A search for competitive advantage is driving up the price tag of replatforming for firms as experts warn costs could rise above estimates.
A recent Finalytiq report estimates the total cost of replatforming for Ascentric, Alliance Trust Savings, Aviva, Funds Network, Old Mutual Wealth, and Cofunds is £828.2m.
But what exactly are the costs that go into replatforming, and why are firms having to spend so much?
Crunching the numbers
The bulk of Finalytiq’s £828.2m figure is Old Mutual Wealth replatforming costs, estimated at £450m. The company has been open about the cost of replatforming to IFDS, announcing in its results in March that spend over six years would be between £425m and £450m – £250m more than was initially expected, as well as taking an additional two years to complete.
The firm with the second-highest replatfoming cost is Funds Network, which is moving off proprietary technology to Bravura.It is expected to spend £250m on replatforming, according to Finalytiq.
Aegon has publicly disclosed the predicted cost of moving Cofunds’ assets to GBST technology following its acquisition of the platform. Upon announcing the acquisition, Aegon said the one-time cost would be £80m, which is the figure Finalytiq has used in its total.
According to Finaltiq, Aviva will spend around £35m on its shift from Bravura to FNZ. The platform will not confirm this, however. A spokeswoman for the insurer told Money Marketing: “As we reported when we announced our plans to move to FNZ, we anticipate investing in the low tens of millions. However, we do not comment publicly on the specific levels of investment.”
At the smaller end of the scale, Alliance Trust Savings is reportedly budgeting £7.4m to move to GBST while Ascentric is spending £5.7m to replatform to Bravura. Both firms are replatforming from proprietary technology.
Ascentric, Alliance Trust Savings and FundsNetwork did not comment on the figures cited in the report.
Finalytiq director Abraham Okusanya says the data was largely taken from firms’ financial reports. He says: “Every year we have been looking at firms’ financial reports and they say what they have spent on replatforming. There is also a section in the financial report that shows accumulated spend on technology over time.”
Okusanya says the Old Mutual figure included in the report is its estimate of the cost of the whole project rather than what it has spent to date. He adds the cost attributed to Aviva is what the insurer has spent on its direct-to-consumer platform and does not account for what it might spend moving its advisory platform assets on to FNZ.
The Lang Cat principal Mark Polson says replatforming costs vary dep-ending on the kind of deal that is negotiated.
He says: “The deals vary hugely. It can be a software licensing cost, or it might be as a percentage of the funds under mangagement which might come with a minimum or it might be tiered. You might then, for example, pay a pound every time someone opens a pension wrapper or an Isa wrapper. Then there are bespoke software costs, hosting costs and ongoing additional support costs that you might require.”
Finance & Technology Research Centre director Ian McKenna says, given the amount of work and cost, replatforming is not a process firms enter into casually.
He says: “It is a significant technology and operational challenge, perhaps this is one of the reasons why organisations spend a lot of time planning and preparing for the replatforming. In some instances organisations are moving from systems that have been around for a long time.”
However, in several of the replatforming projects cited in the Finalytiq data, for example, Old Mutual, costs have grown far beyond the initial expectations of firms.
Polson says: “Money does get wasted and it is usually by people trying to out-manufacture each
other as opposed to focusing on the basics. The truth is you want this done well. We always say what you want is a safe replatforming, not a fast one.”
Investment consultancy Gbi2 managing director Graham Bentley says mounting costs are as
dependent on the proposition as the technology. He says: “For example, Old Mutual has the old Skandia platform but that was merged with the Selestia platform in 2006. Skandia adopted the Selestia approach to the mechanics of doing asset allocation. What these companies end up with are layers of various IT structures and architecture.”
Bentley adds: “The more a business aspires to scale, the cheaper the unit cost of providing the support services. A number of platforms will regard what they are doing now as washing away legacy systems and getting everything in a position where there are few improvements and in future those improvements can be bolted on in a modular fashion.”
Polson attributes creeping costs to firms wanting to differentiate themselves from their competitors.
He says: “A lot of increasing costs is the new functionality and new integrations providers ask for. It is not just about the cost of building those, it is the cost of testing them. When you test them, you don’t just test [those parts], you have to test everything else all over again to make sure it’s ok.”
Replatforming projects running over schedule is also said to be an issue for providers with Ascentric, Old Mutual Wealth, and Funds Network not sticking to their initial time lines.
Bentley says delays are not surprising, given the complexity of the projects. He adds: “What the business may not think of but the IT team will come across fairly quickly are changes to one part of the system that impinge on another.
“That is why projects take longer than expected. It does not matter how much contingency you put in. You have got to be careful of putting too much contingency in so the job looks undoable.”
Money Marketing can reveal the regulator has met with platforms to find out more information around the impact of replatforming on clients as well as data security and testing processes.
Upgrades mean platforms can ease prices down
Advisers we speak to find it baffling that some platforms are still not able to facilitate functionality they feel should be a basic requirement. However, adviser platforms have listened to these criticisms and most are investing in upgrading platform technology whether through an outsourced technology provider or continuous updates to in-house technology.
In our experience, platforms running on proprietary technology are able to make frequent releases. But for platforms that have taken the plunge and outsourced, the initial project is a serious commitment requiring significant investment of time, money and resource. The initial investment can be eye-watering and project delays cause costs to tick up. These platforms must tread the line between speed and accuracy.
But the initial investment is balanced by streamlined costs once the replatforming project is complete. Outsourcing technology allows platforms to benefit from development costs pooled between multiple users. The platforms making the move to outsourced technology have made the decision that their outsourcing partners are able to do it quicker, cheaper or better. Platforms that remain on proprietary technology are not persuaded. We remain agnostic about which option is better.
Beyond the benefits of greater automation and efficiency, there should be further good news for advisers as a result of upgrades to platform technology.
Some advisers have commented to us they expect to see some of the cost savings from so-called “frictionless” technology passed on to them.
The efficiency and automation unlocked by technology upgrades will allow platforms to ease their prices down in future and they will.
Miranda Seath is senior researcher at Platforum