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What if you could have all your business functions supported by best of breed applications, without the integration issues, for half the cost, and a quarter of the time to market?
What if. your competitors already do?
Application Service Providers (ASPs) are becoming the latest talking point at the operational board meeting lunch, but will it ever move onto the agenda for investment managers?
There are already examples of successful ASP services within the hedge fund industry, where Prime Brokers are offering application infrastructure across the Internet to hedge fund managers. This is a relatively simple model where the client is a smaller player in the market. However, this same model is attractive to the custodians and third parties who are already providing outsourcing services to much bigger investment managers for fund and securities administration.
The general consensus is that we are at least 2 years away from seeing a true ASP model becoming established on a wider scale in the investment management industry. There's no doubt about there being some potential, but what exactly is it? do we need it? and why hasn't it taken off yet?
What is an ASP model?
The main difference between a bureau and an ASP model is the technology. Whilst a bureau may have been a green screen into a single application, the ASP model is accessed via a thin-client, normally a browser, and involves a layered, or stacked, architecture with components for integration and messaging that form its core.
The ASP stack in the investment management space may also include layers for business workflow and will be topped with, not one, but possibly a number of business applications. The client is still the owner of the data although the data store is hosted at the ASP site.
Unlike a traditional outsourcing model, in the ASP-world the people remain within the investment management firm, and the business process is still run in-house. It is the technology and infrastructure but not the actual business functions that are outsourced. This means that an ASP can offer an outsource of the infrastructure relating not only to the back-office activities, but also to the core services of the investment manager that are normally perceived as differentiators.
What are the benefits
of the ASP model?
The reason for this is that the infrastructure of an ASP model allows a flexible approach to implementation and access to a broad range of business applications without the cost of ownership normally associated with an insourced technology solution.
The ASP pricing model is potentially cheap as it is based generally upon a "pay-as-you-go" concept as opposed to the more traditional infrastructure "ownership", which means incurring significant costs and risk up-front. Add to this the removal of the on-going costs and resource associated with maintenance; upgrades; data management; and training, and it starts to become extremely attractive. Projected reductions in cost of ownership are estimated to be as high as 40-50%.
The potential for breadth of functionality at a low cost certainly appeals to a start-up or small company. If this extends to a hybrid operating model, where some aspects come under the ASP scenario and some remain in-house, then it could also be attractive to more established companies who are in a replacement phase for some, but not all, of their existing infrastructure.
Further benefits are realised by clients of ASPs by virtue of the shared functionality so that cost of change is reduced. Additionally, any changes affecting the business application or the user interface can be rolled-out quickly since no desktop implementation is required. The client of an ASP is also insulated from external influences such as changes to messaging and technology standards, since these will become the concern of the ASP.
A significant benefit of the ASP model is also a good solution to Business Continuity Planning, which has been in the forefront of people's minds since September 11th. In this scenario, all that is required to use the infrastructure is access to the Internet, and hence a temporary office can be set up with no specialist facilities.
Inhibitors to using ASP
It sounds perfect, so why is the take-up of ASP so slow?
The lack of ASPs in this industry, and therefore the lack of choice or comparisons, is certainly a factor that will inhibit the take up of such services. An aspiring ASP in the investment management market will need to make significant investments in its own infrastructure in order to promote itself as being able to remove that same issue from its clients. The ASPs themselves may find it difficult to resource best-of-breed applications if the suppliers aren't willing to play ball.
A further hurdle to get over is the fact that there is likely to be a certain amount of nervousness on the part of a potential client. This is about an investment manager having to release control on mission-critical business applications, outsourcing the infrastructure, if not the business processes, of activities that are deemed to be core competencies and business differentiators. The confidence of the investment manager to base its reputation solely on its people and processes will be tested fully in the ASP-world.
Why are ASPs particularly
attractive to investment managers?
The most pertinent point is that investment managers have a need for a broad base of IT functionality. Global or start-up, IT support is required for investment decision-making, trading, custody, accounting, and client servicing. For investment managers, the scope of automation is now beyond the capability of a single package. As software packages have evolved, the functionality has become increasingly specialised or modular in offering. Then there is straight-through processing: business imperatives such as the move to T+1 settlement or Internet-based client servicing demand that data is propagated between packages with minimal manual intervention, in near real-time. The combination of these effects has resulted in an inter-connected multi-package architecture. When such an architecture is crafted by design, we call it "best of breed".
Whilst this type of solution represents a step forward in functional terms, it comes at a cost. In effect, bespoke development has been re-introduced into the IT infrastructure in the guise of systems integration. According to a now-familiar Gartner research statistic, developing and maintaining (application) interfaces consume circa 40% of a typical organisation's IT budget. On top of this, the multi-package architecture usually brings with it significant data consistency challenges. Perversely, after a journey of some 20+ years, we find we are working our way back to square one.
Enter the ASP model. In the same way that the software package lowered the risk and cost of functionality by reselling standard bundles, the ASP model has the potential to lower the risk and cost of multi-package architectures by reselling pre-integrated solutions. In addition, like the bureau solutions of old or business process outsourcing today, it is not necessary to own this infrastructure to take advantage of its capability.
As the world of investment management becomes more fragmented, ASPs potentially promise a growing community of specialist managers access to cost-effective, reliable foundation functionality. This base level functionality could be supplemented with specialist applications that are built, bought, run in-house or hosted externally. If this sounds suspiciously similar to the case for outsourcing business processes or buying package software, you would be right.
What should investment
managers be doing about ASPs?
Custodians and vertical market application software suppliers are developing ASP services to complement their existing core offerings. They will be seeking strategic partners to kick-start their ASP services. Like the clients who help develop a software package or 'liftouts' from initial outsource clients, the first-mover ASP clients can expect certain advantages; notably, the opportunity to influence the services offered and to structure the deal. By becoming involved in the design of the ASP model, the investment manager and ASP provider build trust and a strong relationship which are vital to a successful long-term partnership.
Although there are practical ways in which an investment manager could become ASP-based today, each manager must decide whether it is an appropriate model for the business and, if so, the timing of the transition. Again, lessons from outsourcing and package software worlds are likely to prove instructive in guiding thinking.
The driver for becoming ASP-based must be strategic: it must be seen as a way to improve competitiveness. Until moving to an ASP model can deliver a step-increase in capability or operational efficiency, it is probably not worth changing. Key improvements in this consideration include:
n access to best-of-breed functionality
n better control of IT costs through greater cost transparency
n acceleration of IT re-engineering benefits and improved IT focus.
Assuming there is a strategic imperative, the business case must also be compelling. The more complex the model and specialised the application solution, the more costly the ASP solution is likely to be. A unique requirement could amount to a closet facilities management arrangement, and could prove to be less attractive financially than in-house arrangements because of the need to cover tax and profit margin in the pricing. Also, ASP services, in common with outsourcing, involve risk and therefore requires trust. The strength of the business case must reflect this.
Finally, to the examination question: do investment managers need Application Service Providers?
Asset management is an increasingly virtual enterprise. The focus on core competence is fuelling outsourcing. Most investment managers are actively reviewing, if not moving to, business models involving outsourced back office business processes and partnership distribution arrangements. The increasingly connected world of the investment manager means a significant part of the current core IT will become commodity.
Need or desire?; ASP is the new wave.
Jim and Gilly have more than 30 years experience in the investment management industry between them, and have both worked in operational, service industry and consultancy roles.
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