Coming on the heels of the new Basel III accord, this deal is a small but significant milestone in the evolution of banking compliance following years of regulatory upheaval. FRS and Wolters Kluwer's Financial Services unit will have their work cut out in providing solutions to help bank CFOs manage the welter of new regulations coming out of Basel III, Solvency II, the Dodd-Frank Act, MifiD and other regimes.
The financial crisis highlighted the importance of really understanding risk, not just managing it to regulatory requirements. Wolters Kluwer -– an established purveyor of content to the legal, health and financial verticals – long ago started investing in bringing true analytics to senior decision-makers. In fact, by 2009, software and online revenue represented more than 50% of Wolters Kluwer’s business, while books were less than 10%.
Like the acquisition by Thomson Reuters of Complinet, this deal also confirms the entrance of a new competitor group into the enterprise solutions markets previously dominated by IBM, Oracle and Microsoft. Analytics (fka decision support) is the new battleground. The competition is likely to heat up, with IBM also announcing an acquisition last week in the risk management space.
When we acquired FRSglobal together with Carlyle’s European Technology Fund in 2006, we were tracking several trends:
- Need for centralised risk management. Banks had disparate, disconnected systems to manage compliance in each product group and geography. This led to textbook-compliance only –- eg box-ticking exercises to please local regulators -– and deprived CFOs and risk managers of a single view of risk across the bank’s product silos. This lack of risk oversight would have disastrous consequences in 2008. FRS was and remains the only provider of a unified regulatory reporting platform that can address this issue for large banks. Too late for some; in time for many.
- Convergence of content and software. The first wave of SaaS companies moved traditional enterprise applications (eg CRM) onto a hosted platform. The next generation combines delivery of software functions with proprietary content -– eg domain databases, analytics, benchmarking data. Without unique content, most SaaS businesses will be commoditised away. FRS had worked out how to codify statutory regulations in 40+ countries into useable, actionable templates that banks could use to manage compliance. Most important, however, FRS’s domain experts around the world continually maintain this content, effectively providing ongoing ‘compliance insurance’ to customers.
- Shift from perpetual software licences to subscriptions. In the 1990s investors and the public markets loved the spectacular growth rates of software companies flogging perpetual licences. Big deals, high-flying sales people, and double/triple-digit growth drove valuations of 5x revenues and more. But in recent years the markets have developed a total aversion to the volatility implicit in that model, so that now the highest valuations are reserved for companies with recurring revenues, strong cash flows and low churn. When we bought FRS the idea of shifting to a recurring revenue model was a glint in the management team’s eye. Today the majority of FRS revenues are recurring on long-term contracts, and –- thanks to its clients’ reliance on FRS to remain compliant with regulations -– customer churn is virtually nil.
We couldn't predict the financial crisis and the wave of interest in compliance that followed. That was a spot of luck. But the team we recruited into FRS, led by Steve Husk and Serge Minne, understood how to shepherd banks up the curve of the software and risk management trends above.
FRS is an operational success story among European software companies, like Cramer Systems, Business Objects or StepStone. It shows that there are top-notch management teams in Europe with whom we can build market-leading businesses given a modest amount of capital and a touch of vision.
Congratulations to Steve, Serge, Jeroen and the rest of the team.