Paradigm shift: Hyper-customization vs Hyper-standardization

Introduction:?

When evaluating Target Operating Model (ToM) or evaluating systems, there is always a debate surrounding whether to standardize or customize a solution. ?In our view, the debate is now over. ?Although there are still some fervent proponents of this practice, the capital markets industry has realized the economic and technical limitations associated with development and maintenance of customized solutions far outweighs any potential benefits. ??

Both large and small institutions are now focusing on standardized (or outsourced) solutions to improve their time to market, increase their agility and reduce operational costs to enable a razor-sharp focus on their core business activities.?

Furthermore, there are now many (niche) commercial solutions aimed at meeting the specific needs of the industry, contributing to this trend. Although these solutions may not necessarily be designed for the specific needs of each institution, our recent experience has allowed us to observe a trend towards the standardization of internal practices through a use of best of breed systems for specific business functions.?

Recent experience has shown that seeking a competitive advantage through the establishment of a unique operational model is a strategy which unfortunately rarely meets the expected economic benefits. Pooling the best solutions into a single data model incurs costs related to various integrations that undermine the return on investment required by this type of architecture. ?

One of the main metrics that allows us to affirm this trend is that many organizations using this strategy, operating costs tend to increase in proportion to the growth of assets under management. If assets under management growth cannot keep up with increasing operational costs, economies of scale can never be achieved and often the end result is divestment of business lines.?

Towards Standardization of Practices:?

In light of this, the industry's response is simple. The majority of actors are now seeking to standardize their internal processes to conform as much as possible to the most widespread practices. There is now a preference for remodeling processes in favor of system personalization.??

New system replacement projects are therefore no longer seen as implementation or integration projects, but rather as business transformation initiatives. The expected benefits are also different. Rather than attempting to gain an advantage through the appropriation of primary data resulting from the exploitation of customized systems, decision-makers now seek to reduce implementation times, significantly decrease support and maintenance burdens, and have systems which allow better scalability to enable new revenue generating activities.?

Impact on Advisory Services:?

This paradigm shift also has an impact on the consulting industry in which we (FINARCH) are involved. First, the enthusiasm for technical expertise is decreasing while institutions (clients) are favoring business expertise. In other words, expertise in the functioning of a particular system matters less than the ability of an integrator to align architecture and configurations with business processes across an entire ecosystem. ?

At FINARCH, we welcome such industry changes for several reasons:?

1. Our focus has always been on the asset management industry and capital markets.? Although we would like to organically expand to other (related) verticals such as retail banking, our core focus has always been our business expertise, system knowledge and operational know-how?
2. Our view is standardization is good for the industry, which is good for our clients.? Large (complex) implementations or projects with heavy customization are often delayed and go over budget.? Although short term economics are often favorable for these types of projects, our experience shows that institutions prefer quick wins with measurable short term business value created?
3. Standardization and business expertise enable our team (and our clients) to broaden capabilities. ?Instead of being siloed into one specific system or process, we can work with smaller start-ups or vendors which provide a specific business function or service

Limits to the Principle of Standardization:?

Although the benefits of standardization are obvious, there are some limitations which constrain operational models. ??

• Jurisdictional regulatory frameworks necessitate some level of customization to meet financial reporting requirements.? In this context, adaptations to platforms are mandatory and must be performed under these strict frameworks?
• Change is slow within the capital markets – many of the largest institutions use decade old systems which are not prone to change and require extensive industry consultations and testing (i.e. T + 1). ?Although these systems still work and function as expected, it permeates only incremental improvements across the industry and not the big bang exponential gains which occur in tech (i.e. GenAI)?

Our view on the limitations of standardization is that a clear understanding of the underlying need is essential, and should be performed in a holistic manner. These new guiding principles to favor standardization do not mark the end of integration services, but rather suggest a change in approach and, above all, a redesign of the conventional value proposition.?

How FINARCH Stands Out in this Paradigm Shift:?

In the face of these paradigm shifts in the asset management industry, at FINARCH our position is as a strategic partner capable of accompanying our clients and vendor partners in their transformation projects. Our expertise of business processes and systems enable us to overcome the common challenges of implementing systems, and to help align our clients ecosystem with the current industry best practices. ?

By focusing on aligning architectures and configurations with business processes, FINARCH is committed to providing solutions that are agile, meet regulatory requirements and maximize operational benefits for our clients. With an approach focused on added value and close collaboration with our clients, our team is ready to assist on your journey to navigate through the challenges and opportunities within this new era of standardization.?