Having been a traditional software company for over 50 years, SimCorp® is still recognized as having a best-of-breed solution in accounting software for the financial industry. So, moving beyond software development and Software as a Service (SaaS) into technology-enabled services, running investment accounting - and soon, operations - might then seem like a natural next step. It is however a big step and in direct competition with the traditional outsourcing companies mostly run by large custodians. In this piece we will take a closer look at this new service and review some of the strengths and weaknesses, asking the question as to why companies already using SimCorp Dimension should go with this recently launched service.
As of July 2022, three clients have gone live with the service and another two have signed up to this new service including Challenger, with whom SimCorp entered into a Memorandum of Understanding to launch a new investment administration company, see press release here. So, they are off to a pretty good start considering they only recently started promoting this.
SimCorp’s claim to fame is that as they know their own software best and also have vast experience in the financial industry, combining these areas of expertise is a match made in heaven. But is it?
Close-Up of SimCorp's new Service
We took a closer look at the service and talked to Jaki Walsh, VP Operations & Accounting at SimCorp. The foundation of the accounting side relies on more than seventy accounting principles that span different geographic locations and industries and is part of Simcorp’s standard solution that has been reviewed by one of the ‘Big Four’ accounting firms. The input data for the accounting engine comes from two sides:
Securities and Market data is received from multiple sources and scrubbed into one golden record using SimCorp’s Data Management service (formerly known as “Datacare“)
Transactions and custodial data which are received in a centralized data store and normalized for standardized imports into SCD; at the time of writing SimCorp has the ability to connect to around 30 custodians.
As part of this service, SimCorp will reconcile this data daily to the custodians and perform accounting in which their goal is to get an STP rate of over 95%, continuing to improve on this by automating repeat processes. To achieve this, they are working closely with their development department, which we will come onto later. Clients, on the other hand, will receive the resulting output via a digital portal and entries for their corporate general ledger. In short, the data from SCD is transported into the Data Warehouse which sits on the Cloud and will be accessible via a digital portal which, along with standard reports and dashboards, will also allow clients to build their own reports. It is our understanding that clients will not get access to the core SCD database or tables.
This solution is available on both a multi-tenant model and a single-tenant setup. Where the scope is Investment Accounting only, multi-tenant is the typical setup, meaning multiple clients are set up on the same shared installation and database of SCD. This includes sharing security and reference data, whereas pricing data can be customized. However, if clients would like to use other business funcitons of SimCorp Dimension, such as front office, performance, or settlement, they would be offered a single-tenant model where they can get access to the SCD accounting module as read-only. Here they would also be able to customize security and reference data.
Why Choose SimCorp for Accounting
SimCorp continues to spend more than 20% of their revenue on R&D, which includes tracking changes to accounting standards and regulatory requirements for new developments. This knowledge will now be incorporated into the investment accounting service - in short IAS - and we expect it to seamlessly feed through to clients, so they don’t have to run a project to adapt new standards or reporting requirements of any kind. It should all just come as part of the package when the change takes effect.
During the initial phase of starting up this service, SimCorp has gotten insights into running their own platform. Workarounds have been reviewed, client software change requests from the past have been dusted, off and developers have been busy at the keyboard writing new code to create more efficient and/or automatic processes which will not only benefit clients using this service, but also existing clients.
Code-based changes will be made available to existing clients via the regular release process, most included with the maintenance cost, and larger enhancements will come with a module price tag. For clients subscribing to the standard platform, it will be deployed as part of their service agreement and SimCorp has pointed out that these improvements are being added into the global standards and becoming best practices. This makes sense; in order to achieve an STP rate of more than 95% it is key to get rid of all workarounds which in the end will benefit all SimCorp clients.
The service is built around SimCorp’s standard configuration but allows for some flexibility. Another benefit SimCorp learned from the Big Four consultant they worked with was to evaluate what is standard and, as a result, claim they have identified 80% common requirements within each geographic market segment (such as EU pension plans, NA insurance companies etc). Naturally, this also draws on their experience from the 300+ clients currently running on SimCorp. No organization is identical, but on the other hand, using customized builds are expensive, so allowing for a standard solution with flexibility is a great benefit we do want to mention.
“It is clear that the buy-side are actively looking to simplify their operating model and focus on their core business. Our Investment Accounting Services enables our clients to do exactly that. We have built our services on our market leading accounting and operating technology and then have added a team of industry experts who 100% manage the processes and are on hand to provide advisory throughout our client’s business day. I like to think of it as something I have heard recently - scalable customisation; `we provide clients standardisation with optionality much like Starbucks offer a personalized experience selected from a predefined universe of options.” – Jaki Walsh, VP Operations & Accounting, SimCorp
Other benefits to mention include the vast instrument coverage SimCorp Dimension has, the flexibility bringing new types to the market, and a solid client base around the world with over €25tn AuM on SimCorp Dimension, giving confidence that the product works. It is also worth mentioning that going with SimCorp will spread your vendor risk rather than going with a traditional custodian outsourcing provider.
Onboarding SimCorp's Service
For companies not already using SimCorp Dimension, getting onboard is a straightforward migration of their data - such as holdings, pending trades and cash balances - as well as loading of the security and market data. This sounds simple and it often isn’t, but SimCorp tells us that they can and have onboarded new clients in as little as 1 month.
For customers already using SimCorp there are a few options available depending on their existing setup, leveraging either the multi-tenant or single-tenant model.
Who is working on this?
SimCorp has been busy hiring staff to support this new service as they move into what, to them, is a totally new world. And if this service picks up interest, the team is bound to grow – a lot. SimCorp has hired people with accounting and/or operational backgrounds from various parts of the world. Some come from competitors in the outsourcing industry, some come from competitor systems, and some have worked at a SimCorp client in the past. So a broad mix of experience. SimCorp puts great emphasis on the fact that clients will get direct access to a dedicated local accounting expert to address any questions or concern they might have on the calculations and data output.
Challenges of the Service Offering
So, let’s look at what we have:
A best-of-breed system – SimCorp Dimension
Access to developers – in SimCorp
Industry knowledge – hiring from the industry
Accountants – certified and from the industry
On paper this looks good; a strong proposition. So, what could go wrong? Is the proof in the pudding? SimCorp claims to understand the pain points clients face. And who better to run the system than the ones who built it?
There is no doubt that SimCorp have invested a lot to make this work and continue to do so. They’ve got a great product, easy access to resolve breaks, and are renowned for their innovation and pro-active solutions with market changes. These important factors stand out with SimCorp, which most can’t claim to possess.
If there is one challenge that raises concern, it is the SCD knowledge it will take to run this service. The current staff has over 12 years’ experience working in the industry, but the number of years working in SCD is very low as far as we can see. And of course, you are not going to get your SimCorp implementation consultant or a developer to run day-to-day accounting and reconciliation. Anyone who has worked with SCD knows how challenging it can be to run. And we’re not talking about the 95% of the times when everything goes as planned, we’re talking about the 5% that needs investigation and complex research to identify the root cause, whether this be data, a segment issue, or a finance scheme set up wrong.
SimCorp have pointed out to us that they will hire staff from lower-cost regions which will significantly reduce the SCD experience. However, on the positive side, the teams are in Toronto, Manila, Ukraine, Vienna and Warsaw, which provides proximity to SimCorp’s customers and the opportunity to get knowledge from outsourcers who already have talent in exactly those locations, from developers and consultants to supporters.
There is no doubt that SimCorp has strong knowledge of their own system - that goes without saying. As they are learning how to manage and run the business functions of their clients, they gain knowledge and experience. The pace at which they eagerly embark on this venture is ambitious and SimCorp will have to weigh that up against their ability to deliver not only quality service but also quality product and results. One failure can have devastating consequences.
Technology Enabled Accounting Service
If you have been considering outsourcing operations and accounting to a third party, considering SimCorp is definitely a good option. You get a strong platform based on decades of experience that still allows for some flexibility to customize. Look at it this way, clients who choose to outsource will regardless lose flexibility and in-house insight into accounting and operations which in turn will make them dependent on the vendor. But that is not necessarily a bad thing; at least with SimCorp’s accounting investment service there seems to be transparency, access to data and control over the processes.
We should point out that we have not discussed the cost of this service, so we have not taken this into account in this review. The cost of outsourcing has the potential to be more cost effective, but it remains to be seen what the total cost will be and if indeed the internal cost savings will materialize particularly for clients that will still need or want to run other parts of the system.
We hope you found this piece insightful, and we welcome any comments and thoughts on this topic. Are you considering this service yourself? Don't hesitate to reach out to us at Dimensional Community.