6 hidden costs that traditional TCO calculations can’t capture for market operators

The traditional total-cost-of-ownership (TCO) equation is fairly simple: Capital Expenditures (CAPEX) + Operating Expenditures (OPEX) = TCO.

But for financial market infrastructures (FMIs) that underpin the financial fabric of the world, this equation is not enough to assess TCO of their technology infrastructure. These entities are critical to fair, functioning markets that drive economies, and thus often have unique considerations centered around resilience, specialized technology, member demands and connectivity.

While the move toward cloud has been steady among FMIs, they need a way to assess the hidden costs of not modernizing as the first mission-critical cloud workloads come online. Armed with this information, they can make the most impactful business case for investment and transformation.

The costs of standing still

This new equation—proposed in a recent paper by Celent—amounts to: (CAPEX + OPEX) x StrategicFriction = TCO. The StrategicFriction multiplier was developed to represent the business impact of intangibles and opportunity costs that are more difficult to quantify. You can download the full paper here to learn more about how the formula works and how FMIs can determine the weight of particular frictions.

Below is a list of example factors that need to be incorporated for FMIs to have a full and complete picture of the costs:

1. Technical debt

FMIs incur technical debt when they depend on, typically, in-house systems built for specific tasks or purposes and which need to be refactored for current needs. Such legacy systems become costly to maintain, inefficient to operate and increasingly outdated with respect to best practices and standards. The tech debt concept stems from the resources owed to these systems to keep them optimized and resilient; resources that could be deployed elsewhere to more effect. That imbalance isn’t something intrinsically captured by traditional TCO.

2. Future-proofing

Data and volumes have been on an explosive path since the pandemic, which itself demonstrated how challenging and costly it can be to adapt when global supply chains are unexpectedly disrupted. That means scale and flexibility are at a premium for FMIs that need to ensure uptime and performance amid spikes and unpredictable volatility. Cloud can deliver such advantages, but at first glance migration may seem costlier than the current system now. But look into the long term, however, and the costs and lead time of building/acquiring new data centers and equipment, for example, may shift the perspective.

3. Slow time to market

Cloud is integral to unleashing emerging technologies for the business, notably generative AI, automation and data analytics. The slower that FMIs are to embrace a cloud operational model the slower they will be in innovation cycles. Missed market- and business opportunities due to restricted innovation won’t show up in a traditional TCO framework, but it will certainly have a tangible impact down the line if competition fills the space, leading to high opportunity costs.

4. Talent recruitment

This is a particularly challenging friction to surface in traditional TCO. The best technologists want to work for companies that push boundaries and innovate. FMIs tethered to legacy systems will be at a disadvantage in the market for top talent, less able to recruit on promises of working with cutting-edge technology and leading markets forward. Such a cost might take time to manifest but would surface over time and at potentially great costs, both financially and reputationally.

5. Client responsiveness

Markets move at the speed of light, but also client demands and regulatory mandates change at an accelerated pace. This dynamic makes it increasingly important for market operators to be able to continuously introduce enhancements and product developments in an agile manner. In the paper, Celent cited use cases at market infrastructures and financial institutions that show the impact of agility. In a trio of separate instances:

• Time-to-market to build enhancements was 90 times slower in the original state compared to cloud-enabled
• The rate of development cycles was 2 times slower in the original state
• The rate of production releases was 33% slower in the original state.

6. Innovation capacity

As mentioned, cloud is a key piece to the type of large-scale modernization that enables FMIs to leverage new technologies—whether in the business to optimize operations or on top of the business to the benefit of members. Reliance on legacy technology can drag down innovation and sap investment: A 2023 Nasdaq and the ValueExchange study found 78% of FMI budgets are dominated by legacy management. At some point, FMIs that do nothing to modernize may find themselves not only slower to market but also well behind first movers and leaders in innovative products and services.

Making the business case

There are many other instances in which traditional TCO computations won’t surface indirect costs that are material to the decision-making of FMIs, whether related to cybersecurity or risk management. To transform their businesses through cloud, however, FMIs need the hard data to support the case. With this reimagined TCO framework they can gain that comprehensive insight to make strategic investments.

Nasdaq is on its own modernization journey, now operating multiple cloud-based exchanges and bringing AI-enhanced products to market. Visit here to learn more about how our financial technology can help power your growth.