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Title: Cloudy Concept, Clear Gains
Feature: Infrastructure
Date: 1 March 2009

In an industry beset by acronyms and labels, "cloud computing" has become the latest buzzword and it is yet to be fully understood, let alone implemented, across the buy side. By Joel Clark

Every Friday, the 19 employees at Majedie Asset Management, a London investment manager with £4 billion ($5.75 billion) under management, are treated to a bacon sandwich to celebrate the end of the week and the start of the weekend. But bacon isn't everyone's favorite sandwich filler. To tackle the workforce's diverse dietary requirements, the firm has created a shared service that employees can use to select their desired sandwich from a dropdown menu, creating a weekly list for whoever does the sandwich run. A report can even be printed to illustrate how an employee's sandwich preference has changed over time.

The application was built in just a few minutes using the Salesforce.com customer relationship management (CRM) application. But Simon Hazlitt, Majedie's client services director and co-founder, estimates it might have cost £200,000 ($287,000) and taken many months had the sandwich selection tool been built by a third-party software provider.

Bacon sandwiches are clearly the least critical aspect of a buy-side firm's operations, but it is a colorful example of the benefits Majedie has gleaned from using what it calls cloud computing. That term has now entered the IT lexicon, but the challenge is to accurately assess how this somewhat misleading concept might impact and benefit the buy side in the years to come.

Information management

For Majedie, cloud computing is the newest label for what the firm has always done since its inception in 2002-that is to use only providers like Salesforce.com that can deliver Majedie's information needs as easy-to-use, Web-hosted services rather than in-house platforms that require IT staff to maintain them. At first Majedie termed the model application service provider (ASP), but it is now better described as cloud computing.

When Majedie was first established seven years ago, its founders built an information map with inputs, processes and outputs that established what information services it actually required to carry out the process of managing money on behalf of investors. Rather than being swallowed up into the vendor community's bubble of terms-with acronyms such as OMS, EMS, TCA or SOR-Majedie's information map enabled it to establish what it actually needed, as opposed to what a vendor wanted to provide.

It then leased the required services from a small number of providers in such a way that adjustment and modification-even to the point of bacon sandwich selections-is far easier than it would otherwise have been. "It's a radically different concept of information management and at no stage does one use the word ‘technology,'" says Hazlitt. "We've calculated that it's probably three times better and five times cheaper than taking the traditional best-of-breed route with technology vendors."

By his own admission, Hazlitt is virtually the only buy-side practitioner to have spoken publicly at industry conferences about cloud computing and its potential value for the asset management industry. The technology vendor model as we know it, he believes, is broken and his firm's cloud computing approach makes the best business sense, especially in the current economic climate where it is neither sensible nor possible to spend large sums of money on IT.

The elusive definition

Once the cloud computing discourse moves beyond the confines of individual firms like Majedie Asset Management, it quickly gets complicated because of the variety of definitions that are ascribed to the term. In its simplest form, technologists describe cloud computing as the use of Internet-based IT systems, but the same can easily be said of ASP and software-as-a-service (SaaS). In a position paper released in mid-2008, the 451 Group, a technology research firm, defined cloud computing simply as IT-as-a-service. "In cloud computing, dynamically shared computing resources are virtualized and accessed as a service," wrote analyst William Fellows. "Cloud computing is a deployment model in which IP-based connectivity provides services delivered from a logical resource rather than a hard-wired/physical one."

The perception that cloud computing must involve both scalability and Internet access is shared by other research firms. Gartner defines cloud as "a style of computing where massively scalable IT-related capabilities are provided ‘as a service' using Internet technologies to multiple external customers." Gartner's managing vice-president Daryl Plummer says that cloud computing heralds a new era in the relationship between end user and software provider as users focus on the service they actually need rather than what a particular platform can provide-a sentiment echoed closely by Majedie's Hazlitt.

Although the majority of technologists insist that cloud computing is subtly different from ASP and SaaS, most buy-side firms see little distinction. Hazlitt may label Majedie's environment as cloud computing, but it was called ASP when the firm was first established in 2002. Atlantic Fund Administration of Portland, Maine, which uses roughly two-thirds of its applications on an ASP basis, sees no difference between ASP and cloud computing. The firm was formerly part of Citigroup, but became independent in 2007 and had to set up its new operation at low cost in a relatively short space of time. "We had specific needs to get the operations up and running very efficiently with minimal investment, so we felt very comfortable using ASP relationships," says Stacey Hong, president of accounting at Atlantic Fund Administration. The firm uses a number of SunGard's ASP products and also uses thin-client desktops through Citrix to save on its infrastructure requirements.

Clear benefits

Despite the absence of a single conclusive definition, the benefits of cloud computing are fairly similar to those of ASP that are voiced by both Hong and Hazlitt. First, and most importantly in the current economic climate, such services can offer considerable cost benefits. Not only do Internet-based computer services nearly always cost less than an in-house implementation, but they also require virtually no in-house maintenance. The need for an IT management team, or indeed any IT staff at all, is greatly reduced when the cloud model is adopted.

London-based EEA Fund Management (EEAFM), which manages £1.2 billion ($1.7 billion), was first founded in mid-2003 and later had to make decisions on its IT requirements as it moved to a new office. Hiren Patel, the firm's CFO, calculated that it would cost roughly £250,000 ($354,000) to buy the necessary systems and hire two IT professionals to maintain them. But by opting for a hosted model, provided by London-based Intercept, he was able to save more than £350,000 ($503,000) per year. Intercept's OnlineDesktop is taken on a monthly subscription basis and provides EEAFM's employees with access to Bloomberg, Microsoft Office and Outlook, as well as several accounting services. "If we had to hire our own two IT people, first of all there is an inherent risk of relying on two individuals to run such a critical part of our business," says Patel. "Second, the cost of buying hardware and software is not a one-time cost; the systems need to be regularly updated."

Although Intercept markets itself as a provider of "virtualized IT" rather than cloud computing, the same principles-Internet-based, service-oriented, scalability-clearly apply. "It doesn't matter where you're working from or where your data and applications are held, the beauty of cloud computing is that it has the ability to deliver all those applications to you in one working session," says Dawn Miller, head of sales for Intercept's online services division. So because the cloud has the ability to bring together any number of applications from whichever datacenter happens to host them, it allows workers to access their desktops from anywhere. That means that its value-add is not only as a cost-cutting mechanism but also as a possible solution to the age-old debate around disaster recovery and business continuity.

Security concerns

The reluctance of financial institutions to send confidential client-related data outside the confines of their own walls has been voiced as a serious concern ever since the early days of ASP technology. In the wake of a string of high-profile fraud and rogue trading cases, security concerns remain the biggest barrier to the adoption of cloud computing. Although smaller firms like Majedie and EEA have been bowled over by its considerable benefits, larger buy-side institutions remain reluctant to take crucial applications from the cloud.

"Important financial data is held in highly secure datacenters and encrypted in transit, rather than on local servers, PCs or laptops," says Miller. "We exceed the UK Financial Services Authority's data security audit requirements, but the challenge is always gaining the confidence of people not familiar with a hosted approach so they understand how safe their data will be."

Intercept is not the only service provider to have encountered the security issue as a barrier to adoption; in fact, it is voiced as the top concern by almost every institution that is active in the cloud computing, or hosted services, space. "Even though I do see people get past it because of the quality of the service, security is definitely the number one restriction, especially in financial services and asset management," says James Wolstenholme, research director, banking and investment services at Gartner.

Wolstenholme adds that in some cases, particularly for crucial parts of the investment process, some buy-side firms prefer to keep their technology in-house so that they can achieve the lowest possible latency and customize applications as necessary. Although cloud computing does have the potential to offer very low latency and wide-ranging customization, that message is yet to fully permeate the buy side.

Strategic IT

On the few occasions that cloud computing is discussed in a buy-side context, it often meets with a mixed reaction among both the traditional technology providers that serve the buy side and those in-house IT managers who are paid to maintain and service that technology. The multiple benefits of using a cloud-based delivery model cannot be denied, but it presents a threat to the vendors who offer only traditional, installed technology and IT staff who worry that cloud computing may make their jobs redundant.

"In smaller financial firms, cloud computing can deliver highly flexible and secure enterprise-grade IT without the cost or hassle of managing their IT themselves," says James Cox, head of marketing at Intercept, adding that it is natural to meet with resistance from IT managers, but that they shouldn't necessarily see it as a job threat. "In larger firms, a cloud computing approach can free up internal resources to allow IT managers to help shape IT as a strategic asset rather than getting bogged down in support and network issues," he explains.

Despite the hype that surrounds cloud computing, it is clear that the concept as well as the terminology still has some maturing to do before it can truly benefit the buy side. In a recent survey of IT managers at 35 leading financial institutions, high-performance computing software vendor Platform Computing found that 51 percent of respondents didn't think cloud computing would take off in 2009. "Part of the problem is that people don't really understand what cloud is and it is different depending on who you talk to," says Charlie Jarvis, vice president of financial services for EMEA at Platform Computing. "People are also still worried and don't want to send out complex calculations over the Internet."

But as cloud computing matures, buy-side firms-especially smaller ones with more adaptable infrastructures-are unlikely to want to miss out on the numerous advantages that can result from a cloud-based environment. So while it may not yet have truly come of age, cloud computing is certainly a trend to keep an eye on.

As Majedie's Hazlitt argues, it is something that all firms should at least be thinking about: "It's certainly harder for larger firms to get out of an older infrastructure and adopt a cloud-based model, but I don't hear anyone even trying and I think that's a lost opportunity."

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