China's finance sector undervalues IT
By Greg Au-Yeung | 2010-07-19
IN 2008, the Securities Association of China, issued a "trial version" of the IT Governance Guidelines for the securities industry (securities & fund management companies), a rather comprehensive set of guiding principles that established the direction for the local industry. The intention is to improve the overall IT management standards. There are two particular "indications" from the guidelines that caught my attention.
Firms are asked to spend a minimum of 6% (of annual revenue) on IT investment, and 6% of their workforce should be IT staff. These numbers are way below the average when comparing with their western counterparts.
Since the inception of the mainland stock exchanges (Shanghai & Shenzhen) in the early 1990s, there are now 106 securities firms, 56 fund management companies, with turnovers totaling US$8 trillion in 2007. Based on the Securities Association of China, and the China Securities Industry Report 2007-08 (by FriedlNet and Partners), the figure is four times that of 2006, and continues to grow. However, in terms of IT investment it is unreasonably low - the industry average is: 7% staff are IT, with 3% of annual revenue spent on IT.
Lack of real development
In contrast, Morgan Stanley's 2007 annual revenue was US$30b, with an IT spending of $3.1b (11% of annual revenue). In the same year, with 45,500 employees globally, their IT workforce was 5,000, plus another 5,000 consultants (11-22% of total workforce). The relatively large IT spending (investment & people) is certainly not uncommon amongst Wall Street firms and many global financial institutions.
This is easy to explain. After two decades, regardless of China's huge market capitalization and trading volume, the capital market is still at its infancy, with relatively simple investment products. A number of financial IT vendors have emerged over the years, with their software widely used within the financial industry. IT's main focus is therefore spent on infrastructure build-out, software maintenance, and user support. With a low number of IT staff employed by most securities firms, this leaves very little room for creativity, or development of its own software, let alone proactive services or originality.
But all these are changing - with the monopoly of a few financial IT vendors with hefty product price tags and deteriorating services, the apparent imbalance between business (high growth) demand and IT service (underfunded), and the emerging needs of self-developed solutions that integrate with business needs. These factors have compelled some of the IT departments to break out of the traditional "maintenance-focus" and create their own solutions, such as the development of centralized data-warehouse and CRM applications.
Invest to excel
Although this is back-office focus, which has already been widely deployed amongst global financial firms years ago, it is nevertheless a logical step according to the pace of financial market development - the number of financial products tradable over the mainland stock market is still very limited and relatively simple. With the further liberalization of the capital market, such as the recent relaxation of allowing margin trading and securities lending, and the upcoming launch of the derivatives index, IT departments will no doubt be tempted to explore front office applications development, such as trading platforms, also trading and other innovative solutions. This is where technology can excel best and bring true value to the business, by differentiating themselves amongst other competitors, by combining technology, people and knowledge.
Global financial institutions (especially investment banks) also go through great lengths to develop their own talents. Both Goldman Sachs and Morgan Stanley formed their own university to provide employee education. The average annual training budget for experienced staff is US$4,300, and new hires (graduates) at $17,100. It is two to five times (estimates) of Chinese organizations' upper limit respectively. The objective is to provide a sustainable and integrated training program that develops their elite workforce (including IT), which brings long-term benefits to the firm. This is a great model that mainland financial institutions can pursue with.
Greg Au-Yeung was formerly Executive Director of Morgan Stanley (Shanghai) responsible for the investment bank's captive development center in China. He has been appointed by Shanghai's Fudan and Jiaotong Universities as Senior Consultant/Guest Professor, responsible for designing and managing their Master of Software Engineering (Financial Information System) courses.
Email him at: firstname.lastname@example.org