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The Bloor Perspective: Integration, web content to pay for and outsourcing in finance
This week Robin Bloor and his analysts take a look at whether web services will realise the dream of integration, fantasy sports leagues and the web, and outsourcing issues in the financial sector...

By Bloor Research

Published: Friday 21 March 2003

Ever since the proprietary IT model died a death in the early 1980s the main problem facing every organisation has been how to integrate an increasing number of systems running on a diverse range of platforms. There have been various attempts but none have fully solved the integration problem. When will we find a solution? The original one stop IT shop made things simple. One vendor to deal with, one architecture, by its nature interoperable. And then everything changed. The PC put computing power on the desk, Ethernet removed the need for all those proprietary networks and the emergence of the ISV gave organisations a choice of applications to support business operations. Things got more and more complicated. More platforms, more ISVs producing more business applications - all of which need and generate an ever-increasing volume of data - have, quite literally, blown apart the existing IT infrastructure. The emergence of the internet as a business channel for customers, partners and suppliers made things even worse. Suddenly it was all about being able to integrate at a business level, while many organisations hadn't even integrated at the system level. Originally, the answer was simply to apply resources. But the systems integration approach taken by many vendors, all looking to make up for revenues lost with the demise of the proprietary model, didn't work. The next answer was middleware/messaging, EDI, then enterprise application integration, and now web services.

Integration isn't just a nice to have. Lack of integration places a massive strain on a business operation. Integration forms a key part of every new project. The inability to integrate new systems easily compromises system design and automatically places an additional maintenance overhead on the new system and those it integrates with.

At the moment vendors are getting excited about web services. Anyone with a middleware, messaging or EAI solution is quickly rebranding their portfolio with the ubiquitous web services message. The million dollar question is whether web services will provide the answer. At the moment all we know is it's not a million dollar question - it's far, far more important, as the value of the web services market is likely to eclipse many of the recent technology waves. All we can do is hope that web services helps us finish the jigsaw we started over 20 years ago. Only then we can move forward and find out what this IT stuff can really do for the business.

*Sport to challenge porn online* It used to be that pornography accounted for 25 per cent of internet commerce and was the only content that anyone would pay for. That's no longer the case, although the pornography industry still has a mighty commercial presence out there. In general the publishing industry outside pornography is not making much of the internet, with revenues running at about 4 per cent of the industry total and not growing dramatically.

However, one area that is making money, especially in the US, is fantasy sports leagues. Odd though it may seem, this type of game works very well on the internet. A website can promise a prize for the winner and, it turns out, fantasy players are willing to pay. They are also voracious consumers of information. The development of paid fantasy gaming occurred when sports sites discovered their ad revenues drying up. They desperately needed another revenue stream and those that ran fantasy sports leagues noticed that the hit rates were high and the customers were loyal. They started to charge and it worked. Enthusiasts now pay $10 to $20 each to compete in leagues at the major US sports sites (ESPN.com, Sportsline.com) and revenues have grown to million dollar levels. Sportsline.com made about $11m from this source last year, its first full year of trading in fantasy sports.

This is happening despite the fact that there are other sites out there offering free fantasy leagues. It makes no difference. There is also another effect that has been noted, which is the link between television and fantasy sports. Both ESPN and FoxSports.com have found a link between television viewing and fantasy playing and both companies see the business lines as symbiotic. It is clear from this that gaming of all kinds will become a big revenue stream on the internet as broadband proliferates. If people will pay to pretend to be sports managers, they'll pay even more to pretend to be some space hero who's fast on the ray gun.

Interactivity is the defining capability. *The FSA looms in financial outsourcing*

The growing use of outsourcing by financial institutions, not just in commodity services but also major operational processes, has caused the UK Financial Services Authority (FSA) to state its concern over its ability to exercise its powers and responsibilities under the Financial Services Regulations. Accordingly the FSA has introduced requirements on outsourcing to all areas of the financial services sector. It issued a policy statement last year requiring financial institutions to inform it of "material" outsourcing proposals and enable it to raise concerns at an early stage in the process. In the context of technology outsourcing there are a number of issues to be addressed by the regulated institution. Financial institutions have to take steps to ensure that service providers are financially sound, competent and have relevant industry knowledge and expertise. This has to be demonstrated to the regulator. Any regulator requirements must be included in the request for proposal and subsequent contract, not only in a strict constructionist sense but also within what the FSA terms "the spirit" of any requirements to assist the regulator.

In effect, any contract must specifically state that the outsourcer will comply with regulatory needs and demonstrate how. In the technology environment in particular the regulator will be expecting any contract to include non-negotiable terms on matters such as business continuity, resolution of disputes and exit procedures.

In effect the FSA will have a very strong veto role in outsourcer selection in the sense that it may temporarily, or even permanently, delay the transition to outsourcing, where it is not satisfied that the institution can meet its regulatory obligations.

Will the FSA after an initial period produce an 'approved or recommended' list? How will they use, maintain and develop such a list? Will this result in a de facto monopoly for the large outsourcing organisations?

The FSA's tentacles of influence spread further and wider outside the strictly finance sector by the year. Any technology organisation delivering products and services to the financial services sector needs to be aware of the power and influence the FSA could have in the selection process.

Bloor Research is a leading independent analyst organisation in Europe. You can find out more at www.bloor-research.com or by emailing mail@bloor-research.com.