Spending on cost basis reporting by brokers is not limited to the cost of developing or purchasing software, according to a report by research firm Celent.
Operations and staffing costs account for almost three-quarters of total spending on cost basis reporting. As such, it is vital that firms find ways to control these costs.
In the report, Celent explores long-term influences of total cost of ownership, predictors of high costs, and ways to maximize cost basis reporting investment.
Firms are still focusing on compliance for fixed income and options regulations, but they are also increasingly exploring ways to make their technology more efficient in the long term. Addressing operations processes such as data scrubbing, reconciliation, and integration of systems are of highest priority. These new considerations are a result of firms recognizing the increased spending in cost basis reporting.
“The biggest predictor of higher than average costs is the development of in-house technology,” says Alex Camargo, analyst and author of the report. “There are, however, ways for all firms to reduce their TCO. Firms cannot go back in time and reduce their in-house investments. But they can look at their current operations, their data scrubbing efforts, and their downstream systems to make the process more efficient going forward.”
Budgets and spending on CBR varies incredibly based on many factors: the size and type of firm, whether development is third party or in-house, pre-existing systems at firms, whether the firm has data management tools, and whether the firm has outsourced operational processes, the report says.
As it relates to outsourced operational processes, one must consider whether the firm uses an offshore provider for data scrubbing, whether the firm uses a third party CBR provider, or whether the firm has in-house staff.
Total spending on cost basis reporting has ranged from $2 million per year to well in excess of $15 million per year, said the report. This total cost includes software costs, maintenance, staffing, and operations.
The biggest predictor of higher than average costs is the development of in-house technology. Over the past three years, firms that developed in-house systems have learned two important lessons: developing the technology has been a larger project than previously expected; and maintaining the technology and making the necessary enhancements when challenges have arisen from testing have been more difficult than expected. As a result, long delays and staff reprioritization has led to higher than expected costs.
Conversely, a strong predictor of lower costs has been the use of third party solutions. While the initial implementation and customization costs were higher than expected, vendors have been able to keep costs low over time.
"Growing expertise and economies of scale are the primary drivers, making it cheaper for a vendor to provide their product because they’re able to optimize processes," Camargo writes. "In addition, maintenance costs, which have driven budgets for in-house systems, are typically embedded in the license fee."