Using the Cloud To Adapt and Thrive in a Rapidly Shifting Financial Marketplace

December 6, 2011 - 0 Comments

Lower margins resulting from both the commoditization of transaction economics and the high cost of supporting IT-intensive infrastructures are putting tremendous pressure on financial-market companies. This is causing many firms to rethink their business models to create new revenue streams—and reduce costs—across traditional functions such as pre-trade analytics, risk management, and post-trade reconciliation. These functions are now seen as critical business processes that can be “shifted and lifted” into a cloud-enabled service delivery model.

Key enablers of success will include the development of new cloud operating models and strategic sourcing capabilities delivered via networked services. This will provide financial-market companies with greater business agility, and a path for effectively shedding capital-intensive assets from balance sheets for re-investment in new innovations and for producing positive company valuations.

Cloud operating models, which include technology, economics, and governance, are rapidly maturing. Consequently, they are serving not only to enable the business-model shifts and new economics just discussed, but also to accelerate them. An on-demand, shared infrastructure—combining in-house virtual private clouds with an emerging set of financial- market utilities—will foster development of seamless, transparent, and highly cost-effective information and transaction management platforms.

Firms are seeking benefits such as:

  • Faster time-to-market through on-demand provisioning and a compressed software development lifecycle
  • Greater agility to start, stop, and scale projects with a variable cost infrastructure requiring less investment
  • Cost savings through “pay-as-you-go”, demand-driven consumption
  • Lower costs by mitigating vendor lock-in and enabling price arbitrage among providers
  • Increased transparency and more direct revenue-to-cost operating models
  • Improved standardization and lower-risk operating environments

According to the Yankee Group, enterprise cloud services generated US $9.2 billion in worldwide revenue in 2010. This number is expected to grow to $22.3 billion in 2014, a compound annual growth rate (CAGR) of 30 percent. It is clear that the stage is set for long-term growth for cloud service providers. Within the timeframe of this forecast, the skills, capabilities, and value propositions of cloud service providers will surpass those of internal enterprise IT departments.

The Cisco® Internet Business Solutions Group (IBSG) has worked with leading financial-market companies and emerging cloud service providers to identify how participants can benefit from the dramatic shift to cloud-based business models.

Cisco IBSG has observed five key trends that have been part of this shift and will continue for some time to come:

Incumbent players will continue to unbundle services and reconfigure their businesses to be both a consumer and provider of cloud services.

  1. New industry-specific financial-market utilities will emerge to provide services across all aspects of the pre-trade, trade, and post-trade processes.
  2. Federated models will become increasingly common, providing definitions of common and core business processes and associated IT services. These services will be made available for consumption in the future “financial app store.”
  3. New, transparent economics, such as service-level agreement (SLA) types and cloud service provider metrics, will be key elements of the new marketplace.
  4. A connected marketplace will provide global access and secure platform reliability for new, real-time, multi-asset, and multi-lateral trading platforms, as well as entirely new dynamic marketplaces (liquidity venues).

As global financial markets continue to shift, challenges with complex, aging technology platforms and reduced IT budgets will accelerate adoption of cloud-based capabilities. Given this situation, cloud-based operating models will quickly become the basis for competition and fundamentally change the economic landscape and business models of financial-market participants.

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