Director of Strategy, Financial Services, Pegasystems, outlines what he thinks will be one the key technology trends in 2013 – namely, cross-channel retail banking integration.

The director of financial services strategy at Pegasystems, Tony Tarquini, thinks that 2013 may at last see some moves towards cross-channel retail banking integration as post-industrial banking gets underway.

Paul Tucker, the deputy governor of the Bank of England addressed the British Bankers’ Association (BBA) annual conference in October, discussing the “industrialisation of retail and business banking that occurred during the years of plenty”.

Tucker, who has recently lost out on the top job after Canada’s Mark Carney was given the governorship, observed that intelligent resolution tools are necessary for the future of financial services, prompting a discussion at the BBA Conference about what we can learn from the past and where the sector is heading in 2013 and beyond.

In banking, from the 1970’s until today, the push has been to drive down cost by centralising operations and benefiting from the economies of scale that the “industrialisation” of banking could bring. There are great parallels with manufacturing, albeit 50 years behind. In financial services we are now approaching the post industrial revolution era marked by the transition to “mass customisation”.

We are seeing the introduction into the banking of new technologies, which allow for mass customisation at a significantly lower price to serve. In the same way that car manufacturing went from hand made cars, to Ford-centralised mass production “in any colour as long as it is black,” through to today’s manufacture to order following a customer’s spec.

In short, the financial services world is maturing in the same way manufacturing has done in the decades before it. It is moving to a position where customers get what they want, when, where and how they want it, using whatever channel suits them best – whether it is branch, phone, online or mobile.

Targeting the customer 
“Industrial” banking IT has previously focused all its resources on identifying the ‘who’ of a customer – bringing the branch customers into the centre by gathering a 360 degree view of the customer data from the various distributed systems. However, traditional IT systems are not able to integrate this data insight into actionable strategies, leaving operations directors with the hard task to figure out what to do with all this data.

Today’s leading edge software moves onto the What, Why, Where, When and How, guiding the operator and customer through the intended process to the right outcome for that specific customer in that specific situation. The telecoms sector has led the way in this regard, providing ‘Next Best Action’ prompts to the contact centre operator, which has revolutionised their retention and cross/up-sell results, and is widely used by retail banks.

When and where
The “industrialised” banks have created a series of disconnected channels (telephone, on-line, mobile), developed in isolation as each requirement has come to maturity. An interaction in one channel is in a separate unseen silo to any other channel. Integration is necessary for the future and I believe moves will be made towards this in 2013.

In the post industrial world, leading edge technologies allow the present connected generation to access their banks 24/7 through a variety of channels, beginning an interaction with one channel (e.g. on mobile while on the train) and concluding it online or through a contact centre when they get home. Starting communication on one device and accessing information seamlessly across different channels is essential to the future of the financial services industry.

This generation is time poor but more demanding, so they want to be kept constantly up-to-date with how their funds are being managed and what the best options are for the future. Interactive banking applications will offer customers the opportunity to track transactions in real-time, allowing them to check in via any device where their funds are, what are the service fee charges and how long it will take until the transfer reaches the recipient.

In 2013 and beyond we will see a stronger focus on financial service applications that engage customers in a more interactive manner, offering real-time services to manage communications and provide a more seamless customer experience.

What and why
Now that the “financial services industrial revolution” is over, leading edge systems are directing the customer interaction in the What and Why – achieving the specific intended outcome for that customer.

This does not rely on individual operators having to trawl through mountains of screens, windows and data to get to the necessary information. It analyses the customer position in real time and prompts the operator with suggestions as to the next best action for that specific customer interaction in that specific situation. It leaves the operator to concentrate on providing a great customer experience.

Technology can also help banks identify the best channels to contact customers and when is the best time, in order to provide targeted services and smooth on-going communication. When using an ATM, for example, customers can be given the option of requesting information about new offers and products. This information can then be sent to the consumer’s smartphone, ensuring quick, seamless and interactive updates on new possibilities.

In 2013, predictive analytics will play an even greater role in identifying the needs of financial services customers. These services can more intelligently leverage data to not only identify but also anticipate customer needs. Predicting the most appropriate services to offer customers based on their past interactions will enable product and service innovation, allowing organisations to maintain a competitive edge.

…and finally the how
In the “industrialised” world, the operator is presented with a multitude of windows onto different systems with cut and paste facilities (in secure contact centres there are no pens, paper or other means of recording customer information). The operator is there to interpret how the customer can achieve their outcome.

In the “mass customised” world, a customer’s unique profile can be recognised by their operator, who tailors the experience based on a number of criteria – for example, their lifetime value or most recent experience to offer them the best experience in getting to their required outcome.

Post-industrial banking systems can move banks towards a customer oriented architecture, using IT architectural techniques such as a shared service orientated architecture (SOA), which allows retail banks to once again treat the mass of their customers as individuals and achieve the outcomes the individual customer want, at a lower price.

The level of cross-channel customer service hasn’t happened yet – as anyone who has ever been left hanging on a telephone call to a contact centre or had to re-enter log-in details when transferring to a new channel can attest. But I believe that 2013 may start to see some moves in this direction as SOA becomes more widespread, analysis of ‘big data’ and unstructured information increases and banks realise that they need to up their game to retain 21st century customers.

71% of financial sector CIOs believe mobile banking will be important to their customers by 2015

10 October 2012

New study from Fujitsu highlights increasing importance of mobile in reshaping the financial services sector

A study investigating the top business priorities for the Financial Services industry in the UK shows that mobile will be an increasingly important channel for British financial institutions over the next three years. 49% of organisations stated that mobile banking is important to customers today, while 71% predict it will be by 2015.

The study was conducted with 50 CIOs from across the UK wholesale, investment and retail banking community. Three quarters of respondents felt that the main benefit of investing in mobile banking was the ability to retain customers and also to enhance customer loyalty through better customer experience. This was second only to it being a new revenue stream for financial institutions.

However, IT leaders admitted that there are still significant barriers to deploying a successful mobile banking strategy. 64% feel that security is still a significant barrier, with 42% also deterred by the investment needed.

“The reputational crisis that the financial services industry has been through has tested customer loyalty”, said Anthony Duffy, director of retail banking, Fujitsu UK & Ireland. “Mobile banking offers a growing route to customer acquisition and to enhance satisfaction. There is a need for financial institutions to reinvigorate their relationships with customers – and mobile provides a great opportunity for them to do this.”

The study also revealed:

  • Cloud computing is now high on the agenda of CIOs, with 60% of banks believing that it will help them meet their business strategies. Furthermore 64% believe that cloud computing is a key enabler of change within their organisation. A significant number of respondents plan on deploying cloud-based solutions to drive efficiency with core functions, particularly in retail banking functions, such as loan processing (77%), credit card processing (70%) and mortgage processing (64%)
  • Investment is critical, with 65% CIOs warning that in order to transition the IT department to truly meet changing business needs, extra budget will be required
  • The right skills are also crucial. Financial Services companies are increasingly looking for help from third-parties, provided that the latter can demonstrate understanding of core processes. 67% of interviewees look for this strength, with a further third seeking enterprise/infrastructure skills.

“The financial services industry has faced some tough challenges recently and will continue to do so for a few years, at least”, confirmed Duffy. “Banks need to adapt, change and seek new revenue streams in order to thrive and succeed”.

10 Genius Ideas That Changed Marketing Forever

Posted by Corey Eridon

Tue, Oct 09, 2012 @ 08:00 AM
history of marketing ideas

This is an excerpt from our new ebook, 100 Ideas That Changed Marketing

At the beginning of this year, we set out to create an infographic that gave a rundown of the history of marketing. And as we looked back, we found that one idea from all the way back in the 1400s — the invention of the printing press that made mass media possible — totally and completely changed the entire trajectory of our industry. Heck, you could argue it made our industry possible!

That made us think of all of the other advancements that have rocked the marketing world. Because we kind of have a thing for shaking things up 🙂 So, we compiled this ebook, 100 Ideas That Changed Marketing, and we wanted to share 10 of the highlights from it right here. Take a look, get inspired, and let us know if we should add a one-hundred and one’th (one’th? That’s not right, right?) idea!

10 of the 100 Ideas That Changed Marketing Forever

1) Agile

If you’re agile, you can easily and gracefully move at a rapid pace. In 2001, through the Agile Manifesto, the idea of agile was introduced to software development, and it defines an
iterative approach that promotes flexibility and customer collaboration. “In many ways, marketing used to be a lot like software development,” wrote marketing technologist Scott Brinker. “Yearly plans of a few major initiatives would lumber forward with rigid hand-offs between the different stakeholders — researchers, strategists, creatives, media buyers, etc. The end-to-end process was time consuming and difficult to alter midstream.”

By implementing an agile approach, marketers should be able to make iterations faster and respond to change rather than simply follow established processes. Today, with the proliferation of new technologies, the ability to adapt to the rapidly changing marketing landscape is becoming increasingly important and necessary for business success. As Michelle Accardi-Petersen wrote in her 2011 book Agile Marketing, “the old integrated marketing methods don’t work … that is, unless you have an agile process that allows you to move much faster and to adapt to these marketing pressures on the fly where necessary.”

2) Blogging

As inbound marketers, I think we’re all familiar with this … but when’s the last time you took a step back and realized, “Wow, blogging is one of the strongest marketing tools in my kit.” The times they are a-changin’ eh?

Short for web log, a blog is a term used to describe a series of online articles displayed in chronological order that generally encourage comments from digital readers. Blogs are usually maintained by an individual or group of people and will traditionally include regular entries of commentary, descriptions of events, or other material, such as photos and videos. A blog is a long-term marketing asset that brings traffic and leads to your business. It introduces you as a thought leader in your space and allows you to earn people’s trust.

Nearly 40% of U.S. companies use blogs for marketing purposes. “This platform, if done properly, can generate tremendous traffic, leads and sales for your business that you
otherwise would not have had,” wrote Marcus Sheridan, Partner at River Pools and Spas and Founder of The Sales Lion. First, business blogging helps you in respect to search engine optimization (SEO). The more blog posts you publish, the more indexed pages you create for search engines to display in their results. Second, your blog is an asset that introduces you as a thought leader — it will help you earn people’s trust and stay top of mind for many in your
community. Finally, a blog gives you real estate to place calls-to-action in order to generate leads.

The thing about blogging is that anybody can do it, but remarkably, not everybody does. This gap represents a huge opportunity for serious marketers to differentiate themselves — with their bosses, and their leads and customers.

citizen journalism3) Citizen Journalism

The new media landscape has reshaped the ways in which audiences access information. A Pew Research Center report showed that some 46% of Americans visit from four to six media platforms on a typical day, and only 7% have a single favorite one. For their daily information, online readers consult various sources, including newspaper sites, email, and social media. Additionally, social networking sites like Facebook and Twitter have fostered recommendation systems that increasingly shift the power of information distribution in the hands of non-journalists. In these environments, one’s community can make editorial decisions by endorsing stories.

Marketers need to recognize the participation of citizens in the process of newsgathering and always provide credible sources and references when sharing public information. Don’t underestimate the investigative spirit of today’s consumers and people’s ability to get to the truth through in-depth online research. Businesses need to be more alert than ever to the
way they present information and facts because inaccuracies can easily be exposed.

4) Copyright

Copyright is a legal concept that protects the work of an individual from being used without
their consent. It gives the creator of an original work exclusive rights, including the right to receive credit for their work and the right to choose who can use and remix their work.
With the rapid development of technological advances, it has become easier for people to create digital mashups of existing works, which has led to copywright wars and lawsuits.

American academic and political activist Lawrence Lessig argues that we now live in a Remix Culture which encourages people to engage in collaborative creation and stimulate their creativity in new ways. “It is time we stop wasting the resources of our federal courts, our police, and our universities to punish behavior that we need not punish,” he wrote in Remix: Making Art and Commerce Thrive in the Hybrid Economy.

Now that the role of a marketer is so intertwined with the role of a publisher, it’s not difficult to imagine the different ways in which copyright affects the marketing professional. Not only is pirating content just poor internet etiquette, but it also results in duplicate content that hurts both websites on which the content is featured in the search engine results pages. In fact, one of Google’s 2012 algorithm updates will be using the number of valid copyright removal notices as a signal for which websites should be displayed in the SERPs. To stay away from such punishments as a marketer, you need to ensure you are not stealing people’s content. Make sure you are
giving your sources credit in all of your content, including blog posts, webinars, ebooks, and even social media.

gamification5) Gamification

Gamification describes the adoption of game design elements and game thinking by nongame
contexts. It’s applied to make less interactive situations more engaging to users. Some forms of gamification in marketing include awarding badges or providing incentives for participation in specific activities.

For instance, at HubSpot we often give away prizes to random attendees of our marketing webinars or people who share our content with their networks. “Games and research into human psychology have taught us that people are happier when they earn something, rather than when it is given to them,” wrote Darren Steele, the strategic director of Mindspace, and co-author of the gamification book, I’ll Eat this Cricket for a Cricket Badge.

6) Inbound Marketing

Inbound marketing is marketing that’s useful. It means acquiring customers by attracting and nurturing prospects with exceptional content, data and customer service — not interrupting them with annoying, useless messages. It means pulling prospects in with a magnet, not beating them over the head with a sledgehammer.

“Consumers have learned how to ignore TV commercials with Tivo, radio commercials with Satellite radio, email marketing with filters, etc.” wrote in our LinkedIn discussion web presence strategist Linda Lovero-Waterhouse. “Now our goal is to give consumers the information they want *when* they want it. What a concept!”

Inbound marketing tactics tend to be cheaper than traditional marketing tactics, too. Companies that focus on inbound tactics have a 62% lower cost-per-lead than companies that focus on outbound tactics.

There are three key stages to inbound marketing: get found, convert, and analyze. Eventually, inbound marketing boils down to, as web marketing professional Jonathan Mallia noted, “knowing your customers’ needs and feeding them with the right content that ultimately links to the product you wish to market and finally sell. If this is cleverly executed in a strategic manner, you will realize that you have only spent a small fraction of your advertising budget to convert a good number of good quality, sales-ready leads. Why? Because Marketing = Educating.”

7) Social Networks

With the invention of the World Wide Web in 1990, the internet opened up multi-directional communication channels and embraced collaboration. Its digital format removed the physical limitations and expensive cost of producing and distributing information. Forums and chat rooms started to populate the digital landscape, often used to share news. Internet Relay Chat (IRC), for instance, was introduced to the general public in 1991, when the platform offered real-time coverage of the First Gulf War.

In the early 2000s, people joined the new participatory media culture by creating and disseminating content through their personal computers, smart phones and digital cameras. Online users started blogging, video broadcasting, and using social media. Social networking site Facebook, which was founded in 2002, now has more than 900 million active users. Then of course there are the other popular social networks like Twitter, LinkedIn, Pinterest, Google+ and YouTube.

“Social marketing changed marketing forever,” wrote Jose Antonio Sanchez, Communications Specialist at Uberflip, in our LinkedIn discussion. “Marketers have realized that they need to have valuable two-way conversations with their audience before getting it to ‘buy’ their product. Consumers can be convinced but not persuaded anymore.”

social proof8) Social Proof

Social proof, also referred to as “informational social influence,” is the concept that people will
conform to the actions of others under the assumption that those actions are reflective of the
correct behavior. In other words, it’s the mentality that, if other people are doing it, and I trust
those people, that’s validation that I should also be doing it. This third-party validation can be a
very powerful motivator for your site visitors’ and prospects’ actions.

One traditional example of social proof is when TV shows play canned laughter or recorded applause to elevate the perception of funny or applaudable situations. So while the concept of social proof may be nothing new, the rise of the internet and social media adoption have certainly made social proof a lot easier to leverage and exploit, especially in a marketing context. Building and providing better visibility for your business’ social proof can be a powerful addition to your marketing strategy.

The forms of social proof in marketing can vary from social media praises and social advertising to case studies, testimonials and user reviews.

9) Virality

Viral marketing is word-of-mouth marketing that is carried out voluntarily by a company’s advocates. “Viral marketing,” wrote Seth Godin in 2008, “is an idea that spreads — and an idea that while it is spreading actually helps market your business or cause.”

Godin goes on to describe two types of viral marketing: one in which the message that spreads is the product itself, and another in which the message isn’t related to the product. YouTube as a platform would be an example of the first one, and a video on YouTube would be an example of the second.

Email has facilitated the spread of the second type of viral marketing. Tools such as “send this page, article or website to a friend” encourage people to refer or recommend your newsletter, company, product, service or specific offers to other people. In order to leverage viral marketing, you need to have a strong community that will start the process of spreading your message. You can build your community even before you have a product. Letting users into the process early helps provide a sense of ownership while it gives a company valuable feedback needed to make the product better.

“Being viral isn’t the hard part,” observes Godin. “The hard part is making that viral element
actually produce something of value, not just entertainment for the client or your boss.”

10) Web 2.0

When the Web first became available to users, it was primarily about retrieving information. As it evolved in the 2000s, it became known as Web 2.0 — a platform associated not only with consumption of information, but also with collaboration and participation. It is characterized by applications like blogging, search engine optimization, and social media. The term is associated with Tim O’Reilly because of the O’Reilly Media Web 2.0 conference in 2004.

O’Reilly explained that Web 2.0 is based on the principle that online databases improve as people use them. “It’s about how businesses work differently in the age of the network,” he said. Businesses have to figure out how to create more value for their customers than for themselves. Ultimately, customers and businesses are capable of building value together. Think about how you can build a platform online that enables the community to bring value to your business for you.

What other brilliant ideas do you think changed the marketing landscape forever?

Read more:

Half Of Senior Risk Executives Interviewed At Leading Banks Believe Risk Information Across Enterprise Is Inadequate

London – 28 September 2012

White Paper Reveals About Two Thirds of the Institutions Interviewed Are Currently Reviewing Risk Infrastructure to Enhance the Value of Risk Information Across the Business

Half of senior risk executives interviewed at leading banks believe that capturing and processing risk information across their enterprises is currently inadequate. Additionally, seven in 10 financial institutions sampled* acknowledged that they are currently reviewing their risk infrastructure to better understand risk information, according to a White Paper by IDC Financial Insights sponsored by Sybase, an SAP Company (NYSE: SAP) and industry leader in enterprise and mobile software.

Based on interviews with senior risk executives from tier one and tier two financial institutions, the White Paper examines the role of the risk function in optimising the effectiveness of capital allocation and consumption at all levels of a financial institution.

Rachel Hunt, Head of EMEA IDC Financial Insights commented: “In recent years the banking industry has paid lip service to the importance of the risk function; however, the White Paper shows that now the Chief Risk Officer is being empowered to deliver a more proactive strategy that is focused on value creation rather than simply managing financial risk in arrears. The challenge with playing such a pivotal role is the pressure on risk management performance has intensified.”

“While senior risk executives are required to play a more strategic role and drive capital opitmisation in the post-crisis world, they are in danger of being undermined by a restrictive legacy technology that severely impedes the value of risk information. Forward looking firms will invest in risk data infrastructure to ensure that high quality risk data is consistent and available throughout the organisation,” said Stuart Grant, Financial Services Business Development Manager at Sybase, an SAP Company.

According to the White Paper, eight out of 10 view the risk management role as a strategic partner to the board, whilst seven out of 10 cited its importance in driving strategy across the business. Once a reactive tool, the risk management paradigm is evolving to take on a decidedly more proactive approach that creates value. The front office faces strict internal mandates to take responsibility for the risk it originates. While a few banks are able to refresh this type of information intra-day, real-time updates delivering value to the business are viewed as a distant prospect. Many institutions are still forced to accept trade-offs between timeliness, reliability and completeness of analysis when it comes down to risk, liquidity and capital information.

“In the coming months and years, risk management has the opportunity to cement its recently attained status as the core of a financial institution. However, this will require material investments of time and money to bring the risk information and analysis capability to a level of implementation commensurate with the demands of today’s world,” Grant added.

A busy year for Big Data errors

By Ralph Baxter,
CEO at ClusterSeven

2011 should go down as the most significant year yet for errors in the sea of unstructured financial data – increasingly seen as part of the Big Data problem engulfing all modern institutions. One wonders what 2012 will bring.

Despite the problems that these errors have caused, firms such as ClusterSeven face a huge challenge ensuring that ‘data management risk’ gets its fair share of the media spotlight. For example, the biggest data error story of the year was largely under-reported. At the end of October, the German government announced that the country was €55bn [sic] “richer” after an accountancy error undervalued assets at the state-owned mortgage lender Hypo Real Estate.

Cited by Reuters, the finance ministry was quoted as saying: “It was due to sums incorrectly entered twice.” (1)

One can presume that these incorrect sums were entered into the most common host of unstructured financial data – i.e, a humble spreadsheet. Without a proper data control process in place, nobody knew much about them until checks were made later on. How many other such errors are currently – or historically – littering the balance sheets of the world’s financial institutions and national economic data?

Other errors came to light across the course of 2011. In August, the UK’s Office of National Statistics had to revise UK construction industry data sharply downwards after admitting an “arithmetical error” had caused it to overstate the strength of the sector in Q2 by 180 basis points.

In October, Richard Cuthbert, CEO of UK outsourcing specialist Mouchel, stepped down after a spreadsheet-based accounting error reduced Mouchel’s full-year profits by more than £8.5 million to below £6 million, a move which prompted a profits warning.

As the global financial and economic malaise drags on, the fear is that data management will not be a core risk for financial institutions looking to cut costs. This is particularly ironic given that less IT resources will mean more spreadsheets and more pressurised users mean it will become easier for errors to occur.

It is common for audits of spreadsheet estates in leading financial institutions to exceed 10s of millions of recently active files – a staggering indication of the deep-rooted nature of spreadsheets in the modern business world. It is also an indication of the huge risks firms are exposed to if these estates are not managed properly.

One positive development is that spreadsheets have become a core focus for market regulators such as the Financial Services Authority (FSA) in the UK. The FSA has stated very clearly that one of the biggest risks for insurance companies in the run-up to Solvency II is managing the data contained in large estates of spreadsheets.

There is clearly a great deal of work to do, however. According to recent research by ClusterSeven, just over one in two (57 per cent) of spreadsheet users have never received formal training on the spreadsheet package they use.(2)

Almost three quarters of respondents (72 per cent) admitted that no internal department checks their spreadsheets for accuracy, with only 13 per cent reporting that Internal Audit reviews their spreadsheets.

ClusterSeven is in the process of conducting further research into spreadsheet risk among senior business professionals. The early indications are that while spreadsheet risk is seen as serious, companies are simply not putting the right structures in place to mitigate or, better still, eradicate it.

In short, financial institutions will continue to report high profile instances of data mismanagement and fraud unless they take 100 per
cent control of the vulnerable financial data files that move and manipulate information between their business systems.

These include files known as CSVs (comma separated variable), plus spreadsheets and Microsoft Access Databases. Spreadsheets and CSVs are the ‘glue’ that joins everything else together. If this ‘glue’ is contaminated – such as bad data values – then this will be extremely difficult to spot further down the line. Many firms get used to accepting exceptions in this data such as test values or balancing items. However, these loopholes can hide more malicious entries for long periods.

For firms that have put the right system in place to ‘control’ spreadsheet usage and invested into defining, controlling and validating
spreadsheet processes, the rewards are significant.

Actuaries, for instance, benefit from the ability to extract, manipulate and represent the data spreadsheets contain in very fast and efficient manner and to re-present this data as the business environment changes – without being delayed by unnecessary checks.
These rewards include such things as data trending over time, automated documentation to avoid increased administration costs and automated validation of data feeds into the internal model and other core systems.

As ClusterSeven will keep on highlighting, it is only when a serious financial mistake occurs that the subject of spreadsheet risk becomes a discussion point. Many firms do not realise how vulnerable their unstructured financial data processes are until it is too late as they lack formal processes and tools to make sure all these critical data files are accurate and truthful.

Indeed, many firms do not accept just how fundamental spreadsheets are to their business. The outlook for 2012 does not look particularly rosy: we can expect many more errors to swim to the surface over the next 12 months.

Koger: Can Private Equity Firms Afford The Risk of Spreadsheets?

Private equity firms continue to rely heavily on Excel spreadsheets when it comes to data calculation management, but a recent review paper by the UK’s financial services watchdog has prompted a rethink of this business practice.

The paper by the Financial Services Authority (FSA) recently highlighted that data management was a key area in where firms could do better to achieve lower levels of operational risk.In a bid to strengthen their business models with better data management, private equity firms have reached a point where they must decide whether to continue relying on Excel spreadsheets or consider the use of an expert system for private equity administration.
In making a balanced decision, private equity firms may ask what the risks are of spreadsheets and what added benefits a software provider could add.Some of the drawbacks with spreadsheets include significant reliability problems, high human error risks, complexity, capacity limits, lack of transparency, security, and lack of auditing and revision controls.Key man risk is also key – with the average life of a fund being around eight to ten years and the average tenure of a CFO averaging around three to four years, it could take a significant amount of time for someone else to figure out all the spreadsheet calculations – assuming they can, that is.

Ras Sipko, chief operating officer at Koger, which provides administration software to private equity firms, explains: “Spreadsheet risk is a real concern, and one that GP’s are growing more serious about tackling. While Excel offers a short term solution around calculations, it just doesn’t offer long term reliability and audit trail that’s required.”

“Currently there are systems on the market that provide alternatives to Excel, but go much further to satisfy transparency requirements,” he adds.

Koger’s private equity software for example– PENTAS – manages all the investor data from initial commitments, transactions, drawdown’s, to complex fee calculations like waterfall distributions alongside reporting, compliance and auditing services.

PENTAS provides users with greater flexibility and automation of specific processes, ensuring efficiency and accuracy – and those working in private equity know too well the importance of accuracy and timely maintenance when it comes to making importance business decisions.

In addition, with better transparency, auditing control, control over user access and being able to track user changes, private equity firms could significantly cut the risk of errors and be better equipped to meet the data management recommendations of the FSA.

So, as private equity players reach cross roads, it seems there is only one real route to success for reliable data management and risk control.

Why Hedge Funds Need to Consider Spreadsheet Risk

Written by: Chris DeNigris
Risk undoubtedly plays a major factor in any business today, but for hedge funds in particular, with the complexity surrounding them, risk of any kind should sound alarm bells.One of the key operational risks that hedge funds face today is spreadsheet risk, which are still common practice but no longer viable in today’s operational environment where transparency and risk mitigation play a major role in the success of a hedge fund’s capital raising efforts.Both investors and regulators are pushing for more transparency; clients of hedge funds today are not only looking for performance, but detailed reports and an understanding on how performance is achieved – and keeping track of records using spreadsheets is not adequate.

As obvious as it may be, it seems firms are still naive to the common problems associated with spreadsheets.

Although spreadsheets do allow users to modify information simultaneously by more than one user, audit trails around this are not possible since the results of the saved work are merged into one common file. They are also open to viruses, subject to fraud, and most typically, human and mechanical errors are common.

Human errors are particularly placed under the spotlight when it comes to equalisation, where manual entries and calculations are inappropriate and hedge funds using several independent systems or modules for processing different types of administration functions leave plenty of room for errors.

With the danger of making key decisions on potentially inaccurate data and with investors asking for every inch of information in a timely manner, hedge funds must show they have suitable systems and reporting measures in place and can no longer afford to ignore the issue.

And with high profile cases such the Bernie Madoff scandal and several other fraud cases, the pressure to be as accurate and efficient as possible is greater than ever before.

As a result, a number of firms are looking to outsource these requirements to software providers to apply expert technology to meet demands, improve automation, and achieve greater efficiency.

Koger, which provides administration software to hedge funds, understands that transparency is one of the biggest operational issues hedge funds face. Investors want detailed information on everything – and for those firms relying on spreadsheets are open to scrutiny and are deemed to be operating in an inefficient environment.

Hedge funds cannot afford to ignore this, as the costs associated with spreadsheets risk are high and believe it or not can even result in fund failures. Spreadsheets, which involve manual entries and calculations, are not seen as reliable and simply lack integrity. If hedge funds are to continue attracting investors, then it is time to update the working environment.

Lastly, key man risk is an important issue that should not be over looked. These spreadsheets become extremely rich with many formulas to maintain, and it creates a very steep learner curve if a new person steps into the CFO role.

Koger’s transfer agency system, NTAS, for example, is designed to meet the needs of most modern fund complexes and their administrators.

NTAS manages subscriptions, redemptions, reporting, cash management, fund structures, trade processing, compliance and calculation of fees over complex fund structures, but most of all, it eliminates the dependency on spreadsheets by achieving accuracy and efficiency.

It is tailored specifically for the financial services industry, is cost effective, robust, and a scalable solution for the challenges of effective fund administration.

NTAS is already being used a number of financial organisations, mainly third party administrators, and presently a growing number of hedge fund managers are turning to Koger for support. When managers look to reconcile their books against an expert system like NTAS, it’s much more time consuming using excel than it would be using NTAS in-house and shadowing an administrator.

Having a fully automated system on both sides eliminates errors that result in high costs. Partnering with a quality software provider is already gathering momentum in the private equity space and hedge funds are expected to follow suit over the coming months as they strive to succeed in challenging times.

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Marcelo Blank