SaaS and Financial Services A Marriage Made in Heaven

Transcription

1 I D C E X E C U T I V E B R I E F SaaS and Financial Services A Marriage Made in Heaven March 2009 Global Headquarters: 5 Speen Street Framingham, MA USA P F David Bradshaw Introduction Software as a service (SaaS) is an unstoppable shift in the software industry, with software providers, their partners, and customers increasingly embracing this new delivery model for software. It is already well established as a significant part of the U.S. market, and our research shows that European and Asia/Pacific user organizations are now embracing SaaS in the financial services as well as other sectors. SaaS is also part of a larger set of trends towards reinventing the software and IT industries. There is a lot of hype around cloud computing and cloud services, of course, but underneath all this, there is a fundamental change in the way corporate IT is structured and delivers services to its internal as well as external customers. The current economic conditions will only accelerate this change rather than hold it back. These changes are highly relevant to the financial services sector. IT is core to the existence of companies in this area, and therefore innovation in IT is core to competition. However, IT can also be a commodity and, even worse, a burden. Many of yesterday's innovations are business-as-usual today, and tomorrow they may become costly burdens on over-stretched IT budgets. Yet financial services companies must continue to innovate and update their IT to remain competitive. The key to successful innovation is identifying and excelling in the business processes that generate real differentiation. However, all the other critical business processes must also be executed at least as well as the competition, otherwise the innovation is wasted. How does SaaS help address this issue? Unlike outsourcing, SaaS leaves control of the IT system in the user organizations' hands. However, like outsourcing, it removes the day-to-day technical burden of maintaining the IT infrastructure from the user organization. The business processes supported by SaaS can therefore remain under the control of the organization, but with less drain on technical resources, allowing the focusing of those resources where they can support the differentiation strategy. IDCEB01R

2 An increasingly broad and deep range of functionality is on offer from SaaS, extending the choices available to financial services companies. SaaS vendors are addressing the most significant business problems for financial services companies because, for them, that is where the business opportunities lie. This involves moving beyond applications that manage records and data to ones that handle core business processes and transactions. IDC's survey data shows that the majority of financial services companies are already using SaaS, suggesting that SaaS has crossed the chasm in financial services. A particularly valuable advantage for the financial sector, where IT actions often need to be executed quickly, is that SaaS is generally much faster to implement than on-premises IT systems. But even before implementation, SaaS can speed things up by increasing the speed of decision making through the ability for prospective customers to try out the fully fledged production system at a very early stage of their decision process. This means that they can set their requirements based on the system's actual set of capabilities, rather than a wish list that may turn out to be impractical. That's not to say that customers should abandon their key business requirements, but rather that they can be pragmatic over how those business requirements are met. This is helped by giving hands-on experience to the people who will have to use the SaaS service and have responsibility for the business process of the proposed service well before a selection decision has been made. Definitions SaaS is a software delivery model where unrelated customers share a common software product and infrastructure that are managed by the ISV. SaaS software is specifically designed and built for one-tomany delivery over the Internet using a Web-services architecture. Typically, but not always, SaaS services use a shared multitenanted system. SaaS is effectively a bundled software/service offering, though IDC's taxonomy treats it as a software offering, as the software and services elements of SaaS cannot be unbundled. The software code (or intellectual property) of the service is typically owned by the SaaS ISV. The underlying software code cannot be customized by the SaaS vendor's customers, but instead the SaaS vendor typically provides powerful configuration tools. Fee structure: Software license, software updates, and hosting revenue are combined into a single fee. Support services may also be included in the fee. The service fee can be: A monthly subscription fee based on the number of users or some other observable and verifiable metric. A usage fee based, for example, on the volume of storage used. A transaction fee, such as a predetermined share of the revenue that flows through the service in a payment processing service. Some combination of the above and other metrics IDC

3 In addition, some SaaS products are provided "free" either as inducements to try more functional paid-for services or as a vehicle for advertising (in effect, users "pay" for the service by viewing advertising). B2B advertising is a significant portion of Internet advertising in generic services such as and calendar as well as Web search. SaaS functionality: In many SaaS offerings, the client's browser is used as a "thin client" to access the functionality of the application, performing little or no processing on the local computer. However, more SaaS services are making use of rich Internet application (RIA) logic to perform some functions on the client machine, improving the user experience. The most widely known RIA is in Google Maps, wherein a user can scroll a map in a window, but more are arriving with deep industry functionality. RIAs are not just for look-and-feel; they can improve the performance by reducing the back-end traffic to and from the server. While SaaS adoption is most notable in CRM (for example, salesforce.com), SaaS application functionality is expanding commercially to support horizontal and vertical industry requirements. Web-native (i.e., originally built for multitenant service provisioning) firms, including Taleo, RightNow, Concur, and Webroot, occupy the majority of the global SaaS market, but many traditional providers of on-premises packaged applications, such as Microsoft, SAP, HP, Oracle, and Business Objects, already have SaaS services. SaaS vendors' ISVs: The SaaS vendors are now attracting an "ecosystem" of other software vendors that sell products for use with the SaaS vendor's products. Increasingly, these ecosystem partners are themselves SaaS ISVs. In the business applications space, salesforce.com has now attracted a very wide range of SaaS ISVs, including some companies that are larger than itself, such as SAP (Business Objects). In other cases, the ISVs may use another SaaS vendor's infrastructure as the basis for their own product for example, CODA (now a division of Unit 4 Agresso) offers accounting SaaS based on salesforce.com's infrastructure. SaaS and open source: A small numbers of services use open source software as the basis for the service. For example, open source vendor SugarCRM offers SaaS based on its open source CRM product. There are also some service providers that also offer SaaS services based on SugarCRM's open source code. SaaS and the Cloud: SaaS is an example of cloud-based services. However, not all cloud-based services are SaaS. A useful distinction is that those cloud-based services that deliver a level of functionality can be considered SaaS (see chart). However, there are other cloud services that do not, on their own, offer functionality, for example the provision of "naked" computing resources. In all fairness, a consensus on the distinction between SaaS and other cloud-based services has not yet emerged. Similarly, services such as storage as a service, backup as a service, and security as a service are considered to be examples of SaaS by some but not by others IDC 3

4 Categories of SaaS: Figure 1 presents a useful conceptualization of the different types of SaaS being offered. Figure 1 Three Categories of SaaS Application High Configuration Business Applications CRM ERP IT Problems System Infrastructure Software Other Security Intrusion Detection Desktop Management Antivirus Communications Security HR SFA Expense Management Hosted Collaboration Customer Service Transaction Life-cycle Management Business Problems Storage Backup Online Meetings Hosted Application Infrastructure (Productivity) Note: Placement is subjective and is used to illustrate a concept Low Configuration Source: IDC, 2009 Benefits of SaaS to Financial Services Companies SaaS delivers many benefits to its customers, including: Flexibility: Users can turn on their services when they need them, pay just for what they need, and turn the services off when they no longer need them. In business terms for the vendor, this means that strong customer support and service has to be an integral part of the business strategy. There are some services a customer will have difficulty dispensing with at short notice. However, switching vendor will, in almost all cases, require far less effort than with an onpremises product, so strong customer service has to be the norm not the exception in SaaS IDC

5 Leveling the playing field: SaaS can enable smaller players to get access to technology that was previously limited to large players. Smaller players can usually afford fairly basic software for process management, and the implementation and configuration would be beyond their capabilities even if they could afford the software itself. However, in an SaaS environment, the vendor bears all the costs of developing and deploying sophisticated software, and offers it as a service on terms that smaller companies can afford. Faster and more agile implementation: SaaS does not require installation and implementation on servers; it is already installed and working on the vendor's systems. Most SaaS clients require just an up-to-date browser version, and though some require Java, Adobe or.net downloads, these are typically self-installing. SaaS may require integration with other systems, and this is essentially the same as any software system, though helped by SaaS vendors' strong adoption of SOA and associated Web standards. Lower IT management burden: On a conventional business system, either the IT staff or a paid third party has to manage the system, ensuring its availability and security. Beyond network availability, these aspects of the system are the SaaS vendor's problem. As these are key to the SaaS vendor's success, they tend to offer very high availability and security. Cost reduction: As the previous point shows, SaaS provides a far more complete "solution" to a user organization's problem than software alone, so the cost of SaaS should be compared to the cost of the overall system it substitutes for, including the purchase cost, the cost of managing and maintaining it, and the cost of upgrading and modernizing the system over time. Almost always, SaaS will be significantly cheaper. This enables organizations to retain control over operations while still reducing costs. Cost management: SaaS is generally priced according to some level of consumption for example, number of users, volume of transactions, volume of storage used, or some other metric that represents the consumption of the software by the user. These metrics can be made to be very flexible to suit the customer's business cycles. Management focus: With applications in the hands of external SaaS providers, IT organizations can focus on providing the services that differentiate the company as a whole from its competitors. Of course, keeping operations running will always be a significant part of the IT organization's remit, but that does not mean it has to be a huge drain on management attention. Trends SaaS has seen its most visible success in the U.S., where it has been adopted by large and small companies alike. The most visible success has been in CRM, with SaaS CRM vendor salesforce.com exceeding $1 billion in sales for its most recently completed financial year. However, SaaS adoption is not limited to salesforce.com or CRM; there has been an overall rise in both the choice of SaaSbased software delivery and the uptake of SaaS overall by U.S. companies. Shortly before the full impact of the economic downturn, 2009 IDC 5

6 survey data found that the percentage of U.S. firms that plan to spend at least 25% of their IT budgets on SaaS applications will increase from 23% in 2008 to nearly 45% in As a result of the economic crisis, IDC's expectation is that SaaS will become an even greater portion of IT budgets in the U.S. and will be one of the areas where spending will continue to increase. Outside the U.S., the uptake is less visible, but is still there. IDC expects that nearly 35% of worldwide SaaS revenue will be earned outside the U.S. in Our survey work (Figure 2) shows that in European organizations of 250 or more people, most are already using SaaS, and around half are doing so in more than one area. Figure 2 Number of Areas Where SaaS Applications are in use by Sector Business services Telecommunications Financial services Public sector Manufacturing Retail and wholesale Transport and utilities 0% 10% 20% 30% 40% 50% 60% 70% 80% or more Source: IDC IDC

7 Figure 3 shows just how diverse the use of SaaS is across different vertical sectors. The figure also shows the areas that users consider to be appropriate for SaaS use, in addition to the areas that they already use it for. Figure 3 Areas Where SaaS is Used and Where it is Appropriate for the Future /calendar Collaboration CRM Financials HR/talent management Office productivity Application development Application platform Storage Security 0% 10% 20% 30% 40% 50% 60% Use currently Appropriate but don't use yet Source: IDC, 2009 On the supply side, we believe that Europe's software vendors are catching up with their U.S. counterparts in adoption of SaaS. Germany-based SAP is the largest European software vendor, and it offers SaaS products in CRM, business management, and business intelligence (the latter via its Business Objects subsidiary). U.K.- based Experian is a substantial player in SaaS, through its credit analytics and marketing automation offerings. There are also a very large number of smaller companies and startups in the market offering SaaS, and almost all of the larger European software companies offer some SaaS products IDC 7

8 A final trend that is important to the overall IT scene is the increased "consumerization" of IT. The expectations of what corporate IT can achieve, especially in terms of usability and look and feel, are being driven by widespread Internet use. School-leavers and college graduates joining organizations over the next few years will have spent 10 years or more as Internet users at home, and a large number of many existing employees will be Internet users. These people quite reasonably expect that their desktop at work will be at least as usable as their desktop at home. They also increasingly expect to be able to connect any time, anywhere, to deal with urgent issues, using the device in their pocket. SaaS vendors "get" this transition; indeed, they are part of it. Typical on-premises software has a lot of catching up to do here. Considerations As mentioned earlier, the key to a successful differentiation strategy is identifying and excelling in those business processes that really differentiate the company. However, there are other processes where there is no differentiation available, but where the company has to be at least as effective and efficient as competitors, otherwise it may lose business. These insights are key inputs to any software selection process. In the former category, the company must innovate with whatever tools it can use, whether SaaS based or otherwise. Innovation may be in the software itself or in the business processes that software enables. However, in the latter category, it is important to draw on the expertise of its suppliers, specifically where they have built industry best practice into their products and services. Because SaaS vendors can update their offerings without the need for a reimplementation project, they can ensure that the processes embedded in their applications always keep up with industry best practice. This frees up resources for innovation in the differentiating areas. But where are the differentiating areas? In the early 1990s, vigorous debate was sparked among business thinkers by a landmark article in the Harvard Business Review called "Core Competence of the Corporation" by C. K. Prahalad and Gary Hamel. This article showed that identifying and growing a core set of competencies could lead to long-term success for large companies. More recently, author Nicholas Carr has argued that IT should be treated as a utility much like electricity. Carr compares the current state of IT to the generation of electricity at the end of the 19th century, when large companies had to build and run their own generators. He argues that the majority of IT will be provided as a service rather than performed in-house, freeing enterprises to work on the 10% to 20% of their activities that truly differentiate them. Whether or not one accepts the detail of Carr's hypothesis, it is clear that some form of transition is underway in the IT industry and that it will have a profound effect on how IT is provided and used IDC

9 Many organizations in the financial sector believe that they gain competitive or other advantages by running their own in-house IT systems, while others believe that IT can be outsourced to an IT supplier. However, most companies have arrived at a halfway house between these two extremes, outsourcing some parts of their system or IT responsibilities while retaining others. SaaS is, in effect, an alternative halfway house, allowing control over business processes while surrendering control over the infrastructure. Most organizations should be more than comfortable with this few, if any, will derive competitive advantage from IT infrastructure rather than their business processes. This is just one of many reasons why IDC forecasts strong growth in SaaS despite the current market conditions, as show in Figure 4. Figure 4 Worldwide SaaS Revenue, ($M) 25,000 20,000 15,000 (M) 10,000 5, U.S. EMEA Rest of world Source: IDC, 2009 However, as our survey shows, there is still a minority of financial sector companies that claim not to use SaaS. We suspect that many of these companies are using SaaS without realizing it, for example as credit analytics tools (from Experian), professional networking/recruitment (such as LinkedIn, Plaxo, or Yammer), or payroll services (such as ADP or Paterson HR). Indeed, some financial services companies are themselves adding software-based front ends to their services (such as the recent announcement by kaching) that could be considered to be SaaS IDC 9

10 There are still some reasons why SaaS is not more widely adopted in the financial services and other sectors. SaaS vendors can be eliminated in selection processes because they are much smaller and have less of a track record than their on-premises software rivals. In effect, they and their business models are so new that the prospective customer rules them out. That is changing as the SaaS vendors mature, and also as established on-premises vendors launch their own SaaS offerings. Another factor is sensitivity over placing important data on external providers' systems, not least around security and availability. Similar concerns arose in the early days of IT outsourcing, but faded in the long run as we expect to happen with SaaS. Providing outstanding security and availability is mission critical for SaaS vendors. A final issue around SaaS is its acceptance by IT departments. Initially, IT departments were skeptical of SaaS. However, one of the changes that we have seen in many IT organizations is that they have come to see SaaS as a valuable contribution. It enables their organization to focus on other areas and at the very least it becomes one less problem for the IT organization to manage. Conclusion Over the last few years, SaaS has become accepted in the financial services industry, as well as many other industries. There is therefore not just openness to SaaS but growing adoption of SaaS across the financial services industries. IDC research indicates that this is the case in Europe and Asia/Pacific as well as North America. Some of the most important advantages of the SaaS model for enduser organizations are the ability to pay as you go, bear no infrastructure costs, and rapidly implement new capabilities, as well as reduced demands on in-house IT staff and systems. These are especially important in the current times, when users need to respond to volatile market conditions, take control of their budget, and gain greater predictability of costs. Moreover, many financial services players need to take costs out of their operations or at least gain greater value from their IT spend. On the supply side, SaaS goes from strength to strength. At the start of the decade, many questions were asked over the survivability of SaaS players, but these worries have proved unfounded. Indeed, the situation has reversed, and now there are serious questions around the survivability of software vendors that do not have a SaaS strategy. User organizations can therefore have at least the same level of confidence in their SaaS players as they do in their onpremises software vendors, if not more IDC

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