CutterAdvantEdge

Issue 61, September 2008

Application Service Providers

ASP on the agenda

With the turmoil and uncertainties in the global financial markets many asset managers have been casting a critical eye over their IT spending priorities and strategies in the coming months. Can they save money and manage risk without compromising their technology firepower? What are their options? There is a mood for change, for doing things differently.

This is why the pros and cons of using Application Service Providers (ASPs) has been, and will continue to be, top of many firms' agendas as they undertake a thorough review of their whole approach to IT.

What is an ASP and how do asset managers work with them?

In a nutshell using an ASP is rather like leasing or renting your technology. Instead of buying your systems, the ASP hosts and manages your applications on their own servers. You access the applications via the Internet or over a private network. The big plus point for an ASP solution is that you pay for everything – hardware, service, support, upgrades – on a monthly basis. There is no capital outlay and your internal IT support needs will be reduced. The major downside is that you don't have as much control over your systems as you do when you own them directly and customization can be difficult.

So how many firms are using ASPs and what for?

A surprisingly large proportion of asset managers – a full 25% – currently use ASPs for at least some of their applications. And over the next three years, 73% plan to outsource technology. Interestingly, this is in sharp contrast to asset managers' attitude to complete Business Process Outsourcing (BPO). Contrary to what you might think from reading the media (that BPO is all the rage and everyone is doing it) only 45% of firms actually plan to outsource a business process over the next three years. These figures come from a recent survey by Cutter Benchmarking of 50 firms with a combined total of $28 trillion AUM.

In asset management there are ASPs for the following applications:

Trading
CRM
Accounting
Data Warehousing
Portfolio Management
Equity and fixed income analysis
Performance measurement and attribution
Derivatives

Plus points for using an ASP

The costs of hardware, software and support are shared among all the ASP's clients
Clients pay a monthly fee (no upfront capital) and agreements can be very flexible
The ASP is responsible for ensuring the technology keeps pace with changing market conditions and compliance
ASPs create a forced standardization within the market
SOX compliance
Properly trained support specialists backed by Service Level Agreements (SLAs)
The ASP maintains external interfaces
Q/A support is provided for new releases and patches
A proper disaster recovery service with multiple locations, SAS70 and so on
Problem solving tends to be fast and efficient (because they are always at the ASP end!)
You get a good service overall. The ASP cannot afford to have an unhappy hosted client for very long

And the negatives...

ASPs will probably not support extensive customization
There tends be a 'one size fits all' mentality among ASPs
Integration in a complex environment can sometimes be a problem
You can be bounced into new software, upgrades and system changes before you're ready for them
You don't have much control over the quality of the application or the ASP's staff and data
The downside of forced standardization is that you may have limited choice about how you use the flexibility of the ASP's software
You still need people to maintain the relationship with the ASP
Limited interfacing options
Risk of connectivity outages
Even if you have an ASP, you cannot outsource your fiduciary responsibility
You don't own your system and therefore can never have complete control over it

The Cutter Associates view on the ASP option

Brad Burnett, Principal of Cutter Associates, believes that, "for many mid-size and small firms, ASPs are often a better choice than installed software."

"Cutter has conducted over 120 evaluations of investment systems, and in the past few years most clients want us to consider ASPs," says Burnett. "In a market where budgets and application specialist resources are constrained, ASPs make a lot of sense – you outsource the IT, the software and the expensive disaster recovery." He also points out that ASPs offer highly reliable system security.

Another positive is the development of the ASP plus model, a range of value added services including benchmark loading, transaction loading and other file monitoring. Naturally, this is a way for ASPs to generate more revenue, but it's also about providing a better service for existing customers.

Making a decision about ASPs

Weighing up the pros and cons of ASPs is probably the easiest part of the decision making process. Much harder is working out the cost/benefit ratios. For instance, each IT person in your organisation may have many responsibilities, so how much do you save by removing the need for support for one application? It's not a straightforward calculation.

Another question is: can the ASP get hardware and staff more cheaply than you and, if so, will they pass on these savings? And should you enter into a contract based on usage if you cannot predict how your needs may change? You could end up losing money if your usage goes down.

Take your time. Work out the numbers. Think about the pros and cons. And, as always, get as much advice as you can before making a decision.