The Real Cost of Software

A quick analysis

Software costs money. This cost is pretty visible, you get an invoice from your software vendor depending on the model; one off license costs, annual support agreements, annual subscriptions, upgrades etc. It’s even fairly simple to track some associated costs of your new software, like the server hardware required to run the software and the server software licensing costs. Beyond this however, it gets a little cloudy when trying to piece together all the associated costs of departmental software applications. No matter how small you think an implementation will be you will always incur costs when maintaining a platform for software.

Okay, let’s look at an example. Before we start it’s important to understand the main assumptions made so the numbers below make sense. The example is based on the following assumptions;

• The application is a departmental application requiring a live production system, a failover system and access to a test system for doing user acceptance testing with new versions etc.

• The application will be deployed on physical server hardware in a single data centre site.

• A major release upgrade will be taken and deployed every 18 months.

There are additional assumptions made on hardware costs, hardware maintenance and internal management costs. Details of these costs are given below the example.



As you can see, the above figures do not include the purchase cost of the software in the first place. These costs represent the additional costs incurred when maintaining software applications in-house. They are real costs and are very easily blurred into the day to day costs of running a business. This need not be the case – these are not costs of running a business, these are costs that have been chosen during the decision to run an application internally versus hosting with an external provider. Many of these costs can be eliminated and replaced with lower external hosting costs simply by switching to a hosted platform rather than an in-house system.
On this example above, switching to a StatPro hosted service would save over 50% on the annual costs of maintaining an in-house system.

Notes on costs

1. Based on the annual lease cost of three physical 2 CPU quad core servers with local memory and disk storage.
2. Based on 20 hours required to procure, prepare and provision each server with a labour cost of £28.23 per hour.
3. Based on the cost of server administration management time for tasks including change management, problem and incident management, monitoring, performance and availability management, asset management, security management, patch and upgrade management, backup and recovery, restores, storage management, disaster planning, compliance management/reporting, vendor and contracts management and financial/budget management. Based upon 3 server workloads consuming 8% of a server administrator’s overall workload (average of 40 workloads managed per administrator staff) over the year with the burdened labour cost per server administrator being £54,578.
4. Based on the annual cost of backing up 30GB of data to an off-site facility at a cost of £8 per GB per month. Includes 10% data growth per year.
5. Based on the annual cost of software assurance licenses for MS Windows, MS SQL Server, MS Office and 5 user access licenses.
6. Based on each server requiring 516 Watts of operating power and 645 Watts of cooling power at £0.0646 per kWatt hour.
7. Based on one server rack in a data centre facility consuming 23 square foot at an average annual cost of £205.05 per square foot.
8. Based on an average of 14 days a year consulting from the application vendor during application upgrades and maintenance releases at a cost of £1,350 per day.
9. Based on an average of 6 days a year of internal IT project management with a burdened labour cost per project manager of £500 per day.
10. Based on an average of 13 days a year of internal business unit project management with a burdened labour cost per project manager of £500 per day.
11. Based on an average of 5 days a year of internal IT application support requirements with a burdened labour cost per application support resource of £500 per day.
12. Based on an average of 3 days a year of internal IT training time for new/replacement application support resources with a burdened labour cost of £500 per day.
    

Asset Managers need to reduce their costs – SaaS will help

Why StatPro is evolving its business model

Time changes everything. What was once state of the art becomes a cumbersome nuisance at some point. The explosion of activity that occurred in the 90’s when hundreds of small software companies built applications to sell to asset managers allowed a big increase in efficiency. Processes that had taken weeks were reduced to hours or minutes. New processes that were impossible dreams became a reality. This was all possible because of windows and Visual Basic and the process was not unique to asset managers but affected every business sector. By comparison the Dot Com boom did not reach the business community but was aimed at the retail market and when it busted prematurely, development slowed.

So today the IT landscape of the Asset management industry is one where any company of any size has 10 to 20 important systems upon which they depend for a variety of essential services. The majority of these systems are all provided as software that is installed on the company’s own servers in their own IT centre. They will probably have many other applications of less importance that they run as well. The result is that they have large IT teams, complex processes and relatively high costs.

Some companies have tried to outsource the whole thing to a third party such as a custodian or IT services provider. However, there are many horror stories that warn this is not a simple solution. In fact the rule of thumb is that if your IT department works well and efficiently, you can outsource it, but if it is inefficient you can’t. The outsourcer cannot be expected to unravel your mess.

What has worked however is selective outsourcing. This typically means getting the supplier of your system to host their own application. This makes sense as the supplier ought to know how to support their own product and if they do this for all their clients, they can get economies of scale which a generalist outsourcer cannot hope to achieve.

The other factor is that Web 2.0 has unleashed a new revolution in IT making it possible for suppliers to provide “Software as a Service” (SaaS) solutions over the Internet and with relatively low cost. Incumbent suppliers are reluctant to adopt this new technology as they fear cannibalisation of their existing business and because they calculate that such is the complexity of the processes that surround their embedded systems, clients will be loathed to move anyway. That leaves the door open for start-ups, but this generation have a much bigger battle than the class of ’95 as the standards and functionality they have to match are significantly higher and the gains in efficiency are less about time and volume and more about money. Clients want the same for less rather than more for the same.

This is the thinking behind StatPro’s own strategy. We believe that eventually all our clients will want to access their services over the web just in the way that we all use email rather than a fax (or telex, or telegram). Indeed, email is fast being superseded by instant messaging. However, we also recognise that clients cannot simply throw everything out and start again, but rather need to evolve in a sensible direction according to a plan that has been tried and tested. The last thing anyone wants to do is jeopardise their business for the sake of saving a relatively small amount of money.

This means that we have focused on deploying new services and products that offer quick savings for clients whilst moving them towards the strategic objective of low-cost web-based applications.

StatPro has built a solid reputation as a supplier of Data for valuations and Analytics systems that cover Performance, Attribution, Risk, Compliance, GIPS and Reporting. Right now, most of StatPro’s clients deploy our software on their own servers. They feed the software with index data and market data from third parties and finally with their own data. The result is that the cost of the software we supply (on a subscription basis) amounts to less than 10% of their total annual cost of ownership in most cases. IT costs are about 10%, data supply will be about 30% and 50% employee costs although some of those employee costs relate to managing IT and data.

We are in a position to offer our clients the IT platform and the third party data and we believe that by doing so we can reduce the total cost of ownership to 70% or less of what it is despite charging additional fees for IT and data. This is because we can offer the IT platform together with the index and market data at a very low rate.

Apart from saving our clients money, we will also improve their service as we will have direct access to their system in the event there is a problem. We will also save our clients further money because we will not have to charge them to upgrade their software. The clients will receive upgrades when we are ready, not when their IT departments are ready. Overall, the complexity of process and the management time required to follow it all will be slashed so there will be other hidden savings and benefits. If a client buys more products from us to replace legacy software we will offer further discounts and savings.

It is also important to note that it will be easy for the clients to take this new service as it is a simple matter of us putting their existing system on to our platform. From there we will upgrade them progressively and, from their point of view, painlessly.

The second stage in our strategy is what we call SaaS2 which is a SaaS product built from scratch. This product takes full advantage of all the latest technology as well as our accumulated knowledge about our products. Once the platform is launched however, it will be relatively easy for us to migrate clients to it from the SaaS1 platform if they wish to use it. This new platform will be released in beta form during 2009 and go live in 2010.

Many asset managers must be thinking about SaaS as a way to reduce their costs, but the obstacle they will encounter is the complexity of getting there and doing so for a wide number of applications. We believe that our approach offers a strategic shift with clear and immediate savings whilst laying the groundwork for the final move to a pure SaaS platform which in turn will allow greater savings.

Justin Wheatley
Chief Executive StatPro Group plc

Setting the Standard

Author: Neil Smyth

When deciding to outsource or host software solutions with vendors it pays to know how they intend to deliver such a service. Software vendors write software, what makes them capable of hosting that software for their clients?

When you choose to host your application with the vendor you are asking them to take on much more than their traditional responsibilities. You are effectively asking the vendor to take on the role of your in-house IT department. How do you ensure that the vendor is able to handle this new burden and maintain the availability, security and integrity of the application and more importantly, your data?

Understanding the vendor’s ability in this area can be hard to do. Long winded RFP’s take time to analyse and without going into second stage of Q&A sessions with the vendors IT department you still can’t be sure on the level or standard of service. Even with detailed levels of analysis you are still only getting the vendors point of view and not an independent opinion on their ability to securely host your data and ensure it is available when you need it.

Having an independent opinion and assessment on your vendors hosting service is the only way you can know they are taking their responsibilities seriously and have the processes and ability to deliver on those responsibilities. This is where recognised standards should play a key role in your decision to host with a software vendor. The next question is which standard? When it comes to hosting applications and information security there are only two you need to look for. ISO27001 and SAS70. These are the big boys and anyone telling you that they have others that are more stringent or more relevant obviously do not meet the requirements of ISO27001 or SAS70.

Knowing your vendor has been independently audited and certified gives you the confidence that they have invested in putting the right processes, people and technology together for their hosted service. Not only does the vendor have to demonstrate this to the auditor, they have to continue to demonstrate the process and show a continuing cycle of improvement across the standard.

Trusting your data and application delivery to a third party requires you have a high level of confidence in that third party. Placing that trust in the software vendor makes sense, but only if they can demonstrate they have the ability to deliver on the extra responsibilities that trust will bring. A vendor with a trusted and recognised certification in information security should be your minimum requirement when switching to a hosted service.

Neil Smyth is the CTO at StatPro – a leading provider of analytics software and data for the investment management industry.