Innovation Suffering in Back Office Tech, Says Panel

One reason is that compliance has sucked up so many of the resources that previously went to research and development of new products. Another is that regulation has driven up costs for everyone, which is pushing smaller players out of the industry because they can't afford to keep up. Less competition and less disruption, he said, leads to less innovation.

And while Lodato believes that senior technologists have noticed and are objecting to their service providers and business heads about this stagnation, they might not be contributing to the solution. "CTOs and CIOs say they need a seat at the table," Lodato said. "The problem is, when they get there, they really don't say very much."

But Steve Alepa, CEO of consultancy Olmstead Associates, argued that Lodato is only half right. Yes, the rollout of new products has slowed among middle- and back-office providers. It's still buzzing, though, among front-office providers.

Laying $5 billion dollars worth of fiber between New York and Chicago is innovative. So is microwave technology that shaves a few milliseconds off of market data transmission. These are examples of new technology designed to help traders. They get the primary investment dollars, just as they have for so long.

"When you're selling to the back office, you're selling to a cost center rather than a revenue center," said Alepa. "In a prior life we had this trade operations product that helped you interface with your Swift messages, with your Omgeo, and so on. It was a neat product but we had trouble selling it. When we added a central clearing capability and went to the front office and said, ‘This is going to allow you to trade the way you want using the strategies you want and not worry about the downstream implications,' the product took off."

Doing More With Less

What innovation does exist in in the back office is often focused on efficiency and cost containment. That includes finding new functions to outsource, or to put into a software-as-a-service model.

To improve innovation rates among service providers, Jeffrey Baccash, head of product management for alternative solutions at BNP Paribas, recommended that investment firms build closer relationships with them. "As your relationship grows with the vendor, you'll have more access to them, and your needs will move up the vendor's priority list," he said. "The downside of it is change management. If you increase the coupling of products, then when you're trying to change or go to a different model, it's difficult."

Continuing with that theme, Alepa warned that close relationships can end up backfiring. Many vendors are looking to branch into new revenue streams; if those streams don't correspond to the competency you hired them for, it could spell trouble, he said, especially if that competency is a low-margin business. The company could start devoting less and less attention to it.