SaaS for Financial Services (Part 2 of 3)

My last blog about Software as a Service (SaaS) highlighted the benefits of the SaaS model versus the traditional on-premise deployment model. In this post, I will contrast SaaS with other deployment models that are common in the financial services industry, specifically the service bureau and the application service provider (ASP) .

There are several similarities between SaaS, ASP, and service bureaus deployment models. All are centralized deployment models where the hardware is managed by the software vendor in the software vendor’s facilities, rather than on the customer’s premises.  In addition, customers pay a monthly subscription fee with minimal upfront fees, rather than a large upfront perpetual license fee with yearly maintenance fees.

Service Bureau

A service bureau deployment is a common deployment model especially for post-trade (clearing) applications. Also known as facilities managed, the service provider not only hosts the application on their hardware in their facilities, but also provides resources to operate the application on behalf of the customer.  This model is unique in providing resources to manage and operate the application as if they were employees of the customer.  The service provider bundles the hardware and software costs along with the human resources to operate the application into one monthly subscription fee.  On the surface, this model appears ideal for companies that want to outsource a solution rather than building and staffing a solution on their own, but there are significant drawbacks.

  • Restricted Use “As Is” – In order to offer a cost-effective solution, the service provider restricts application usage and customizations that tailor the software to the customer business process.  The customer has to accept the application “as is,” adopting the functionality and terminology of the service provider.
  • Limited integration – Service bureau providers limit the integration points to the customer’s business.  For example, the application may only accept trades from the service providers trading platform or only from a select few trading platforms.  Service providers use to tout this as “straight through processing,” but it’s really intended to force the customer to use the service providers trading platform.  Once data is in the application, service providers make it difficult to get data back out, preventing seamless integration to customer’s environment.
  • Older Technology – one of the driving reasons for the drawbacks previously mentioned, is that that the underlying technology is often old and rigid.  The application was not built from the ground up using leading-edge Internet-centric technologies.

Application Service Provider

An ASP is a business that began in the late 1990s as an alternate way to finance software and to leverage the providers facilities (building, network, power).  In this type of deployment, the service provider hosts the application in their facilities on dedicated hardware for each client.  If co-location is desired for business continuity, the customer essentially pays for two instances.  ASP is similar to the traditional deployment model, except the software runs in the provider’s facilities which are often more fault-tolerant and higher performing than the customer’s facilities.  The customer not only purchases a software license for the application, but also must pay for the dedicated hardware and any underlying software licenses such as a database. The service provider bundles these costs into a monthly fee paid over several years.  In order to recoup the costs, the service provider often requires a 3 – 5 year contract.  The service provider, in addition to hosting the application, also provides backups and upgrades to the operating system.

The customer operates the application as if it were on premise and contracts separately with a consulting firm to deploy and customize the application to their needs. Software vendors that offer their software via an ASP model typically have not designed or optimized their application to work well over the Internet or with high efficiency in order to able to house multiple customers in a single instance.  Because of this, the total cost of ownership between the traditional and ASP model is nearly the same. The ASP model simply amortizes the upfront costs over several years, which is why this model is far less common today.

The emergence of SaaS-based solutions for financial services has replaced both service bureaus and ASP solutions for many capital market firms. As technology innovation continues to forge ahead and speed, flexibility and control remain high priorities for customers.

In the 3rd and final installment of the SaaS series, I’ll cover Firm58’s unique offering and address some of the more common topics that customers and prospects ask about including security, performance, co-mingling data, and disaster recovery.