The financial sector is a highly technology-defined industry, with services and offerings being digitally enabled and delivered to clients today. The reality for the industry incumbents is decades of adoption of new technologies which are all stitched together in a complex enterprise-architecture where the ability to integrate and run systems takes precedence over innovation. During this time, top players in the financial sector distinguished themselves through technology excellence. Among many other drivers, this strengthened the trend towards favouring the big players, because excellence in technology operations and integration comes with economies of scale – so bigger meant better, often.
Institutional investment managers are no different to this development. In recent years, there has been a shift in this trend – integrating and running technology has commoditized over the years and many investment managers can’t or don’t want to use this aspect as a business differentiator anymore, especially when they don’t reach the required economies of scale alone. When Do-It-Yourself is replaced (or, to be precise, complemented) by Outsourcing (or in more modern phrases: by technology consumption as a Service), software vendors start transforming their offerings into SaaS – the software and technology operations excellence is their core value contribution and with modern public cloud-based infrastructure and enhanced accessibilities, nobody should be better setup for best economies of scale. This has been enabled by an increased maturity of the global hyperscale cloud providers in delivering services to financially regulated institutions, especially because these cloud services are now designed for regulatory and contractual compliance, and because we have surpassed the level where cloud-based services are now more secure than on premise.
Benefits of cloud powered SaaS
Generally speaking, being on the cloud has many advantages, which is why a lot of companies have adapted a corporate strategy to move most if not all applications onto the cloud in the coming years. The financial sector is no different.
Benefits of cloud:
Security and privacy
SaaS consumption can add some benefits to the above:
Focus your resources on your core business and required core competencies for business innovation, instead of the required technology innovation
Consume technology as a service, based on strict operational SLAs
Outsource operational risks
Make software maintenance incl. upgrades a non-issue
With many security and business agility related advantages of the journey from on-premise-DIY towards cloud-powered SaaS, it should not be overlooked that essentially, this means outsourcing technology skills. This requires both consuming financial institutions to adjust their setup, as well as technology vendors to enhance their scope of service coverage. The reason for that is that every financial institution that outsources some technology skill set will still require their entire IT-landscape to be fitting into that SaaS driven outsourcing strategy. To ensure non-regression during system changes also in a SaaS setup, the integration of different technology partners needs to be receiving a lot more vendor attention compared to previous decades – and technology vendors are adapting this need more and more.
Challenges of B2B SaaS in the Finance Sector
There is a major difference between software offerings that were invented and architected with the new modern cloud technology capabilities in mind, and software offerings that have a multi-year (sometimes multi-decade) history of success and feature richness to take and transform into cloud readiness and SaaS consumption models (mostly because rewriting everything from scratch is not having a promising business case that would benefit consumers).
True multi-tenancy is typically a characteristic of true SaaS offerings. The specifics of the financial sector, and the data heavy footprint of each player make this less relevant for Investment Management purposes. However, the data heavy footprint is a good example of what challenges to be aware of:
Challenges of cloud/SaaS:
Data volumes drive costs a lot more on the cloud than on premise. Keeping historical data in the live operational database is significantly more expensive than doing so on premise.
Economies of scale require standard operational playbooks, and some aspects of how the business day and its execution are structured need to be adjusted by consumers to adjust to this standard.
The SLAs in the service contracts define future capabilities and their restrictions very transparently and reliably – but if you don’t know what you need, and also often not what this would be worth to you, you can risk ending up in unclarified regimes of daily service delivery expectation mismatch.
All challenges can of course be positively dealt with, but they are important to take into account before deciding how to approach a generally compelling journey towards cloud and SaaS consumption.
SimCorp’s SaaS and Cloud Transformation
Around 23% of SimCorp’s client base is live on their SaaS solution for SimCorp Dimension. In actual numbers there are over 6000 users and more than 350 environments (besides production, this includes test, dev etc) running on the cloud. Two different cloud models are offered in this context:
a) a public cloud offering using Microsoft Azure. Using this offering allows the biggest benefit with regards to the technology automation layer built by SimCorp on Azure, for example for ramping up and down entire installations within a few hours and on the click of a button, literally. The public cloud offering is ideal for clients willing to adapt to the operating standards that SimCorp optimizes for. In our view, this is the cleanest cloud option, and this setup does allow for the above-mentioned cloud benefits to materialize.
b) a private cloud offering using IBM as a partner. The degree of automation and operational efficiency is expected to be lower in this option, but it allows clients to deviate from some operating standards that SimCorp optimizes for, without having to do technology operations inhouse. Hence, this is a possibility that restricts the amount of above-mentioned cloud benefits to materialize – but might be justified due to needs to differentiation or the consumers own cloud strategy (public vs. private, for example).
The initial rollout was only offered to new clients, and it was only in 2020 that SimCorp started to move existing clients over. So far close to 10% of their existing client base has moved over, but this is expected to grow further in the coming years, and by now almost 20% initiated the process of migrating to the cloud which will bring SimCorp closer to the desired 50% mark. The current client base is very diverse, spanning across North America, Europe and Asia, with different sizes and complexities and from different industries.
Moving from an existing on-premise installation into SaaS maintains the existing system configuration and data – however, some migrating optimizations will be required in order to later on materialize the benefits intended from such a move. One aspect relates to data volumes – the costs for wasted data storage space are growing tangibly in the cloud and cleanup is practically a necessity. Also, naming and structure conventions (for example for batch job groups) need to be met and hence adjusted. These investments are worth it, but should of course be known and accepted as necessary. If a SaaS customer wants to maintain their current business processes totally unchanged (and hence not adapt to any standard that is not their current), they will lose out on many possible benefits of SaaS consumption, and should actually think twice if this is the right move for them – or change the thinking paradigm about adapting to standards.
An audience survey from SimCorp’s Global Summit 2023, where cloud and SaaS was a major topic on the agenda, revealed that 45% of SimCorp’s present customer base say they do not have any SaaS plans. SimCorp has also confirmed that the on-premise model is not supposed to be discontinued, so that clients have the full choice of technical operating model in the future:
Full SaaS on public cloud with SimCorp.
Full own cloud operation without SaaS consumption from SimCorp (consuming SimCorp’s products on-premise). This option doesn’t benefit from any technology automation work to simplify system operations as much as option a) and continuous efficiency improvement in this option will depend on each consumer’s own technology innovation investment.
A hybrid construction of the two (mind the resulting overhead!).
Classical on-premise, using datacenter driven technology operations.
The number of financial institutions without any cloud strategy will decrease further – the times of exclusive technology operations in classical data centers seem counted. Nevertheless, industry data from 2022 indicates that while spending's on cloud infrastructure had an exponential rise during the last 6 years, the cost spent on classical data center infrastructure did not go down in the same period. Our conclusion is that the financial benefits of cloud operations are not immediately apparent through short term cost savings, but by improved business agility and enablement of changes to differentiate on the market. If the latter is your key interest, having a cloud strategy would be recommended. If it isn’t – you can probably do well to focus on your own business differentiator by other means to reach some benefits that you need, instead of simply following the trends. Some of the benefits of SaaS consumption benefits can also be achieved in a DIY setup, provided you have a clear understanding of your needs and how to leverage the right resources.