Cloud nine
Cloud computing is the much-hyped model of internet-based computing that allows companies to access a range of platforms and applications without hosting them themselves. It combines familiar IT outsourcing benefits with advantages peculiar to flexible remote hosting. Firms employing cloud computing solutions need not develop, implement, maintain or upgrade their technology. Rather, they can leave this to the diverse providers and applications that populate the ‘cloud’. And the on-demand nature of cloud computing provides both scalability and elasticity: if a bank requires surplus computing power or storage space to meet occasional spikes in demand, for example, it can get these from the cloud.
But do these advantages offset the concerns about security, availability and the threat to data integrity that follow from giving up control and hosting of core IT systems? Not necessarily, believes Markus Ruetimann FCSI, Group Chief Operating Officer at Schroder Investment Management. “We have good reason to want to retain internal security around our architecture, data and applications,” he says. And whether cloud computing is actually a new phenomenon, rather than a collection of existing trends cobbled together to attract publicity, is uncertain.
“Cloud computing is a popular vendor phrase, but it essentially involves firms leveraging outside corporate and data providers - something they have been doing for a number of years,” says Jonathan Cohn, a partner at Oliver Wyman. It is an important tool, he maintains, but users must look at the technology from a holistic, business perspective. This means asking: what are the drivers; what is the demand; who are the suppliers; and who will manage the process?
Ruetimann agrees: “The ‘cloud’ world means many things to many people and remains something we watch. It is not, however, a single thing that we will need to implement: the hype is about encouraging products to market by stimulating interest in the possibilities.” We must distinguish the buzz, advises Ruetimann, from the products that actually come to market and the precise benefit
they confer.
A question of definition
Part of the problem is that the industry lacks a standardised definition of cloud computing. “Much of the fault can be laid at the door of various vendors,” explains Jeff Goldberg, an analyst at Oliver Wyman-owned consultancy Celent and author of a report titled Cloud Computing, SaaS and Technology Outsourcing for Banks. “They have rapidly been relabelling their products as ‘cloud-compatible’ only for unsuspecting customers to find that there is nothing new or cloud-compatible at all.”
Three current buzzphrases - cloud computing, software-as-a-service (SaaS) and application service provider (ASP) - describe different, but related, activities. Cloud computing, according to Celent, refers to the outsourcing of IT hardware, such as storage, servers and other infrastructure services, to a vendor that provides these services via the internet on an on-demand basis. Users, therefore, pay only for what they use and can call on these services as and when they need them.
SaaS, on the other hand, refers to the outsourcing of various applications, but not hardware. While SaaS is based on all users having access to the same application via the same internet-based route, ASP - the third area - employs private networks and constant customisation, making it less economical.
Further hurdles
Regulatory and licensing issues may hinder the adoption of cloud computing and SaaS by securities firms. Under EU rules, customer data should not be stored beyond the confines of the EU, and similar rules apply in the US. Regarding licensing, it is unclear how service level agreements would change to accommodate external data hosting. “A vendor going out of business is very different when all the code is hosted externally rather than installed at the customer site, and the terms of the contract need to reflect this,” notes Goldberg in his report.
Despite the rapid growth in vendor numbers - there are now roughly 85 providers, led by IBM, Microsoft, Amazon, Salesforce and Google - these obstacles mean that cloud computing will be a gradual trend. “At the moment, we do not have a general consensus of what cloud computing is; there is no template on how to do it and the technology has not matured yet,” explains Fred Ponzo, who recently launched GreySpark Partners, a capital markets IT consulting firm.
Ponzo distinguishes three different layers - hardware, middleware (which connects different parts of an application or a series of applications) and software - noting that all three must be outsourced to achieve cloud computing. “So far, we have seen banks outsourcing their hardware to data management centres, but the other two are a work in progress,” he says.
According to US-based IT consultants Gartner, which identified cloud computing as the leading contender in its Hype Cycle for Emerging Technologies Report 2009, maturity of the industry will comprise two stages. The first is characterised by private clouds: data centres that are still owned by the corporate users and managed in-house. These take advantage of cloud-enabling technologies, such as the virtualisation provided by VMware and the internet. As users become comfortable with the technology, they will then migrate to public clouds, the second stage, where nearly all of a company’s information-technology operations are outsourced and managed by a third party that owns clusters of data centres.
Spending on cloud computing, believes Gartner, will initially be concentrated on private cloud computing. Overall, the cloud services market will grow by 25% over the next year, from US$70.8bn this year to US$88.8bn in 2011.
Until now, concerns around security and control have ensured that banks follow this incremental approach, applying cloud computing to non-core operations first. “Despite the high levels of security offered by leading cloud providers, there can be a psychological barrier to entrusting data to a third party,” explains Stuart Berwick, CEO of Singletrack Systems, UK joint venture partner of Salesforce.com. “This means that banks are starting with fewer critical applications and moving more to the cloud as they see the benefits. The obvious candidates include human resources, customer relationship management and content management systems.”
Nevertheless, the effect of the trend over time will be to reduce IT staffing requirements across the industry. “I think investment banks will outsource peripheral applications to the cloud but retain their core applications in-house, potentially using a private cloud,” says Jeremy Symonds, Chief Technology Officer, DST Global Solutions, a technology provider to investment managers. “In terms of how this will affect IT departments, I expect that, over time, there will be a reduction in the number of pure technology staff and a better alignment of the core objectives of the business and IT departments than there is today.”
Uptake is likely to be quicker for smaller firms with less invested in existing IT systems. Cohn of Oliver Wyman says: “There will not be the same level of IT spend in small or medium-sized firms: they may employ cloud computing across the spectrum for end-to-end services. The larger or more sophisticated companies, such as high-frequency trading firms, may choose a more component-based type of service.”