The future of application management: ASP vs. on premise

There are two common delivery methods of technology in the investment management industry. While the majority of firms host their software on premise, there is a growing interest and demand for application management offerings, provided by application service providers (ASP). This article looks at some of the pros and cons of both delivery methods.

While on premise may be the dominant method in most markets today, outsourced application management of core systems is gaining momentum. I predict that within 5-10 years, most asset managers will have made the shift. Just as software-as-a-service (SaaS) re-wrote the rulebook for many businesses, the investment management industry is now playing catch up.

Industry norms

Market research and anecdotal evidence suggests that North America for example, is a little bit ahead in terms of ASP compared to Europe which is still heavily weighted towards the on premise set up. Even so, ASP still remains in the minority in most markets.

In many cases it’s a question of whether the IMS vendor is future proof or not. Some clients may implement on premise, but want ASP as an option, so that they know that it is there as an option if necessary.

We are seeing that some firms are developing strategies in which they clearly state that they will avoid developing their own infrastructure solutions on premise, and rather seek outsourcing solutions such as ASP. These firms realize that they are not technical experts, and do not want an oversized IT department to manage. Rather, they want to focus on managing investments. Having said that, there are also firms that still have a strategy saying the exact opposite, that they want total control and ownership over their IMS, no matter what.

So overall, the reality is that the market is mixed in terms of preferences and it is evident that the future will lean towards ASP.

What’s the difference between ASP and on premise?

With on premise, firms manage all aspects of their installation, from infrastructure to environments to data centers. This means that they also have a large IT department in order to manage their application. This department needs to be made up of a broad range of very specialist knowledge, much of which may actually not be required on a full time basis, for example, monitoring batch jobs every night or administrating the database.

ASP takes the investment management system (IMS) out of the client’s infrastructure while still allowing them to operate with the same flexibility in configuring and using the application. Firms don’t need  resources with IMS application skills, establish and maintain infrastructure and disaster recovery, or cope with all the niche technical application management challenges that are associated with any enterprise solution. Rather than having to stretch resources across tasks, ASP providers have the possibility of having specialists managing specific tasks on multiple installations.

The key talking points between ASP and on premise

Specialist knowledge and manpower

Because firms managing their solution in-house need to have a broad range of specialty experts on hand to do tasks which may not require a full time employee, their specialists end up becoming generalists. ASP providers have accumulated knowledge and man power related to their IMS and can therefore pool resources and have specialists work across multiple client installations in their area of expertise.

While a local IT team may be experts in their specific company, they will never have the same level of expertise as the IMS vendor employees working on ASP installations. Because they can draw on experience from multiple installations in different environments and are closely linked with their development team they will always be one step ahead, and have deeper knowledge than any internal IT department can offer.

Generally, it is also a challenge for asset managers to attract and retain IMS experts to operate their system. They are in short supply and high demand.

Generally, it is also a challenge for asset managers to attract and retain IMS experts to operate their system. They are in short supply and high demand.Thorvaldur Flemming Jensen, Head of ASP Division, SimCorp

It comes down to trust

Apart from the fact that asset managers are asking a vendor to take responsibility of a solution that is critical for their business, without an investment management system, firms could not execute their daily operations.

Entering into an ASP partnership requires firms to trust their IMS vendor – more so than an on premise offering. We should remember however, that even with on premise installations you are trusting your internal IT department to secure your investment management system will always be working optimally. So no matter what, you need to rely on someone.

If for some reason, an ASP service has outages, then it is the IMS vendor’s problem to solve. In terms of risk mitigation, this is a nice element for firms. If your internal IT department screws up, then your firm needs to shoulder the burden. ASP contracts are subject to KPIs aligned with business requirements and well defined governance structures and in that respect should be seen more as a partnership than a client-vendor relationship.

Transparency of costs

Generally, firms are more comfortable managing and controlling their systems themselves, the problem however is that the total cost of ownership can be difficult to extract. When a solution is managed in-house, you might struggle identifying the actual cost of it because some of the costs will be hidden. With an ASP offering costs should be fully transparent in terms of exactly what costs are involved with managing your application, all laid out in your contract with the provider.

Flexibility

Flexibility is always a big talking point between ASP and on premise. People get concerned that as soon as they outsource their application management, they lose all control of tweaking the system to their needs. In reality, there is no real difference in terms of flexibility the client has on the application. There will be more managed processes around changes, but that is more to ensure that the requested changes actually make sense and will not negatively affect the operation of the system.

With on premise installations, IT departments have complete flexibility over how they create add-ons and manual workarounds. This is good and bad. In such a complex industry, there will often be times where new features are needed, and quick-and-easy solutions can be made. The downside is that if too many manual workarounds are created over time, and they are not done in a rigorous and tested process, then they can end up slowing down your system significantly and/or limiting the possibilities of having a smooth upgrade process when new features and services are applied.

With both offerings, you can make changes in the solution itself. With on premise, your IT department takes care of it, while with ASP, your vendor takes care of it and will likely follow more strict change management procedures.

Who controls the data?

The information and data handled by asset managers is not only highly confidential, it is also covered by a wide range of legal and regulatory demands. For this reason, many get peace-of-mind from the thought that their data is stored in their own database in their own data center, and are reluctant to outsource this responsibility to an ASP.

However, through the use of globally recognized security reporting standards, asset managers who outsource even their core systems can get assurance that their system security is being handled according to international best practices. It is the ASP’s business to be in compliance and therefore they can often live up to higher requirements in this area.

With both offerings, you can make changes in the solution itself. With on premise, your IT department takes care of it, while with ASP, your vendor takes care of it and will likely follow more strict change management procedures.Thorvaldur Flemming Jensen, Head of ASP Division, SimCorp

Future outlook

On premise will continue to make up a good deal of IMS delivery methods in the short term. Most will likely stick with what they know before going out of their way to convert to ASP and those considering to change IMS vendors will almost certainly evaluate ASP as part of that process.

The shift is coming.

While on premise has decades of proof under its belt and is the tried and tested methodology, I think we can see from other industries that ASP offerings are the natural next step of technological advancement. As the first-mover firms prove to the market the benefits of using an ASP offering and the ability to focus more on their core business, rather than also being an IT platform operator, others will quickly follow.

For a long time now, we’ve had technology firms providing on premise as the only delivery method, so while it’s not going to happen overnight, it is going to happen faster than we think.