“There is a time to compete, and then there is a time to execute,” says Jörg Ambrosius, describing how technology and service providers have revised the way they think about their competitors, not only on the buy side, but across the industry.

The head of business for State Street’s Europe, Middle East, and Africa team says this change is driven by a demand for more choice—both for vendors and best-of-breed solutions—which in turn has forced providers’ hands to develop interoperable tech and forge partnerships with their rivals. A recent substantive example of this is the strategic agreement signed last month between State Street and SimCorp, two major competitors when it comes to servicing the front-to-back office tech needs of buy-side firms.

The partnership agrees that both firms will fully integrate and co-invest in their technology and outsourcing services for the insurance community. The common denominator that has made this alliance possible is their shift to open technology—a shift, Ambrosius says, that is necessary for vendors to remain relevant.

“We don’t believe that closed systems will—I wouldn’t say ‘survive’—but that it will be the right way to capture the market in the long term,” he says. “When you look at history, closed systems have sometimes had to have a significant ramp-up and there is a tipping point where closed systems will eventually go out of fashion and will not be up to date anymore.”

State Street and SimCorp have a shared interest in interop platforms and have spent several years transitioning to an open architecture. SimCorp began building its API technology for SimCorp Dimension four years ago, while State Street has spent the last two years upgrading its Alpha Platform to include Charles River’s front office, in parallel to opening up its tech.

Brad Bailey, research director for capital markets at research and advisory firm Celent, describes this trend among rival vendors working together as “co-opetition,” an agreement where separate providers believe a value proposition is worth more to a client by cooperating than by doing business individually. Bailey says vendors know they cannot do it all on their own; in other words, no single vendor can develop best-of-breed solutions for all components of the trade lifecycle and peripheral tools, such as specialized risk models or analytics.

Dan Schleifer, CEO of Cosaic, a desktop integration platform provider, says open solutions force vendors to be competitive in what they do best but incentivize them to work with other firms in areas they fall short.

“As vendors, we would rather not have to be the best at everything we do, and I think competition is healthy for the industry,” he says. “I think it allows for smaller and more innovative vendors to step in and say, ‘I don’t do A, B, and C, but I do B really well, so do A and C with the incumbent, or with the 800-pound gorilla, and just do B with me, because I’m better at that one thing.’”

The embrace of interoperability and modular technology among buy-side vendors raises the stakes for competition and helps resolve the issue of vendor lock-ins, meaning an asset manager, in this case, can more easily switch out applications. When an industry has more choice, it creates a healthy environment for new entrants and innovation to thrive. And most importantly, it forces incumbents to be competitive on pricing, helping to relieve some of the cost pressure on buy-side firms.

“This [shift to open tech] definitely keeps vendors on their toes,” says Jay Wolstenholme, research director at Chartis Research, a subsidiary of Infopro Digital, the parent company of WatersTechnology. “There’s a lot of competition out there, and at the end of the day, the asset owners—‘we’ being the asset owners—all the way up to the institutional level, we call the shots, we decide where we put our money, how we invest our money, and that criteria goes right up to the institutional investor level.”

The Plumbing

The demand for interoperability and optionality goes hand in hand with other shifts on the buy side, as firms switch to running leaner shops and leveraging managed services. Celent’s Bailey says the bulk of asset managers and hedge funds, not including the top 10 by assets under management, rely heavily on their vendors and service providers to absorb the cost of building these solutions from scratch, a tech spend they could not afford alone. Over time, he says, the move to outsourced solutions has ascended from the back office to the front office, where today more and more buy-side firms are now leveraging third-party trading platforms.  

Where open technology plays a role is in making sure that multiple third-party solutions can talk to each other—an integration and cost burden that would typically fall on the end-user, rather than the vendor.

“This is why these integrated solutions are so attractive,” says Michael Mollemans, research principal at Chartis. “You have a one-stop-shop where you’ve got all the back-end taken care of, across the front-to-back office. And now the rest is all about portfolio managers focusing on their investment strategies.”

Ambrosius says the vendor is responsible for the heavy lifting and connectivity behind the scenes. On the other hand, consumers of the technology should be preoccupied with the customization that occurs on the front end, something he describes as the “last mile”—such as proprietary analytics or risk modeling.

“One key element of [this integration] is to create the plumbing because you as a client shouldn’t care about how SimCorp connects with State Street,” Ambrosius says. “Where you do care is: ‘Do I have—on the last mile—the right customization?’ Because that’s where the customization needs to happen; the customization should not happen on how [the user gets] State Street’s technology to communicate with SimCorp’s technology.”

In the State Street–SimCorp example, both firms have a bilateral agreement to integrate their systems, but separately they work with other third-party vendors in the industry that plug into their front-to-back systems via APIs. One reason for this is to allow portfolio managers or risk management teams to diversify their strategies—beyond just leveraging a standardized platform.

Several other buy-side technology and service providers have also adopted APIs for integrating third-party systems. These include BlackRock’s Aladdin Studio for building APIs, FIS’s open API solutions, and Finastra’s API framework, among many others.

“We see tremendous demand for openness, for interoperability, for the ability to take in third-party datasets, proprietary risk models, proprietary or third-party trading analytics, or how to leverage alternative data,” Bailey says. “All these things are driving a competitive shift.”

Pulling Back the Curtain

Most API integrations are typically simple in how they function and largely non-invasive. In simple terms, an API allows one application to communicate with another application under a set of defined rules negotiated by the parties involved—for example, if application A requests X data, application B will respond with Y.

API integrations can be done on the user side, where they connect their system to third parties, or where vendors take it upon themselves to integrate with other vendors. In the latter example, the data flows to and from vendor A’s server or cloud to vendor B’s server or cloud.

“You can think of an API, an interface, a little bit like something that sits out in front of a curtain [that anyone] can see, and then there is all the stuff behind the curtain, which only you can see. So it sounds like what State Street and SimCorp are saying is that as part of the partnership, they are going to let [their tech teams] behind the curtain and allow them deeper [access] into the technology that’s not normally available to the outside world,” he says.

Jochen Müller, chief commercial officer at SimCorp, says the Danish vendor has been given comprehensive access to State Street’s Alpha platform for the integration process. As a result, SimCorp is developing over 20 interfaces that will operate across the entire front-to-back office systems for insurance—including transaction management, corporate actions, collateral management, and reconciliations—through to State Street’s custodial services. As part of the joint venture, both firms have also formed integration teams and made commitments to invest in the combined technology platform.

SimCorp will lease its technology to State Street for clients that opt to use its modules. SimCorp Dimension will be developed, maintained, and hosted by SimCorp, but all services and staffing will be handled by State Street.

Blurred Lines

While the two firms do compete on some fronts, Müller and Ambrosius say the companies define themselves differently. SimCorp sees itself as a software solutions company, whereas State Street’s primary focus is the delivery of managed services, such as fund administration and custody. This partnership is also not the first time the companies have collaborated. Since 2005, State Street Bank GmBH, headquartered in Munich, has used SimCorp Dimension for administration and fund accounting.

But there is no mistaking that competitive forces remain, despite the newly-forged alliance and the embrace of open technology. Businesses are sustained by revenues at the end of the day. For this agreement to work, Ambrosius says both firms had to agree on an equal footing in terms of transparency, understanding how the relationship would work, how the tech would be rolled out, and how they communicated that to clients.

Müller and Ambrosius say there will, of course, be situations in which the two vie for users, but believe that the agreement will offer more opportunity to win new business rather than lose it to the partnering vendor.

“If there’s a competitive situation, both organizations will make their pitch, but once a client has decided, we are then committed to executing that preferred option in the best interest of the client,” Ambrosius says. “That, I think, is really important when you get into something like this. There is a time to compete, but then there’s a time to execute.”

There are limits to whom a firm can partner with and how much it can commit. No firm wants to hand over its IP to its competitors. While agreements like these can generate business, there is a fine line between cooperation and competition, and it shouldn’t be crossed.

“I do think there is a balance here in how co-opetition can work and for a vendor, the balance is the key to moving forward in the future—that is asking how open can we be, how much can we open a system to others so that it makes sense for us, and how can we partner with different players,” Bailey says.