Recent years have seen the emergence of compliance as a new and fast growing segment of the software industry. One of the early movers in the area is Dublin-based Zarion. Its CEO, Gerry O’Connor (pictured) acknowledges that the company almost got into the area by default.
“We’d been doing compliance software for years without knowing it,” he says.
He readily acknowledges that a strong element of bandwagon-jumping has been going on with a diverse range of software firms cleverly re-packaging products to target this hot new market.
“Compliance software is this year’s customer relationship management,” O’Connor observes. “Sarbanes Oxley, Basel II, anti-money laundering… everyone’s doing something.”
O’Connor, a technology sales veteran whose previous employers include Wang Technologies, co-founded Zarion nine years ago with former Wang colleague Gerard Newman, now Zarion’s CTO. The company’s pitch was to automate complex internal processes within banks and insurance companies.
Zarion’s first significant contract win, in 1995, was with Irish Permanent, for a system that would improve the process for issuing mortgage cheques to customers. A mortgage application had to go through lots of hoops before Irish Permanent would approve it; plenty of boxes had to be ticked before funds would be released. Based on the success of the system, O’Connor quickly realised there was good money to be made.
“We were able to reduce the time it took, cut people’s time as well as improve customer service. It had a major impact on their business. That gave us confidence to say that this is an important area to be in. There is a lot of value to the customer and a lot of value we can get out of it,” he asserts.
More deals followed. It got first international customer, ING, in the life and pensions area where it installed an application processing system in central Europe. In the last year Zarion started working with General Motors Acceptance Corporation – GMAC – the financial services arm of the car giant, both in Ireland and the US.
Irish Permanent, AIB, ING and GMAC are now its four main compliance customers and O’Connor believes Zarion is taking “an early market leadership position” in this fledgling market. It has had an office in the UK for the past six years, and is eyeing a move into the lucrative but notoriously hard-to-crack US market, the appointment of a local representative being a likely first step. Employee headcount stands at 38 and rising.
Compliance work now accounts for 30pc of Zarion’s revenue, a percentage O’Connor expects to increase significantly in the years ahead as the banking sector applies auditable processes that comply with the burgeoning amount of compliance legislation. With its systems selling for between €200k and €500k, Zarion needs only to make a handful of extra sales to make a big difference to its bottom line. Turnover has doubled in the past two years and the company expects to hit €5m by the end of 2004. O’Connor is confident turnover will double to €10m within two years and says that the acquisition of one or more niche players is potentially on the cards.
Zarion has identified anti-money laundering (AML) as a particularly promising area, a rich seam of potential it is hoping to tap with a new dedicated AML product. It is estimated that money laundering is worth up to 5pc of world GDP (IMF) and that between US$1.5trn and US$2.85trn is laundered around the world every year (Dirty Dealing, Peter Lilley, 2003).
In the light of such vast sums, governments around the world are starting to clamp down on the activity. In the Cayman Islands, Bank of Bermuda was fined US$67.5m for its failure to prevent money laundering while in the UK, Abbey National was fined £10m sterling for failing to apply money laundering controls.
Even more than financial penalties, it is reputation damage that financial institutions fear. As O’Connor puts it: “Who wants to admit they have US$1bn on deposit with Al Qaeda?”
But despite the prospect of such unpalatable outcomes, surprisingly few financial institutions have put their houses in order. A recent study done in the UK by the University of Leicester showed that only 6.2pc of financial institutions were equipped with dedicated anti-money laundering systems.
According to O’Connor, it’s not that financial institutions are avoiding compliance; rather, they are unsure of how to go about it.
“A bank can decide to hire another 500 people to ensure that it is compliant but it might then go out of business. The real issue for an institution is how to be compliant while maintaining customer service levels and keeping costs down. The margins in the banking and insurance area are dropping, so the more tasks you put in the more you eat into margins,” he says.
It’s also the complexity of the area that can befuddle banks, he argues. Unlike other internal processes like manufacturing, supply chain or accounts, compliance cannot be achieved by applying a single company-wide system from the likes of SAP or Oracle. It has to be done piecemeal, painstakingly stitched together like some sort elaborate corporate quilt.
“There is no silver bullet; we don’t think compliance can be solved by enterprise software,” O’Connor concludes. “It’s going to be a series of evolutionary improvement to the business to ensure the business is compliant. It has to be tackled on a business unit by business unit basis.”
By Brian Skelly