Do You Know Your Total Cost of Ownership? (Part 2: On Prem)

Purchasing an on prem solution can be costly and pose a security risk. 

In Part 1 we looked at the total cost of ownership (TCO) for building your own system. In this post we will look at the likely costs you will incur if you purchase a solution from a vendor which needs to be installed & implemented on your own hardware (so called “on premises” or “on prem” solutions).

Up until the 2000s, on prem was the only option for running software provided by a vendor to do the compliance monitoring function. Fast forward to 2020 and while on prem is slowly being replaced by SaaS, there are still a large number of old vendors who require running their software inside a financial institution.

Part 2: Buying, installing and implementing on prem software from a vendor

The process is generally thus - once agreement with the vendor has been signed, get technical / infrastructure requirements from the vendor. Generally this will be:

• Purchasing 1-5 servers: Depending on the nature of the service, the software could be installed on existing servers, but could lead to performance degradation. Otherwise one server at an absolute minimum, most likely two (one for production and one for testing) but depending on the institution could be up to 5, with 2nd test environments, fail-overs, backups, disaster recovery etc.
• Purchasing [additional] database licenses: Every compliance service will need a database, generally this will be Oracle or SQL Server. If you already have Oracle or SQL Server licensed then adding licenses can be straightforward. If you do not then navigating which license type you need and how many licenses can be a minefield. As an example, Oracle’s database price list is 15 pages long.

One Off License / Hardware / Software Costs

Either once the hardware has been purchased & installed or in parallel, the actual implementation project will commence. The vendor will generally need to send multiple staff on-site (or the slightly more modern ones might be able to do it remotely). 

The duration of an implementation project can vary wildly, depending on the complexity of the financial institution. A small hedge fund with a handful of portfolios operating one entity and trading in a few jurisdictions can go live in a matter of months. An investment bank with thousands of accounts / portfolios and hundreds of legal entities, with complex corporate hierarchies can take 2 years to be 100% live.

Tasks that the vendor may / will be required to do can generally be categorised thus:

Broken down into financial costs, we can predict likely implementation costs:

One-Off Implementation Costs

As mentioned in Part 1:

“Predicting the duration & likely cost of a project in advance is extremely difficult. It's a well known fact that people tend to underestimate (“Planning Fallacy”), sometimes wildly”.

When you are implementing an on prem vendor solution however a new level of complexity arises. With a “build your own” solution you alone are in charge of the project and requirements, with an external vendor unexpected issues easily occur. Common examples include - vendor requires version 11 of Oracle and you are currently only operating version 10, all desktop PCs need to be updated to Windows 2016 SP 4 to access the client software etc.

But presuming everything goes to plan, an implementation project is likely to take 6 months to 2 years and cost anywhere from £250k to £3M (not including internal costs). Crack open the champagne and have the go-live party!

Unfortunately, going live is only half the story of on prem TCO - you still have large annual costs to factor into any decision of whether you should build, buy on prem or subscribe to SaaS:

Yearly Operating Costs

So a total of between £145k and £1M p.a. should be factored in for yearly running costs. You may remember from Part 1 that at a conference in Barcelona a large Investment Bank said their yearly operating costs were "2 Million Euro, of which 1 Million was purely IT Costs.”

This gives us a 5 year TCO of:

Security

While not directly linked with TCO, one must also consider how secure an on prem solution is. For small to medium sized financial institutions, maintaining dedicated server rooms with bio-metric access, full offsite disaster recovery + backup and 24x7 support can be prohibitively expensive / unfeasible. One only has to read the press to hear of cleaning personnel with USB sticks stealing data, or buildings hit by catastrophic events & weather (which will unfortunately happen with more frequency and certainty as the climate crisis escalates). So the risk and financial implications of a security breach or disaster event must be weighed in any decision to host data in-house. 

Summary

The Total Cost of Ownership numbers over 5 years are in the same ballpark as if you were to “build your own”. However, one of the advantages of choosing a vendor is reducing the element of risk - if the vendor’s solution is tried & tested in the market (and you do reference calls with a similar institution to yourselves) then it’s also likely to work for you, although as mentioned above it's not 100% guaranteed due to technical compatibility issues.

Again, as with “build your own”,  you must be clear about your appetite to host sensitive data in-house and be very aware of the implications if that data were to be compromised.

Hopefully this is some food for thought about potential hidden costs and risks when purchasing an on prem solution, please feel free to reach out to sales@fundapps.co if you’d like a copy of our TCO Calculator.

If you'd like to automate your compliance processes and reduce the element of risk associated with choosing a software vendor then get in touch! 

In part 3 of this series we look at the potential TCO for subscribing to a Compliance-as-a-Service monitoring solution.