Curt Frierson, Chief Technology Officer
In the latter half of the 19th century, one of the key differentiators for any major business was its effectiveness in producing electric power. Companies within industries as diverse as printing, manufacturing, agriculture, and food processing had to create their own electric power in order to produce the goods and services that drove their businesses. This meant that they had to employ experts who were educated in the latest advancements in electrification if they wanted to gain an edge over their competitors. Additionally, they had to employ maintenance workers to keep their complicated electric generators running. Any unplanned downtime in the flow of power to their machines meant hundreds of hours of lost productivity. Over time, companies had to deal with issues such as ensuring old equipment could work with newer machines and how to integrate new electric power technology with their existing systems. Looking back on this era, it is easy to see the inefficiencies in this model. It is also simple to observe the astonishing similarities with the state of information technology today.
This is precisely the comparison made by Nicholas Carr in his book, “The Big Switch – Rewiring the World, from Edison to Google.” In this book, Carr describes the transition from locally produced power in the late 1800’s to the creation of a power grid capable of generating massive amounts of electricity and delivering it across long distances as a utility service. He then relates this evolution to the current shift in software and computing power from locally installed servers, software, and workstations to hosted IT services and cloud computing. Virtually every business today has purchased and installed its own computer network. Most of these individual networks share the same or similar types of technology and software packages that are installed over and over again. Each organization must incur significant capital expenditures to obtain these tools to run their business. Additionally, operating expenditures must be incurred to keep systems up-to-date and running efficiently. Carr predicts that, in the near future, most computing power and software will be provided by technology service providers and paid for as a service fee based on consumption, with little upfront expenses and no ongoing management burden placed on the end-user organization. This model is very similar to the way we now consume electricity and other utilities. Although a more accurate and descriptive term for this model may be utility computing, it is most widely known as either cloud computing or hosted services.
Assuming this prediction is correct, a logical question for any financial institution may be, “Should we move to a cloud model now rather than investing more money in hardware and software resources within our institution?” The answer to this question, however, is not so easy to determine. Every business must develop its own strategy for taking advantage of the benefits “the cloud” can provide. Each strategy should be based on the business goals of the individual institution. For some, adopting a complete cloud-based IT model will help support their business goals. For others, it may make more sense for the institution to run their own systems that are deemed mission critical while supplementing with hosted services to add additional capabilities and efficiencies in less critical areas. The following five questions can help guide financial institutions in developing a cloud strategy that best supports the unique goals of their business:
1. Do we have a firm understanding of where we’re going to be in 3 – 5 years?
The past few years have been a turbulent time for financial institutions. Many institutions are still recovering from budget cuts and are hesitant to commit future resources until the financial outlook has improved. For these institutions, hosted services may be a good fit to provide the flexibility they need without a large upfront investment. Hosted services may also be a good fit for institutions that have emerged from the past two years with plans for aggressive growth. One of the benefits of a cloud-based solution is that additional users can be easily added at any time, eliminating the need for long-term infrastructure planning and building an internal solution to address future capacity. If, however, your institution has already invested in a technology and does not have short-term growth plans, you may be better off riding out your capital investments to maximize your return on those assets.
2. Is IT a strategic differentiator for our business?
Does your institution distinguish itself from the competition by providing technology solutions that are unique to your organization? If so, it may be difficult to deliver this differentiation with a cloud-based solution. Hosted services offerings are built to provide a repeatable, affordable solution to meet the needs of the market. If your institution competes by providing the next generation of services, you may be forced to implement the technology that drives these services as an internal solution in order to provide the unique attributes that will set your institution apart. Alternatively, many institutions may find that utilizing a hosted service solution provides access to technology that would otherwise be out of reach, either due to the cost or expertise needed to effectively deliver it internally.
3. Does our current IT budget support our risk tolerance and margin for downtime?
Ask any financial institution these two questions: What is your maximum allowable downtime for your most critical applications? How quickly can you recover your most critical applications after a major disaster to your primary IT facility? For community financial institutions, the answers to these questions are almost always out of sync. This problem is most often due to the prohibitive cost of delivering high availability and business continuity to smaller environments. Robust disaster recovery capabilities can involve utilizing specific technologies to protect individual applications, each with its own required investment. Management costs to ensure the proper operation of these technologies can add additional overhead. This scenario often forces smaller institutions to forgo the recovery requirements identified in their business impact analysis in order to remain financially sound. Hosted services can be an ideal way to avoid compromising your business continuity goals. Because a hosted services provider’s success is based on their reputation for delivering reliable services, any reputable service provider must build in robust disaster recovery by default. Therefore, utilizing hosted services can allow financial institutions to minimize the cost and complexity involved in addressing their disaster recovery objectives by relying on their service provider to do much of the heavy lifting. Of course, do not just assume this is being done. Request a copy of your service provider’s DR test results and ensure they specifically address the hosted services they are providing for you.
4. Is our IT infrastructure outdated?
The last few years have forced many organizations to minimize or delay IT spending, resulting in production hardware infrastructures that have become increasingly unreliable and out of warranty. Additionally, these organizations are now faced with a larger than usual hardware refresh to get back to a stable foundation. Although this is not an ideal situation, it does provide a great opportunity for revising your strategic IT plan. A significant change in IT strategy can be cost-justified more easily when facing a large capital outlay. Financial institutions in this environment can evaluate overhauling their traditional infrastructure to include options such as virtualization, storage area networks, and cloud solutions. Institutions whose strategic plans call for retaining or developing in-house systems can use this opportunity to build toward that strategy. Those institutions looking to focus their attention on streamlining their business can migrate toward a hosted services model without having to incur significant write-offs on existing capital expenditures.
5. Are we willing to invest the required resources to build a staff of IT experts?
The effect on staffing is one of the most important aspects of the decision to outsource or co-source IT services. A decision to grow internal IT capabilities must also include a plan to increase both the number and expertise of internal staff. Utilizing hosted services for all or part of your technology needs will also impact your staffing needs. Typically, the greater your institution’s use of hosted services to provide your IT capabilities, the fewer requirements you will have to expand your internal staff. This can result in significant long-term cost savings for a financial institution considering the cost of salaries, benefits, and ongoing education. However, do not make the mistake of believing you will not need any internal technical staff. Even in an environment that takes full advantage of hosted services and cloud computing, there is still a need to have resources capable of identifying your IT needs and managing your IT service provider relationships. The responsibility for managing risk cannot be outsourced, so you must be able to rely on internal employees to provide this critical role. The staffing benefits with hosted solutions are that you can achieve much greater business scalability without needing to acquire additional IT experts to manage new technology and a growing IT infrastructure.
Computing power is as important today as electric power. Making efficient and strategic use of information technology is critical to an organization’s success, much like the creation of electric power was in late 1800’s. Whether or not “the cloud” is the right strategy to create these efficiencies for your institution depends on whether your business strategy aligns with the benefits this model can provide. Undoubtedly, a cloud-based IT strategy is a business decision. For this reason, it is also imperative that executive leadership recognize the importance of their involvement in this issue and take an active role in selecting the right strategy for their institution.