Focus on hard costs and the difference between capital and operating expenditures.
Still on the fence about whether it’s time to switch to a cloud-based IT solution? If you’re like most leaders at elite RIAs and broker-dealers, you want to use the technology that meets all the operational and financial needs of your business, while not putting your firm in security or compliance risk. However few financial experts are also technology experts, so deciding what your firm needs and how much your firm should spend on IT can be baffling.
We urge financial executives to do a thorough cost analysis of how building a robust IT solution in-house compares with outsourcing those needs to an elite provider of secure cloud computing. Look at current actual expenditures as well as those mandatory investments needed to be productive, secure and compliant over the course of six years. That’s how long the average in-house solution lasts before new technology emerges, at which point firms often conduct major IT overhauls.
Hard Costs versus Soft Costs
Hard costs are better to focus on than soft costs, because they are not as susceptible to financial scrutiny as soft costs. Soft costs for IT relate to lost productivity from outages, and management’s time spent dealing with tech issues. Those things matter, but there is no universally recognized price tag for them. Hard costs, on the other hand, are much more concrete. Goods and services come with actual prices (purchase orders, contracts, receipts), and although they differ by brand and product, it is possible to estimate average prices by searching the Internet and calling vendors.
CapEx versus OpEx
At a high level, costs fall into two categories: capital expenditures and operating expenditures. With IT, getting set up through CapEx is a different animal than staying in business through OpEx. CapEx is a matter of knowing what tools to purchase – which is itself a matter of knowing what tools meet the needs of a firm’s staff, clients, business associates and regulators.
OpEx can be just as complex – especially when taking the in-house IT route – because that deals with both personnel and non-personnel expenses. Personnel expenses include resources required to support and train end-users, support the systems needed to run the business, research new technologies to specify, procure and implement. For personnel, calculating expenses involves the staff’s level of talent and the firm’s ability to keep that talent from competitors.
Let’s break this huge category into a few basic buckets: hardware, software, facilities, and services.
Hardware includes the implementation and ongoing operation of servers and storage, insurance and property taxes on the server and storage, maintenance and repairs.
Software includes the server Operating System and Client Access Licensing, platform programs such as SQL and Exchange, management programs for patching and backing up, and desktop programs such as Microsoft Office and Anti-Virus/Anti-Malware.
Facilities include power and cooling of the equipment, operations and maintenance of the air conditioners and battery backups, and floor space for equipment. Many firms simply have a locked (and occasional unsecured) closet for their IT equipment. This is a far cry from a real enterprise-class data center. Don’t underestimate how costly this bucket can become. Depending on the lease and the environmental quality of your space, hidden costs may exist or facilities options may be restrictive.
Third Party-provided services include disaster recovery and business continuity, IT consultants and contractors, backup and replication of data to offsite storage, data security, and any miscellaneous IT service.
When a firm builds a robust IT system in-house, expenses have a way of adding up far higher than expected as the years go by. Like those high-performance PCs on your desk. According to a recent survey by research firm Gartner “the average life span of a desktop PC is 43 months, and only 36 months for mobile PCs.” When you move your IT into the cloud, your computer no longer requires large amounts of memory and storage as the processing now takes place in the data center and you can choose to use a micro desktop that will cost much less and last 7-10 years.
Fully outsourced cloud solutions often cost far less over the long term. That’s a matter of scale. An IT service provider that focuses on the specific needs of financial professionals should be large enough to have the resources and economy of scale to provide these services to each RIA and broker-dealer client at a small fraction of what it would cost to build all of these capabilities in-house. It is analogous to building your own power generating plant versus tapping into the power grid. Yet when a financial firm does everything in-house, there is rarely any scale and the firm must spend a greater proportion of its resources on IT.
A financial firm may choose not to invest in quality IT to save a bit of money. However, one must now trade off risk versus return. In the short term there may well be more money returning to the bottom line, but in today’s age of Cybersecurity concerns, it’s no “if” but “when” a malicious attack will occur. Of course, in that case, a firm risks alienating clients and running afoul of regulators if a data breach were to occur. We’ve all seen how HIPAA treats data breaches of Personal Health Information, and the SEC is pushing more responsibilities and liabilities onto the firm for the protection of client information. Those problems would cost the firm considerably more money than investing in better technology. So although upgrading to the right outsourced cloud solution would cost more than doing nothing, it’s still the best long term investment for elite RIAs and broker-dealers.
Our next blog in this series will look at the projects needed to make the proper upgrades, and conducts an apples-to-apples comparison of them for in-house IT versus outsourced cloud solutions.