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Thinking Out Cloud - To Cloud or Not to Cloud in Financial Services?

Xand : Joel York - 1st January 1970

The opinions expressed by this blogger and those providing comments are theirs alone, this does not reflect the opinion of Automated Trader or any employee thereof. Automated Trader is not responsible for the accuracy of any of the information supplied by this article.

Cloud computing has graduated from technical curiosity to technology trend. According to a recent Gartner survey, cloud computing and virtualization sit squarely at the top of the list of 2010 CIO priorities. However, most financial services IT professionals are still taking a cautious approach to cloud computing. This is quite understandable given the high performance, security and compliance requirements of financial applications. Unlike Twitter, you can't just post the fail whale when a financial application has an issue, because real money is at stake not just tweets. So, what financial applications are good candidates for cloud computing and why? To cloud or not to cloud? That is the question.

This is the first post in an series entitled Thinking Out Cloud with the aim of helping financial services IT and market data professionals charged with developing cloud computing strategies separate the cloud buzz from the cloud reality.

Focus on Competitive Advantage

Realistically, somewhere between 75% and 95% of the software used by most businesses today is a commodity. That is, it offers no competitive advantage because the competition has access to the exact same capabilities from a plethora of software vendors, SaaS vendors, open-source projects and home-grown systems. This means that if your financial services IT department does everything in-house, pretty much 75%-95% of your IT department's hard work and budgetary expense offers a competitive advantage of exactly zero. Only the 5%-25% spent on systems that help your business stand out from the competition make a real difference to top line revenue. Yet, I've never seen a financial services IT department that had extra time on its hands. Therefore, the first consideration in any analysis of cloud computing should be to weigh the competitive importance of the various systems under IT management, and to look for opportunities to free up resources by pushing systems that do not offer competitive advantage to the cloud.

Leverage Cloud Computing to Lower Costs

The primary financial benefit of cloud computing is lower total cost of ownership created through the economies-of-scale of shared computing resources. It makes no difference if it is infrastructure from Amzaon AWS, CRM from, or market data from Xignite, the underlying common thread is that these vendors can do it significantly cheaper by the dozen than customers can do it in-house one at a time. This cost savings is then passed onto the customer in the form of an ongoing usage-based subscription. Conveniently, this prospect of lower overall costs fits nicely with the idea of outsourcing commodity systems. Therefore, the next consideration in an analysis of the benefits of cloud computing for a particular system should be the relative costs savings. It is critical at this point to compare the total cost of ownership of each internal system to a cloud vendor's subscription pricing, not just the cost of the software and hardware. More often than not, the largest costs are hidden in the IT staff time that the systems absorb in the form of ongoing maintenance, upgrade projects, support and bug fixing, etc. Since these activities are taken on by the cloud vendor, they should be included to ensure an apples-to-apples comparison in the on-premise vs. cloud decision.

Reduce Operational Risk or at Least Stay Risk Neutral

Risk is easily the biggest barrier to cloud adoption for financial services applications. Financial risk, regulatory risk, security risk, performance risk…risk, risk, risk. The risk implications of cloud computing often appear so daunting that some financial services IT professionals would prefer to avoid the cloud entirely-which is a shame. To be sure, putting customer investment account information on the cloud is a non-starter. And, even something as simple as company email entails significant compliance risks. However, the one mistake most IT departments make when evaluating the cloud is to equate risk reduction with internal control. It is often the case that the focused expertise and scale of a cloud computing vendor provides significantly lower risk than an in-house system. This gut reaction can be compared to fear of flying: just because you'd feel safer if you were flying the plane, doesn't mean you'd actually be safer. Therefore, it is important to evaluate the risks of cloud computing as objectively as possible. Does the vendor publish an SLA and public performance statistics? Who are its current customers and what do they say about the vendor? What are the vendor's security and disaster recovery policies? What kind of support is available? All these questions should be asked of a cloud vendor. And, all of these questions should be asked of the comparable internal IT operation. If you're not a pilot, you might just be better off taking a commercial flight.

Market Data: To Cloud or Not to Cloud?

There are two important aspects of market data systems to consider when evaluating the potential for moving them to the cloud. The first is to recognize that it is not the data that is being outsourced with cloud computing, but the data management infrastructure. In most cases, the data is already outsourced in the form of a traditional data feed, so the on-premise vs. cloud comparison actually centers around the internal software, hardware, databases, development and administrative IT staff required to maintain the internal data management infrastructure that shuffles the data from a feed to a final application. The second aspect is that unlike investment account data, market data is not about the company or its customers, and thereby sidesteps the number one barrier to cloud computing adoption in financial services: data security. But, it doesn't make it a slam dunk. It is still important to carry out a full evaluation along the dimensions of competitive advantage focus, cost reduction and risk reduction. Does the data management system in question create competitive advantage or simply maintain competitive parity? Does the cloud offer significant cost reduction over the total cost of internal data management systems? And finally, does the cloud offer neutral to lower risk given the nature of the market data and the relative sophistication of the cloud vendor's platform vis-a-vis on-premise operations.

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