The asset management business has never been more competitive, and CFOs are under tremendous pressure to keep their firms lean. As CFOs seek solutions to keep the headcount down, the argument for Software as a Service (SaaS) has become particularly appealing. SaaS solutions promise to help your firm focus on investment management and “get out of the software business” by having the vendor run and maintain your systems. The argument is compelling; the vendors will assure you that they can support a high-quality, mission critical service as well or better than your in-house technology group can, and at a much lower cost. If you are looking to make the leap, a SaaS system may do exactly that. If you suspect it might not, how do you evaluate the shortcomings and what can you do about them?
In my experience, there are three critical areas to evaluate:
- Fit and coverage
- Cost Containment
Fit and Coverage: Most SaaS offerings are not extensible, so you will not be able to manipulate tables or run custom applications against their databases. If there are significant gaps in functionality, you’ll have to live with them, so make sure the solution fits your business processes. Part of the attraction of the SaaS product may be that the data is included, and the TCO (total cost of ownership) analysis may include a big cost savings over sourcing that data separately. However, some vendors require separate subscriptions to underlying data that you may already have, so those costs will remain. Conversely, you may discover that the SaaS product’s data has some gaps in coverage that can impact your firm’s ability to model portfolios or monitor compliance. Before committing to the deal, take a deep dive into the data model to ensure that the quality and coverage of the data matches the needs of your firm.
Flexibility: Vendors have no incentive to make it easy for you to switch to a competitor, and it can be difficult to decouple systems when you don’t keep them in-house. If your portfolio managers add new strategies or expand into asset classes that are not native to the system your firm has chosen, you may find yourself doing extensive work-arounds to accommodate the change, or hitting a brick wall. For example, forcing complex derivatives onto a system that specializes in corporate bonds or vanilla swaps, may be impossible, and you may end up supporting macro-laden spreadsheets or creating additional workloads for your middle or back-office to maintain accurate holdings. Developing a thorough understanding of the level of standardization that your vendor employs is the key to evaluating your true costs.
Cost Containment: Are there any penalties of not going live by a certain time, or when the vendor’s “production” license kicks in? Carefully scrutinize the vendor contract and ask for it in writing if it isn’t clear—does the license take effect upon “go-live,” or parallel? What if the timeline is delayed; does the vendor take responsibility or does your firm get stuck with the additional cost? On a recent project, I found myself working with my client to QA the vendor’s configuration and document the problems, just to help the firm avoid the late fees the vendor was attempting to charge. In fact, you may want to add some cost assumptions into your implementation and maintenance calculation to accommodate the QA you may need to do when new releases or patches are issued. Some vendors will allow you to opt out, but some will not, or allow so little time between the announcement of the release and its deployment that it may be impractical to do. Others may allow your firm to have more control, but the time it takes to test and implement a vendor upgrade or patch that may not help your firm could be a costly and time consuming endeavor. Finally, vendors will want to keep the number of users included in a contract to a minimum for performance reasons and to keep their costs down on the hosting side. Consider these costs as your firm grows and needs to add additional users.
Bottom Line: There are now SaaS products available that can serve mission-critical areas of your firm’s infrastructure—from trading and compliances systems to all areas of the front, middle, and back office. If something goes wrong on the vendor side or you can’t get the attention you need when there is an issue, it will be your firm’s reputation on the line. Ultimately, the risks may be manageable and the benefits substantial, but it is important to go in with your eyes wide open.