Big bank mergers, big cuts in data spend? Not so fast, experts say

Most large-scale mergers or takeovers go through significant planning and strategic decision-making before anything is agreed or announced publicly. Then, there’s typically a long period while the deal is hashed out or while the parties await regulatory approval, during which time the firms and their IT and data organizations are able to share information and prepare for integrating their systems and services.

Not so in the case of UBS’ purchase of Credit Suisse: In such “fire sale” scenarios, months of planning are condensed into mere days. Preventing a collapse, saving business lines, and protecting investors’ deposits take priority, while the practical matters of integrating the companies, their tech stacks, and their data services and agreements may take a back seat.

However, when trying to strip costs out of a failing organization, besides staff costs, the cost of market data contracts and duplicative IT systems make up a large part of financial firms’ spend—often in the hundreds of millions of dollars. And when one institution buys another and does the math, they want to realize savings. In short, they want 1+1 to equal less than 2. Some of those savings can be achieved due to attrition or staff cuts; reduce the number of data consumers, and you can reduce the amount of data consumed. But the remaining targeted savings may require shrewd negotiating, flexibility on both sides, and precise data management to reduce data expenses, says Peter Serenita, a former chief data officer at HSBC and JP Morgan.

“The needs of mergers are urgent and non-strategic: You need to get two firms together quickly and accurately, so you need to be somewhat tactical because, initially, you can’t take the time you would need to put them together strategically. It requires you to take the quickest route,” says Serenita, who, today, serves as CEO of his own firm, CDO Advisory Services LLC, and as an advisory partner to data management consultancy Element22.

“It’s about combining the key data of the two firms and deciding whether to bridge between systems or move onto one. Usually, you need to run both initially, then decide which—and which supporting team—to consolidate on. So, your overhead may go up for a while until you are able to rationalize the systems and organization.”

Damian McCarthy, managing partner at research and consulting firm Expand Research, also notes that costs may increase in the short term—partly due to employing consultants to assist with the merger integration—but says two firms of similar scale should expect to save between 15% and 30% in market data costs, with the biggest gains coming from “traditional non-user attributable product types” such a ratings, pricing and reference data, and real-time datafeeds, which are priced based on the breadth and depth of data subscribed to, and where there may be “significant overlap” between the two firms.

“On the opposite end of the spectrum, you have, for example, Bloomberg terminals, which are charged at a fixed price per user, so the only way those costs will be reduced is if the user base is reduced,” McCarthy says.

Expand Research estimates that medium to large financial firms would have significant synergies between their technology divisions—from 10% potentially up to 25%, depending on how the resulting change in combined scale allows the combined entity to negotiate more favorable licensing and leasing agreements, and the level of overlap in terms of similar systems that present opportunities for rationalization, McCarthy says

Opening the kimono

Public companies are limited in terms of how much information they can share prior to an acquisition even in normal circumstances—let alone in the event of a forced takeover—says Barry Raskin, senior consultant at data consultancy Jordan & Jordan, who previously served as president of Six Financial Information and Telekurs USA for almost 20 years. “Before any merger, the firms come together and identify a savings target. You look at the inventory, you look at enterprise agreements, what’s duplicative, and what can be canceled.”

However, says Mike Carrodus, CEO of research and benchmarking firm Substantive Research, it offers firms an opportunity to see how they compare to one of their peers in terms of spend and efficiency.

“It’s one of the few ways in this opaque market that data managers can compare their spend with granular data,” Carrodus says. “Compared to swapping notes over coffee, with a merger you have two budgets, you can compare licenses, discounts, how inflation is calculated, and the benefits of a multi-year approach, and see how each organization has been treated by its providers.”

And once a merger is officially underway and the companies are allowed to share information, another challenge for firms combining and consolidating their data assets—and then being able to reduce spend by eliminating duplication and renegotiating agreements—is knowing what each already has.

“Step one is to understand each firm’s contracts with each vendor, and what each is paying, and then negotiate consolidated contracts. But the first thing is understanding their inventory and having easy access to all the contracts—and not all firms have that,” Serenita says.

In theory, you should be able to push a button and see all your spend. However, it doesn’t always transpire that all data is tracked and managed in these systems

Nadine Scott, TRG Screen

Indeed, as Serenita says, that first step to understanding a firm’s inventory can sometimes be a bigger barrier than it should be. Nadine Scott, who has managed market data at major investment banks including HSBC—as well as stints at both UBS and Credit Suisse—and who now serves as global head of inventory management platform vendor TRG Screen’s managed service, says that while in theory it should be easy to understand firms’ data inventories, there are often practical hurdles that make it harder in reality.

“In theory, you should be able to push a button and see all your spend,” she says. “However, it doesn’t always transpire that all data is tracked and managed in these systems.”

For example, software and analytics relating to specific datasets—even provided by the same vendor that supplies the data itself—may be managed differently, as may other third-party services, such as research. In some cases, trading desks or business lines may buy data directly, bypassing their market data organization and inventory management system, meaning that those costs are not being tracked centrally (and that renewals or cancellations are also not being managed by the data team), and obfuscating the firm’s true data spend.

In addition, Scott says, while it may be easy to monitor data products from one vendor, a bigger challenge is managing internally-built applications that consume data, which is managed via entitlements systems and then uploaded to the inventory management system. And in the case of large firms that have grown through acquisitions, different legal entities with different finance or accounting rules may still exist, which categorize data and data spend differently.

“Typically, the bigger an organization, the more instances of untracked spend,” Scott says. “An inventory system serves multiple different purposes: For example, it can drive invoice reconciliation, contract renewal pipeline, forecasting, requisition, usage monitoring, and exchange declarations. But not all firms run all those processes on that system. And if the processes are run differently, then the way the data is managed and structured may be different as well,” making it harder to track and compare apples to apples.

The point is, good data management and cost control shouldn’t be left until someone demands drastic savings; it should be an ongoing best practice. 

“Irrespective of a merger, it’s always good practice to understand what data you have, what you need, and to have a good relationship with your vendors, so they can work with you as partners to optimize your spend,” Serenita says.

Not managing data inventory properly on an ongoing basis can allow untracked data costs to grow unchecked. “Often, firms invest in new projects, but that can be at the detriment of investment in demising old platforms. If a legacy application continues to run, then it may still be consuming data and incurring costs,” Scott says.

One former vendor manager who has worked at several large investment banks, and has been involved in merger-related rationalizations, also notes the risks surrounding internal applications pulling in data, and stresses the importance—for both cost and consistency—of standardizing on a single source of data and single security master to feed those applications.

But, he says, “That’s not day-one stuff.” Instead, the initial priority should be on identifying overlap and instances where data is going under-utilized, or worse, completely unused. The former bank vendor manager says it’s important to understand how contracts are set up—for example, by location or office, which could be centralized more efficiently, providing greater control and leverage—and to what extent services are actually used.

“It’s important to understand who has what services at both firms, and what’s used or not,” he says. “During one merger, I was able to get rid of a lot of services because we discovered they weren’t actually being used.”

Once firms understand their inventory and what they actually have and what they pay, they’re in a position to start negotiating toward what they need and what they want to pay for it. And given that the firms will be reducing the number of staff and systems that probably have a high degree of overlap, they can legitimately expect lower usage, and therefore expect lower bills, Serenita says.  He adds that a more detailed comparison of vendors based on price, quality, ease of integration, and the relationship between the firm and vendors can take place over the medium term.

The simplest approach, says Brennan Carley, managing principal of strategic advisory firm Proton Advisors, is for the firms to decide which front-office desks and teams perform best, and keep them and the data and technology platforms they use, rather than trying to merge different systems into one “best of breed” platform.

“The fastest approach is to push one, because you reduce your integration cost because you’re not trying to create a best-of-breed. The alternative is a longer, slower, and riskier integration process,” Carley says. “So, on day one, you have both running in parallel. Then day two, you do an assessment of which is better and more modern and pick that, then you migrate the data and models across and shut the old systems down and let go the people associated with that.”

After identifying which systems work best and will be retained, and which datafeeds can serve them, the bank will generate new user IDs in the platform being kept, and cancel those in the platform being shut down, says a former bank data technology executive who now works at a technology vendor.

Once the firms understand their inventories and needs, Carley adds, “then they can go to their vendors and say, ‘One plus one is not going to add up to two.’”

But even though firms will expect to reduce costs, it’s not all doom and gloom for their suppliers. First, as Serenita notes, the firms aren’t going to be canceling services on day one. Second, others say, the process of negotiating, rationalizing and integrating can take a significant amount of time—during which timeframe the vendors won’t be losing any revenues, and which they can use to identify opportunities for growth elsewhere within the firms.

“The target timeframe for rationalizing contracts should be less than a year. And within that, there’s always an initial two- to three-month period of understanding the magnitude of what just happened, during which nothing happens, before you can start meaningful conversations with providers,” says Bob Iati, managing director at research firm Burton-Taylor International Consulting. 

That first year serves as a proving ground for both firms as they come together, allowing the tech and data staff from each to understand and become proficient in the other firm’s systems, understanding where redundancies exist and can be eliminated.

“An organization of this size should be good at negotiating downward. So, if by the end of the first year, they can negotiate multi-year contracts for the future, they’ll be happy,” Iati says.

In addition to data services, infrastructure and datacenters contribute a significant amount of spend. The former bank data tech exec notes that firms may have minimum spend clauses in their contracts with cloud providers or datacenter operators that may take months to net out. In fact, he says datacenter costs aren’t typically as well tracked as market data services, so the firms may need to perform a datacenter-specific inventory assessment.

“If we assume they have 10 datacenters around the world, including third-party co-locations, it could take four to six months,” to fully understand the opportunities to rationalize those, the exec says.

And depending on the extent to which each firm already utilizes cloud computing resources—particularly if they use the same cloud providers—then “there are obviously more cost benefits to unlock here,” says Expand Research’s McCarthy. “This may increase the speed of transition and decrease the need for as many temporary resources.”

Don’t bite the hand that feeds

It’s worth noting Serenita’s earlier comment that a good relationship between a firm and its suppliers will encourage them to work as partners to rationalize spend. On the one hand, firms need vendors to work with them when renegotiating contracts, and vendors want to preserve as much revenue as possible, so it makes sense for both sides to work together so that each gets the best deal possible. For one thing, contracts may have specific wording that negates a deal in the event of large changes such as mergers, Raskin says.

“For example, in the event of a merger, contracts may contain language about evaluating whether the acquired business can come under the umbrella of the buyer’s enterprise agreement. And if not, they’ll negotiate a reasonable contract. I’ve seen vendors who didn’t have that in their contracts lose money as a result.” 

In fact, given the potential costs involved to the combined company, how a contract is written may even impact how the buyer structures the new entity, Raskin says.

Vendors have two rules: first, never lose a renewal, and second, never give money back

Douglas Taylor, douglasbtaylor International Consulting.

Carrodus agrees: “Market data costs are now so big that they’re a material factor in any merger strategy,” he says. 

And the higher the spend, the more loath vendors are to accept cuts to their fees.

“Vendors have two rules: first, never lose a renewal, and second, never give money back,” says Douglas Taylor, managing partner of Douglasbtaylor International Consulting. “You can give up other things, like give more services to the fewer remaining staff so it’s not such a reduction in revenue. And you can try to take away revenues from other vendors in other areas of the organization to maintain the same revenue level—or even grow it.”

In any stressed takeover situation, vendors may not be in a position to enforce contracts—and trying to may be counter-productive. “They’d just be biting the hand that feeds them if they take a hard line—and that’s not good in the long haul,” Taylor says.

And even if vendors have a right to renegotiate contracts on their terms, there’s a fine line between protecting revenues while firms try to cut spend and working with firms to help them make cuts while still protecting the vendors’ interests: In short, they may not want to push back too hard against short-term cuts for fear of losing goodwill in the long run.

“Yes, vendors don’t want to lose revenues, but they also don’t want to upset a firm the size of UBS, which might still spend a lot with them on other things,” Iati says.

Equally, the banks may not want to throw their weight around too much in the pursuit of deeper cuts with their suppliers, says the former bank data tech exec. “If they force their way out of a contract, then the vendors will rip their eyes out with retail pricing for the next two years, and the only way to avoid that is to migrate a bunch of applications that you didn’t want to change,” the exec says. “So, it’s in everybody’s interests to play ball and come up with a model that makes sense.” 

In addition, if suppliers and clients aren’t already working as trusted partners—for example, if a vendor sets its fees opportunistically and without justification, the merging companies will spot disparities when they get an opportunity to look over each other’s contracts, Carrodus says.

“If how a vendor has priced their services matches how the client wants to use them, then they have a good chance of not losing much money. But if a vendor is pricing opportunistically and some of the pricing drivers don’t hold up to core value and material usage, then that could hurt,” he adds.

“That’s a really good point,” Taylor says, adding that this transparency is a two-way street that the vendors involved can also take advantage of. “There’s a lot of competitive intelligence that will come out of this for vendors about how they’re priced against their competition. It’s a good way for those vendors who are true trusted partners to come out of this with the possibility of bigger opportunities.”

But to be able to do that, vendors need to be approaching the merging firms immediately and offering to play a key role in assisting with their plans.

“Let’s assume each firm is paying $100 million for data from each of the key vendors, and let’s say they’re targeting a 25% reduction overall. So instead of paying a total of $200 million, they’ll be paying $150 million,” says the former bank data tech exec who now works at a technology vendor. “So, I would say, ‘We understand it will take a while to get to that point, so let’s create a runway that reduces subscriptions and fees by 10% each quarter. But in return, we want opportunities to help in other business areas, and if you use a competing vendor in that area, we’d like to take some of that business.’ So, as revenue ticks downward in some areas, it’s ticking upward in others, and the vendor still gets something out of it.”

This “runway” of contract negotiations, strategic cuts, and technical integrations can take significant time. Taylor estimates a merger situation of this scale may cost a year of productivity—at least six months to process the changes, then another six months to ramp up to full speed again. And, as Iati noted previously, if the firm can sew up a new enterprise agreement within year one, it will likely view that as a win.

But actually executing on that rationalization could take longer—potentially two to four years, says the former bank vendor manager—as firms whittle down technology and settle funding and budgeting.

“And don’t forget what’s already in the pipeline over the next two to four years that the merger integration has to compete with, or work with,” as the combined firm shifts its focus from integration back to business as usual, the former vendor manager says.

That is, whatever “business as usual” looks like in two to four years’ time.