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Mutual Funds Face Implications of Mainframe Brain Drain'

The mutual fund industry has faced its share of challenges in the last decade.

It began with Y2K issues, continued with the technology industry implosion and corporate accounting scandals, which resulted in the U.S. economic slowdown, and quickly moved to late trading and market timing compliance. Unfortunately, relief is not yet in sight as the new issue of a mainframe brain drain is looming on the horizon, a concern that will potentially disrupt mutual fund back-office operations and possibly lead to higher costs for shareholders.

The transfer agency systems of most mutual fund companies currently run on mainframe legacy computer systems. Mainframe systems, which were originally designed in the 1960s and peaked in popularity in the 1980s, have become antiquated. Computer science departments have not included courses related to mainframe technology as part of their core curriculum for decades. Numerous factors have contributed to students looking at other technology specialties, including the concern among most IT professionals that mainframe programming is riddled with repetitive and mundane tasks.

Thus, the available mainframe workforce is aging faster than the hardware itself. As technology evolved to distributed computing - and today, web services - the focus of training and education evolved as well. Therefore, it is likely that fund companies and service providers who rely on mainframes will soon face an acute shortage in the workforce.

Mainframe Techs Going Gray

Numbers on the graying of the mainframe workforce vary, but all agree that they are high and getting higher:

* A study a few years back by the Meta Group found that 55% of IT workers with mainframe experience were over 50 years old.

* According to the Mainframe Migration Alliance, in North Dakota, as of 2002, 60% of people with mainframe skill sets were over 50.

* Other estimates state the number of mainframe support staff over 50 is actually closer to 80%.

During the next three to five years, we will see a severe shortage of workers with mainframe knowledge. The impact is already visible. Performing a search on job Web sites for mainframe specialists yield thousands of open positions.

The problem is compounded as the aging mainframe workforce continues to retire from their positions, expanding the void of experienced workers. Companies without a transition strategy, particularly in an industry as complex as the mutual fund industry, will find it difficult to grow and maintain the business in a cost-efficient manner.

Vendors will also be impacted. As mainframe hardware comes to the end of its life cycle, fund companies may run the risk of reduced mainframe vendor support for the software. The Meta Group estimates that by 2006, 30% of mainframe products will lack adequate vendor support resources. According to a recent report published by the Meta Group, those that fail to negotiate firm contract terms and conditions will end up paying 20% to 30% higher in product costs and incur a higher risk of support failure.

Problems and Solutions

In summary, there are some major obstacles in the near future for mutual fund companies. Those who house mainframe systems onsite will experience increases in training costs to compensate for the lack of mainframe education available. Fund companies that outsource to service providers running on mainframes may eventually face higher servicing fees as service providers look to pass on some of the increased costs. As more and more resources are required to maintain legacy systems, fewer resources will be available to develop innovative features and functionality necessary to remain competitive within the mutual fund industry.

Mutual fund companies that are still relying on mainframe based transfer agency systems, whether it is in-house or with an outsourced provider, however, can take a number of steps to mitigate the risks.

A business assessment should be conducted and alternative solutions explored. Given the evolution and proven reliability and scalability of client server architecture, it should be considered as an alternative to the mainframe. If, however, there are other mitigating factors that impede the ability to migrate off the mainframe the following precautions should be taken. First, all existing contracts with mainframe vendors should be examined and, questions should be addressed to the provider as to what guarantees they can supply on containing costs and ensuring ongoing support in the future. Second, processes need to be put in place to ensure knowledge transfer from exiting mainframe specialists. Finally, a long-term strategy should be developed to ensure that you have the appropriate technology platform to support your business.

As with other issues that fund companies have dealt with recently, an ounce of prevention is worth a pound of cure.

Satnam Gambhir is president of Envision Financial Systems, a provider of software solutions to the institutional and mutual fund asset management markets.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.