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The Almost-Meteoric Rise of SaaS on Wall Street

Providers are pitching Software-as-a-Service as a universal answer to application needs. But will Wall Street firms adopt SaaS beyond CRM?

Software-as-a-Service, or SaaS, has been experiencing a meteoric rise in popularity among U.S. companies, including Wall Street firms. But while some small firms have fully embraced SaaS and many large firms -- including Morgan Stanley, Merrill Lynch and Citibank -- use hosted customer relationship management software, when and whether large firms will be willing to rely on hosted software for applications more complex and time-sensitive than CRM is open to debate.

In the '90s, a colony of application service providers (ASPs) and hosted software providers emerged. The niche gave companies an alternative to costly and time-consuming software implementations, letting them rent already up-and-running software. Employees could log on to the applications through direct connections or via the Internet and use the ASP's servers, which were housed in secure bunkers that were proudly shown off to visitors and press. (At one facility I visited, however, it was amusing to see a cleaning professional walk straight through all the security hurdles, trailing behind her a vacuum cleaner cord that kept all the doors slightly open.)

The ASPs thrived for a few years. Companies liked the idea of offloading software installation and maintenance chores to someone else, and the usage fees were thought to be cheaper, or at least easier to amortize and budget for, than one-time or annual licensing fees.

But then a few things happened. Companies found the hosted software hard to change and customize. The hosted arrangements ended up being expensive, and broadband networks, painfully slow by today's standards, caused performance issues that made the hosted software impractical. Many ASPs died in the minirecession that followed Sept. 11, 2001.

But one ASP, Salesforce.com, founded in 1999 by former Oracle executive and marketing wiz Marc Benioff, succeeded where others failed. Salesforce convinced thousands of companies to use its CRM software (it currently has 43,600 companies on its customer list). Today, Salesforce and other ASPs have reinvented themselves as "Software-as-a-Service" providers, leasing Web services-oriented software to companies over the Internet.

"Everyone in our company uses Salesforce," relates Peter Andrews, CEO of Dreambuilder Investments, a New York City mortgage investment and resolution company. "We operate every aspect of our business on it."

Another survivor of the ASP movement is SunGard, which has offered hosted conventional financial services software for almost 20 years. Last year, it began offering services-oriented software, either hosted or in-house, through its CSA and Infinity initiatives. Its first SaaS offering was the Investran software for the institutional asset management space.

Beyond CRM?

Financial services is the second-largest industry user of SaaS, after the technology sector, according to Gartner. But most of the current financial services SaaS deployments are CRM applications. "Wall Street and financial services firms are more and more looking at [SaaS] from the CRM side of the fence," says Rob DeSisto, VP and distinguished analyst at Gartner.

Over the past two years, and especially the past six months, however, there has been an acceleration in the use of certain types of non-CRM SaaS offerings among large asset managers and brokers, according to Jonathan Cohn, a consultant in the strategic IT and operations practice at Oliver Wyman. "In the risk and compliance space, we've seen an uptick in vendors offering hosted applications and in financial services firms willing to use such services," he notes. SaaS-delivered risk and compliance applications include corporate actions, approval mechanisms for complying with customer regulations and anti-money laundering applications. With compliance work, "There's a fit for SaaS because it's modular, it's repetitive and it takes significant intellectual capital to build, yet it is not something companies want to waste a lot of money on," Cohn adds.

Cohn says he also sees many large firms using SaaS for wealth management advisory workstations; they rent these from large clearing providers and wealth management software providers. Such arrangements are a good fit for firms that have agent networks of 10,000 or more financial advisers, according to Cohn, because in this situation, "The deployment of client software itself, forgetting everything else, is very traumatic. On top of that, these firms have a difficult time developing these massive programs, so going to SaaS providers is efficacious."

Darren Weseman, chief technology officer at SunGard, also sees wealth management, portfolio management and asset allocation as applications "that are pretty generic, the kinds of things you can deploy in a Salesforce.com way." On the other hand, he notes, "In financial services, there are relatively few situations where you have a CRM kind of application that's pretty much the same for everybody. That's why SaaS, in a financial services context, will take a long while to catch on." In addition, Weseman says, large firms often have policy or security restrictions that block the use of SaaS applications.

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