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Avoiding the traps
Date : 01/03/2008 A system selection process is a major undertaking for a superannuation administrator. With the reliance on information technology (IT) and recordkeeping systems to administer funds, making the right decision is of paramount importance. In layman’s terms, a system selection process involves the due diligence framework surrounding the identification, assessment and selection of a system or technology platform by an institution. This can include self-administered superannuation funds (SMSF), third-party administrators (TPA), or in fact, any type of financial services organisation responsible for superannuation administration. The benefits of having a robust and well tested methodology to help drive the process of undertaking a system selection can greatly alleviate the stress associated with such a major initiative. The methodology also provides a reliable framework by which decisions can be made, and more importantly, scrutinised. Using a tested methodology within a highly regulated industry is not only governance best practice but is also a regulatory requirement. All material business functions outsourced by superannuation funds, and even TPAs, must meet certain prudential standards. While outsourcing of material business functions by funds and even TPAs is expected to continue into the future, the ever increasing complexity of superannuation and the extended services now being offered have cost and functionality requirements most superannuation funds find prohibitive. Software vendors operating in the superannuation business sector offer a range of different system architectures, platforms, services and product types. The decision to appoint a particular vendor or system for the administration of superannuation business requires a deep understanding of the industry and the corporate culture/history behind the vendor. Having a methodology directly relating to the workings of the investment administration business and latest technological innovations is mandatory. It is also important to have a strong risk management framework producing a transparent auditable process in line with APRA requirements and prudential standard guidelines. Combining this with a strong understanding and clear disclosure of the investment requirements for the system and any modifications/enhancements and on-going maintenance is a strong start for the selection and appointment of a vendor and platform. It will also assist with the implementation and migration process. Why change systems? Australian legislative initiatives have enabled superannuation assets to grow faster than those in any other OECD country. Assets under management passed $1 trillion in 2007, while at the same time the number of superannuation product providers in Australia is declining. The registrable superannuation entity (RSE) licensing legislation increased the cost of compliance, while the choice of fund legislation increased competition. Both, indirectly, have led to consolidation of superannuation funds. Traditional superannuation funds are branching out into wider product offerings and are becoming financial institutions in themselves. The distinction between what has been perceived as ‘retail’ and ‘industry’ funds is blurring and will inevitably disappear. Many funds will find themselves considering broader and more complicated service offerings whilst also looking to reduce their operational costs. Current recordkeeping systems have been heavily modified over the years to meet legislative changes and to provide competitive products for members. Many systems were first built decades ago in outdated legacy programming languages. Maintenance costs continue to rise and ever fewer staff know how the systems have been developed. Often new employees are reluctant to work on what they perceive as legacy platforms. The net result of all this is administrators are facing the move to more modem recordkeeping systems in order to lower costs, ensure better compliance with regulatory requirements and provide better levels of service to members Selection Methodology Once the decision to change a system is made, a framework is required for the decision making process. While APRA Prudential Standard APS231 relates strictly to outsourcing, the principles underlying it can be equally applied to the selection of a new recordkeeping system. To further assist with the decision making process, The lQ Business Group has devised a 10 step methodology for system selection. It includes:
· establishing the business case; · initiating the selection process (e.g. expression of interest); · defining the ‘as is’ and ‘to-be’ business and system models; · defining the functional requirements; · defining the non-functional requirements; · determining potential suppliers/ vendors; · defining the evaluation methodology; · issuing the request for proposal (RFP); · evaluating the responses; and · purchasing and implementing the system For many organisations, establishing a business case is a major issue as it examines the current business position and the drivers behind the need for a new system. This is something that covers the initial scope and budget, the expected benefits from the new system and the initial cost benefit analysis. If the business case withstands the inherent scrutiny then, and only then, is the project initiated. The second step of the initiation phase outlines key system features required, refines the scope and budget, defines the quality plan and finishes with an expression of interest document that is distributed to possible system vendors. For superannuation administrators the ‘as-is’ and ‘to-be’ business and system models are documented, followed by functional requirements definition including business requirements, process models and business rules. Next follows the non-functional requirements delineation covering operational, security, technology, capacity and performance needs. The selection of systems or technology platforms is based on responses to the expression of interest document, consideration of engagement models, the vendor’s capability or capacity to deliver the desired solution and the vendor’s product set.
Evaluating the responses The final remaining steps are based on the evaluation methodology defining the scoring mechanism by which supplier/ vendor responses will be evaluated. The methodology is defined in a pro-forma template consistently applied to all supplier/vendor responses. All the client requirements are collated into an RFP that is distributed to the shortlist of suitable vendors. In drafting the RFP it is important to avoid or mitigate some of the risks associated with the process. Common RFP pitfalls include:
· scope or requirements not dearly defined for effective responses; · vendors underestimate requirements either deliberately or through lack of understanding; · an overly prescriptive REP leads to a lack of innovative responses or to a substantial product modification needs (i.e. concept of fitting to a system or a system fitting to the client) · an inadequately defined ‘to-be” model may lead to misinterpretation or misunderstanding; and · not properly identifying known pre-existing integration problems with existing systems. Partners in the system selection process should be working to a detailed analysis of vendor responses using pro-forma templates. These templates weight responses across a range of categories such as functional, non-functional, vendor, pricing and implementation. Asking Questions At the assessment stage of the process, it is important to check vendor references, to ask searching questions of each vendor and to go on at least one reference site visit per vendor. It is also important to consider the following potential differentiators: · How viable is the vendor? · What is the vendor’s vision and technical architecture? · How good is the reporting? · How competent are the vendor’s staff and how many developers does the vendor have? · How useable (i.e. look and feel and key expected processes) is the system? · How broad is the vendor’s product set? · How much customisation will be required? On the basis of RFP response ratings and the reference visits, a winning vendor should be visible for selection. Sometimes a proof of concept stage is necessary to substantially demonstrate the vendor’s capability before a final contract is awarded. For projects of this scale to be effectively managed, a well defined and documented program and program roadmap are essential. Detailed planning and analysis can provide organisations with significant benefits through clear direction and delivery of strategic initiatives. It ensures program delivery contains quality essential information covering factors such as scope, resource requirements, delivery schedules and budget.
Also, by using a due diligence framework for system selection, the merits of using a tested methodology approach are apparent in the identification and management of the inherent risks, issues and dependencies. A complete overview of the initiative also facilitates effective communication at all levels. Published in: Superfunds March 2008
Panos Alexandratos is a general manager, Management and Governance Practice, at The IQ Business Group.
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