To SaaS or not to SaaS:

the question of choosing Software as a Service to deliver cost efficiencies

One growing trend in controlling operational costs is to use Software as a Service (SaaS) as a full end-user application compared to an on-premises solution. This article outlines how SaaS is an option for investment managers to consider, examining the pros and cons of SaaS, what the short- and long-term benefits are, and how SimCorp as a global provider of financial software and services draws on research and client surveys to offer different operating models to fit different needs.

by Klaus Søren Arfelt, Vice President and Manager of Product Services at SimCorp, Copenhagen, Denmark

With resurgent turmoil enveloping global financial markets these days, adopting the right operating model as a means to manage cost has returned to top the agenda for most investment management companies. Adding urgency to this drive is the need to ensure sustainable profitability, more intensive competition and stricter regulations. Thus investment managers are advised to reappraise their current system and, if deciding on a new solution, evaluate which of the available options they find most attractive for their particular line of business and company size.

Augmented by the current focus on cost control, there is a proven need in the investment management industry to continually renew and overhaul its software, hardware and processing flexibility. Technological evolution drives hardware updating, as do new infrastructure products. The industry’s history is a patchwork of systems implementation and change management projects of any conceivable nature or size.

The result in many cases is typically complex software, as well as hardware and process environments that require cohorts of IT staff to operate. Not to speak of change. When the system implementation teams leave the scene, the new solutions adopted face the risk of mutating into black boxes if knowledge management is not handled professionally.

CONTINUOUS CLIENT-DRIVEN SOFTWARE DEVELOPMENT

Software and services companies like SimCorp must constantly be at the forefront of investment management technology to be able to adapt their offerings to the industry’s players. Individual businesses, be they investment funds, asset managers, or pension and insurance funds, have individual operating needs – also depending on the size of their operations.

Based on exhaustive research and surveys of clients’ business needs and operating requirements, as illustrated in more detail later on in this article, SimCorp gears its significant knowledge-based resources to continuously finding new ways for financial companies to control costs while also providing different operating models.

As an example of its commitment to providing different operating models to suit different needs, SimCorp offers a software service variant of its investment management system, SimCorp
Dimension, which is a software on-premises (SoP) solution provided in a variety of setups. By contrast, a typical on-demand solution very much resembles the setup illustrated in Figure 1, which by way of example shows how the SimCorp Dimension as a Service Programme works.

The illustration depicts how the end-user receives the SaaS service as one single application accessed via a portal embedded in the on-premises infrastructure. This kind of on-demand solution provides an end-to-end service that includes technical infrastructure, WAN lines, third-party integration, as well as other required components that are pre-defined to match specific business areas.

Figure 1. How a typical SaaS solution works in practice. Source: SimCorp. 

SOFTWARE AS A SERVICE (SAAS)

SaaS, also called on-demand software, is a standardised software service offered to clients via internet browsers. Because the applications are hosted, this eliminates the need to install and run applications on client computers, or even servers, as well as maintenance and support. What follows is a more general discussion of the pros and cons of SaaS as an alternative software solution in terms of short- and long-term benefits.

While service providers argue that SaaS helps to control costs and increase efficiencies, it is not the best choice for all investment management operations, however. Due to the challenges that face companies regarding outsourcing, such as communication interruptions and security, SaaS still represents a question mark for large parts of the investment management industry. For many investment management companies, an on-premises as opposed to on-demand solution remains the preferred option.

UNIQUE DEMANDS REQUIRE UNIQUE RESPONSES

Every investment management company has its own unique challenges, and therefore any single software application or SaaS provider may or may not prove a good fit with respect to the specific business processes and goals of that company as there can be many different motivations for introducing cost-control initiatives.

Depending on the circumstances, the objectives may include an immediate need to contain costs due to a sudden drop in revenue, a long-term strategic initiative to curb costs and improve margins through implementation of a new cost structure, or a combination of short- and long-term cost improvements. Agility to adapt to changes and act on opportunities is key, and complex operations can block otherwise attractive opportunities.

THE PROS OF A SAAS APPROACH

With this in mind, adopting a SaaS approach represents an opportunity to shift attention from complex technical environments, prepare for change and increase corporate agility – all at one and the same time and all in one go. It puts focus on the income-generating aspect of the business, and reduces software, hardware and process support to secondary, business-facilitating components. In a nutshell, SaaS simplifies.

In this context, SaaS is defined as a business logic-enriched software, which runs remotely and which is serviced by the provider. In the classic software context, the buyer has to add hardware, IT operations, upgrades, patches, configurations, etc., on a continuous basis to benefit from the functionality provided. With SaaS, these are out-of-the-box services.

The prerequisite for successful SaaS offerings is an appropriate embedded business logic that covers the task at hand – end to end. The solution must be modular to enable treatment of varying client demands within a standardised framework. The modules must be additive for starting out with a subset and then expanding as demand changes. As demand materialises and hopefully expands, it must be possible to add or expand components as required.

The obvious value driver for SaaS is economies of scale; via standardisation, it becomes possible to operate a number of installations with the same effort it would take to manage a single environment in a traditional setup. Yet another key feature is the quality perspective: the more volume on the basis of a standard solution, the less likely errors are to occur. When volume rises, obstacles are eroded.

Yet the key value driver for SaaS is the fact that the service provider constantly updates the solution in order to accommodate changes in the business or technical environment. Traditional software providers deliver upgrades and leave it to the buyer to install and implement these on-premises. With SaaS, this becomes an out-of-the-box functionality, which reduces overhead and shortens time to market.

THE CONS OF A SAAS APPROACH

One of the biggest perceived drawbacks to adopting a SaaS solution is that once all of the investment management company’s data is placed on a SaaS server, the company may find it difficult to access its data. While some providers claim otherwise, many companies find that the provider owns their processes, and switching back to on-premises software or to another provider may prove as cumbersome as a complete reimplementation.

In addition, not all SaaS applications represent a cheaper option over time. Most charge a fee on a per user, per month basis and some providers require lengthy contracts stretching over three years or more. First, the investment management company has to measure the tangible benefits of what it is paying for over the entire length of the contract, as it might prove a larger financial commitment than initially factored in.

SaaS is standardised software and application management. This means that the client has to comply with the core structures, processes and automations as defined by the provider. It places limitations on the integration into existing processes.

Lastly, because most SaaS providers offer a single version of the application to everyone – customisation is much more difficult. If something specific to unique requirements is required, it may not be readily available or accessible. Moreover, many providers will only be interested in making a change if a substantial proportion of their users are requesting it.

WEIGHING UP THE PROS AND CONS

In assessing the advantages and disadvantages of adopting a SaaS solution, it can be argued in its favour that SaaS simplifies, adds value and generates quality improvements – all benefits that otherwise could be hard to achieve for investment managers without significant investments in internal systems. However, it also entails less control over data and processes, fees that do not necessarily fall over time and limited flexibility. This also means that SaaS when viewed in isolation can be costly, while on the other hand it can pay in the long run, as the expenditure stream becomes more predictable over time. The overall SaaS business case is easy to make: if business is good, the benefits are shared between service provider and client.

TAKING A LONG-TERM PERSPECTIVE ON SOLUTION OPTIONS

When considering the solution options that are available, whether it be an on-premises or on-demand alternative, a long-term perspective to deal with operational cost must be high on the agenda among global investment managers. In a recently published survey initiated by SimCorp, one of the main conclusions was that, the longer an on-premises solution is in production, the less SimCorp Dimension clients spend on IT budgets in percentage terms regarding all SimCorp Dimension-related costs (see Figure 2).

Figure 2. Expenditure on SimCorp Dimension by number of years in production. Source: SimCorp 

While it has to be stressed here that the survey’s findings are based exclusively on responses from SimCorp Dimension clients, the goal of obtaining a clearer and more transparent picture of clients’ costs in relation to operating their on-premises investment management systems was achieved. Responses were received from a number of users worldwide, and a total of 137 clients each with at least one year’s production experience with an on-premises SimCorp Dimension solution were invited to participate in the survey.

The client responses provided invaluable insights into their investments in on-premises investment management IT infrastructure. Moreover, several trends and tendencies were identified, allowing SimCorp to assess where and how clients allocate their operational costs, what the cost-related advantages are in utilising an on-premises solution, and how these costs develop.

One of the survey’s key findings was that the majority of the surveyed organisations (60% of the polled clients) utilise a centralised on-premises installation, while the second most common configuration (26%) is a central installation in combination with virtualisation software. The respondents were almost evenly distributed among the three major IT deployment strategies: integrated enterprise solution primarily from one supplier (39%); a core system integrated with multiple add-on applications (34%); and best of breed – a patchwork of multiple provider solutions (27%). The indicated preference for a centralised on-premises solution suggests that security and reliability remain important concerns among investment management companies.

Examining the cost-related aspects of the survey in more detail, the findings indicated a decrease in IT budget expenditure of 22% for clients in production between five and eight years compared to clients in production up to four years. That IT costs decline as the years in production mount is further proven by the fact that clients with an installation in production for nine or more years showed an additional three percentage points’ decline in expenditure.

This decrease in IT costs over time argues the case for an on-premises application versus an on-demand application. Although on-demand applications eliminate substantial initial investments, they often include extra monthly fees for mobile access, industry-specific functionality, offline synchronisation, and extra storage. While return on investment (ROI) is realised relatively quickly with SaaS solutions, the indications are that the recurring monthly fees can make them a more expensive option in the long run.

On the other hand, SaaS transfers operational risk from the investment manager to the service provider. This makes it difficult to compare the absolute figures in terms of SaaS versus SoP solutions. The two solutions simply represent different risk scenarios. To sum up, the right option for an investment manager to choose from depends on the individual risk averseness that dictates the value of the risk transfer.

Broken down into the different cost categories, the tendency is to spend proportionally less of the entire IT budget on own staff, external consultants and network application software related to SimCorp Dimension as the number of years in production increases. The expenditure on hardware and systems software shows a relatively flat or slightly increasing trend as the number of years in production increases (see Figure 3). The findings also indicate that when a client is in production over a longer period, the proportion of internal staff costs associated with implementation of new functionality decreases.

Figure 3. Expenditure on SimCorp Dimension by cost category and years in production. Source: SimCorp. 

Further, the survey findings point to two key factors. First, clients become more knowledgeable and establish best practice when implementing and/or upgrading, thereby reducing the effort spent on these tasks. Second, more knowledgeable and productive staff lessen the need to engage external consultants, further reducing the proportion of IT budget spent on operating SimCorp Dimension as the number of years in production increases. Reflecting these two factors, on-premises solutions tend to provide more robust integration and greater flexibility than on-demand applications.

Regarding the overall expenditure on application software, there is a tendency for larger organisations (based on the size of the overall IT budget) to spend proportionally less of their IT budget on application software. For organisations with less than €5 million in IT budget, the expenditure on application software was shown to be 29% of the IT budget, whereas for organisations with more than €10 million in IT budget, the expenditure was indicated as 14%.

The two largest expenditures related to the organisations’ own (internal) staff equate to the same two largest expenditures for external consultants; namely the cost of implementing new functionality and the cost of upgrading. For internal staff, the third and fourth largest expenditures are production support and problem management, while for external consultants, the third and fourth largest expenditures are problem management and integration (See Figures 4 and 5).

The finding that clients spend proportionally less of the entire IT budget on their own staff, external consultants and network application software related to
SimCorp Dimension as the number of years in production rises suggests that staff, consulting and network infrastructure are the most likely areas in which operational cost efficiencies can be gained.

Figure 4. Distribution of internal staff costs. Source: SimCorp. 

Figure 1. Visual scorecard for outsourcing decisions. Source: TowerGroup, 2011. 

SAAS AS A GOOD PLACE TO START

By way of summary, in an economic environment where investment management companies are striving to find ways to contain costs while increasing business, many investment managers view SaaS as a good place to start. With manageable start-up costs, and an overall lower cost of ownership, adopting a SaaS solution can fit in well with an enterprise’s financial goals.

Whereas in the case of adopting an on-premises solution like SimCorp Dimension, as the SimCorp client survey indicated, savings can be achieved over time in the areas of IT staff and infrastructure, maintenance fees, hardware and software maintenance and upgrades, firewall installation and more, an on-demand solution like SaaS can offer software costs that are reasonably consistent over time.

Whether it be an on-premises or on-demand solution, the most operational efficiencies tend to be realised in the areas of internal and external staff costs. The bottom line in both instances is that organisations will best realise cost efficiencies as they accelerate along the learning curve while at the same time benefitting from economies of scale.

Further, adopting either of the two solutions can save money by saving time. For instance, managers are relieved of the need to allocate time to overseeing operational processes, and instead can focus on more important areas of the business such as customer relationship management, business analytics, and decision-making.

Despite SaaS’s obvious attractions, however, challenges remain. Within the investment management industry, the move to a SaaS platform will remain a challenge in the foreseeable future. Data needs to be migrated, connectivity re-established and people need to be educated. Audit approvals must be established and security verified. The adaptability fully depends on the ability of the service provider to design solutions that are completely dedicated to the client tasks.

To sum up, SaaS has the potential to revolutionise the use of software in the investment management industry. Its development marks one of the next big steps for the global software industry, and those that are able to bundle industry insights, user focus and standardisation within a flexible structure will have a very interesting product to offer.

Klaus S. Arfelt is Vice President and Manager of Product Services at SimCorp and holds a master’s degree in finance. Since joining SimCorp in 1992, he has been active across all fields of the financial software development, deployment and maintenance business. Solid background from Nordic, Central European and Middle East investment management engagements provides the foundation for various corporate management positions. Klaus S. Arfelt programme-manages the SimCorp SaaS initiative.