How SaaS Enables Competitive Advantage in the Current Market
With recent developments in the financial services industry pointing towards a slowdown in economic growth, commercial lending operations have also been noticeably hit during the mortgage downturn. Banks of all sizes are under increasing pressure to tighten their financial belts and, as such, are looking at more efficient ways to manage internal costs, particularly with their IT applications.
One of the initiatives at the forefront of discussions to lower operating costs and ensure a higher return on investment is the software as a service (SaaS) model. SaaS is a software distribution model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet1. According to Ovum, SaaS is likely to experience tremendous uptake in the coming months and recent research by the analyst predicts a 59% increase in the UK’s SaaS market by the end of 2008, with revenues reaching around £800m this year. A recent survey for the vendor BIW Technologies backs this up, suggesting that more than 65% of IT directors think the economic climate would lead to greater SaaS uptake.
In the current market climate, banks should take advantage of the benefits that can be gained from SaaS in order to stay ahead of the competition and continue to drive innovation in their own organisations.
As a result of the credit crunch, banks are beginning to turn to SaaS for a number of reasons, mainly to reduce IT costs and to more reliably predict their IT spending.
By outsourcing the hosting of their applications rather than buying their own licences, banks can reduce the total cost of ownership for IT. As such, they can support a higher return on their IT investments in the long run. Additionally, implementation costs are significantly lower than developing a custom solution, or purchasing and installing proprietary software and hardware. As a result, SaaS provides an opportunity for banks to eliminate time and money spent on supporting and maintaining their technology, including the applications, operating systems and databases. In the process, most of the risks of selecting and implementing new applications are avoided.
For the small- and medium-sized banks, gaining access to flexible software applications that they would traditionally not be able to obtain is another driving force to consider. With minimum set up and maintenance fees, SaaS enables banks to benefit from the highly specialised applications traditionally only associated with the larger players.
With SaaS offering increased flexibility in responding to changes in demand as well as seamless product enhancements, it consequently allows small- and medium-sized banks to concentrate on their core commercial lending operations by not having to focus on maintenance or upgrades of the software applications. As a result, the smaller players are able to provide an improved service to their banking customers.
In addition to having an impact on a bank’s own IT infrastructure, SaaS can also deliver significant benefits to a bank’s corporate clients. One of the SaaS applications already offered by financial institutions on a wide scale to corporate treasurers is the web-based cash management service. Corporate treasurers can automate and consolidate their financial processes by having complete access and control of their financial activities through the bank’s online cash management tool. The more flexible and efficient management of their financial activities allows them to better concentrate on their core business. The bank’s customer also benefits from a more efficient loan origination process by receiving a more expedient reply to its credit application.
Despite the predicted growth in the SaaS market, one of the main concerns that banks have is around the security of their software as well as hardware. Many vendors already offer the full management of desktops to their corporate and bank customers. However, banks perceive that there are a number of challenges to face, including some loss of control of such an important internal infrastructure and the additional resources required to manage a third party. Whilst these are valid points to consider, many might be the result of resistance to change. However, much investment has been, and is being made, in the areas of information technology security that the technologies addressing this issue are state-of-the-art. As such, the SaaS model allows banks to store their critical data in a much safer online environment than their local hard drive which is located in an office.
In addition to improved software and hardware security, SaaS providers are also required to comply with strict regulatory requirements such as ISO 9001 and BS7799. The increasing regulatory pressures are designed to reduce risk and avoid jeopardising security, providing a stable and secure environment to banks looking to deploy SaaS applications.
Looking ahead, SaaS-led business models look set to continue to attract investment and with the early adopters paving the way, banks should take advantage of the concept to remain innovative and progressive, despite the fact they are finding themselves in a difficult market environment.
As the early adopters gain higher profit margins and increase their market share, the financial community should realise that a shift in mindset is needed to achieve the ultimate goal of reducing IT costs and deploying secure, flexible software applications.