Banks and vendors are joining forces to work together to integrate their skill sets and bring new offerings to the market. Alan Duerden looks at some of the partnerships that were forged in 2007 to see how mutually beneficial this trend can be.
Increasingly, organisations in the financial industry are coming around to the idea that sticking to core competencies is a good move, and are no longer pumping unnecessary levels of investment into research and development (R&D) projects around new areas of business, most of which are less than fruitful.
As the financial space becomes increasingly competitive, organisations are focusing more on their core specialisms and not over-stretching themselves by taking on new capabilities, but rather working with others that are renowned for those capabilities. If an organisation can find a partner that has a proven track record and that it trusts, then it can leverage a strategic partnership to help its businesses operate rather than developing specific areas of new business itself: working on the principle that the whole is greater than the sum of the parts.
Reasons to partner
Most Tier 1 banks still have bespoke in-house supported systems written internally that are surrounded by a lot of packaged software from vendors and the long-time promise that packaged software services can do what the larger banks need. “The business requirements are often extremely large and varied on the Tier 1 banks,” says Guy Warren, executive vice-president and general manager of core banking at Misys, an application and services provider. “What we are finding is that banks are less happy to continue to fund the bill for internal development and want to switch to ‘package providers’ that can meet the business requirements.”
As well as the internal issues driving the trend of partnering, there are external factors putting pressure on companies, especially technology vendors, to partner with one another. Banks and vendor customers consistently pick up the slack of implementing and integrating the systems that are sent to them, whether from a hardware provider, a software provider or a services provider. They are now pushing back and asking why the software packages are not pre-integrated, why the companies providing the different software solutions have not spoken to each other, and why one platform supports a particular application and another one does not.
Improving relationships
Behind the rationale of trying to give a quality solution to their customers, vendors and banks are finding that they need to have a much better relationship with the eco-system of companies that sit around them and the partnership process is one way of initiating this.
Partnerships can be categorised into three main groups. First, there are partners that provide services for one another. The partnership between HCL Technologies, an Indian IT services company, and Misys in October 2007 is an example of this. HCL has become a major provider of flexible resources to Misys that the latter would have either trouble hiring and retaining or finding in the marketplace, while also helping on the development of some of Misys’ products, says Mr Warren.
Second is the partner model, with organisations working alongside one another, where one company, for example, has a piece of software that another company wants to incorporate into one of its solutions.
Third is the supplier type partnership in which a company wants to resell another organisation’s software with its services: it sources the hardware, does a fixed price deal with a bank or client and implements the software on behalf of the other company. Message Automation, a post-trade transaction management solutions provider, announced a similar partnership in July 2007 with City Networks, the operational risk management services company.
Two-way traffic
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Hugh Daly, CEO of Message Automation, says that City Networks is a larger and more established company with more than 500 clients in the financial services space, and one of the flavours that the partnership has taken is a distribution agreement whereby City Networks has the rights to distribute Message Automation software as either a standalone product or wrapped up in a bigger solution. |
“[City Networks] has also taken an equity stake and invested some money in us as well,” says Mr Daly. “There are obvious benefits and it helps to incentivise them into introducing us to their 500 different clients.”
Whether a company has got hundreds or thousands of customers, the bottom line is that they do not care who wrote the specific pieces of software – they just want it to work properly. If a vendor or bank can find another organisation that wants to make use of its software, this is an obvious attractive proposition and, provided organisations keep an open mind and steer clear of the traditional ‘we develop everything in-house’ strategy, they can reuse other people’s components, incorporate them and develop their own offerings.
Product access
The R&D involved in writing banking software is a risky and costly business: the product has to have a spec, be built, taken to market and sold before there is any return on the investment that has been put into developing it. The partnering process allows organisations to combine the resources of their product offerings to bypass the expensive and risky strategy of building new products in-house.
Misys, for example, has recently partnered with SAP, a business software solutions provider, which developed a component-based banking solution with components that Misys did not have as part of its offering. In September, a licensing deal was signed whereby SAP’s customer relationship management system was licensed into the Misys offering while Misys had trade finance software that SAP wanted to wrap into its solution, so the process was two-way.
Message Automation has another partnership with New York-based derivatives technology specialist Global Electronic Markets (GEM). GEM has a derivatives matching and reconciliation product that Message Automation has embedded in its solutions to help it address a specific business problem that it is encountering with a lot of its customers in the area of collateral management on the derivatives side. “Recreating the piece of software that we are selling into our customer base from GEM would be extremely difficult,” says Mr Daly.
“It is a very highly specialist piece of software. The man who wrote it has a Gold Medal in chaos-theory mathematics from Harvard and was one of the founders of FPML, so that product is not something that we could just deploy a team of 12 people to recreate. It is a very specialist piece of kit and it is best-of-breed globally so why would we deploy people and resources to recreate something like that?”
The benefits of partnerships in the specialist software space are clear and again the costs involved in producing a new piece of software or extending the product offering can be reduced. With the development of new software, partnerships can capitalise on the time to market factor, too, because a problem or new market trend can be addressed immediately. In Message Automation’s case, for example, on recognising that collateral management was going to be a big issue among its customers, having a pre-existing piece of software from GEM that it could integrate and use prevented the lengthy process of developing a new piece of kit, the time constraints of which may have prevented it from capitalising on the new opportunity.
Geographical spread
Mr Daly points out that a geographical coverage factor comes into play in the partnering process, which can benefit both parties involved. Both GEM and Message Automation are fairly small software companies that have complimentary pieces of software with which they can build a more diverse product range, but their pooling of resources also allows them geographical scale.
“GEM is in New York and it can spot us in the New York market and wider US market while we can equally help it get access to the European market,” he says. “Even though both companies are quite small, the partnership creates a factor of scale and geography that allows us to punch above our weight because we can be transatlantic.”
In the wake of the United Arab Emirates (UAE), and specifically Dubai, recently setting up a free-trade zone, BT Radianz’s most recent partnership last November sought to capitalise on the geographical positives that a partnership can bring and to allow its customers connectivity into the UAE marketplace. Its partnership with Etisalat, the longest established telecommunications service provider in the UAE, will provide financial institutions around the world with the connectivity to get to the blossoming local market where previously the ability to connect to this region had presented operational challenges involving complex installations and significant investment.
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“The regulatory format for the Middle East dictates that you need to work with one of the two partners, and we are working with Etisalat,” says Chris Church, managing director, Radianz Services, BT Global Financial Services. “We chose Etisalat to be our strategic partner because it has that local infrastructure, which means that its customers and our customers can take advantage of access to that global financial community and we can take advantage of the great infrastructure that it has globally. So the partnership is bridging that gap.” |
The partnership challenge
Like any successful venture, the process of making a partnership does not come for free and takes a big effort to make it work. As the examples above show, the key element is that both parties have clearly articulated common goals and that a common purpose is established. A lot of effort is required to make sure that alignment between partnership parties is found, otherwise an organisation may find itself in a place where there are misunderstandings, confusion and pulls in different directions.
The prerequisite that needs to be recognised by any partnership is that the agreement should create a win-win situation for both parties.
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“A partnership is not about how much wool you can pull over the other’s eyes. A partnership is about openness, transparency, clarity of purpose and a single and shared set of objectives,” says Martin Wilson, chief marketing officer at VocaLink, an electronic transactions infrastructure provider. |
Thinking about and developing partnerships takes time and manpower, and one of their downsides is that they can lose momentum quickly. If there is not a genuine customer ready and waiting that both organisations can engage jointly, the partnership process tends to peter out. There have been numerous examples of these non-starters in recent years. A lot of wasted effort goes into trying to make partnerships work that are fatally flawed from the beginning because there has not been a set of shared goals or the process has lacked transparency.
As well as their low rate of survival from initial idea through to official agreement, partnerships throw a number of conflicts of interest into the mix. For example, if a company previously had a direct sales force that did not compete with anyone apart from its main competitors, the partnership process can introduce extra complexities into the territory that sales teams from each of the partnering organisations control.
Mr Warren at Misys says that in the case of its partnership with HCL, the sales team at Misys may want to get involved if HCL is selling into a client, so a judgment call has to be made about who should run the deal. “One way or another there will be channel conflicts,” he says. “But it’s just something you have to manage.”
Despite the complexities of getting partnerships off the ground and running them smoothly, many banks and technology providers are enjoying fruitful and successful relationships through partnering. Although the process does not always work and can introduce potential conflict, partnerships have many advantages. There must be communication and transparency, and most importantly a commercial vested interest for both parties must be found for the partnership process to work. Where these elements can be achieved the success of working together will come naturally.
