The IT world stands at the threshold of a paradigmatic shift to cloud computing. According to industry consultancy Gartner: “[C]loud computing [is] begin[ning] to move beyond the pure hype stage and into the beginning of mainstream adoption.” The prospect of storing business critical transaction data in the cloud – a massive centralised and virtualised third party-managed data centre – is seen by some as the panacea to all scalability, agility, and operational efficiency issues. Yet to others it's an invitation to a massive business disruption scenario, poor user experience and potential loss of extremely confidential data.
From your perspective, why is ECTRM such an interesting starting point for exploring the potential of the cloud for financial institutions?
For three reasons: First, most market offerings, including that of Navita, are fairly old-fashioned compared with offerings from other software categories: large monolithic applications with massive and specialised functional footprints and significant use of proprietary technologies, and typically installed at customer sites. You can ask then if there are structural hindrances to the financial industry accessing the cloud, and if so, why these hindrances would somehow disappear overnight? Second, transaction data in ECTRM space are extremely business sensitive, and I guess that a true litmus test of the feasibility of the cloud is whether a bank or hedge fund would be willing to store its energy contracts, for example, in the cloud. Third, certain parts of ECTRM space seem to have needs that actually resonate very well with what the cloud potentially offers: massive data, flexibility, agility, scalability, and scale advantages.
What differentiates cloud computing from hosted solutions?
There are in my opinion many key differences from a customer perspective: one instance per customer versus one instance for all customers, highly bespoke configuration of system versus choosing from menu, virtualisation within a customer versus virtualisation across customers, seat-based licensing versus metered by use, rigid contracts versus flexible contracts, and fairly loose SLAs versus tight SLAs, often with financial penalties. An interesting observation is that none of these differences fundamentally changes the security issues and the operational risks associated with the cloud.
Does Navita currently deliver ECTRM functionality from the cloud?
As we have not yet seen any demand for it in the market, currently we are not, and I doubt that we will for quite some time. What we do deliver are hosted solutions in combination with lease-based licensing models. These solutions have turned out to be attractive for smaller players on the physical side, as well as hedge fund start-ups and banks starting up energy or commodity trading desks on the financial side. These players have needs centered on cost variabilisation, scalability, flexibility, agility, and risk containment more than around functional compliance. Here, hosted solutions answer well.
Longer-term however, I think, and despite all the skeptics, we'll eventually see cloud-based services also in the ECTRM space. The argument that specialised vertical software combined with highly business-critical data is fundamentally not deliverable as a service from the cloud is simply not true. Reasoning by analogy, I personally believe that salesforce.com, the prime example of SaaS, testifies to this.
Which customers will be the first to move to cloud computing?
As our hosted solution attracted significant interest from smaller physical players and start-up hedge funds, I expect that we'll continue to see the same trend; again, start-ups with limited funds that want to exploit windows of opportunity through short time to market, preference for OpEx over CapEx, cost variabilisation, scalability, flexibility, and risk containment, all of which are key to delivering shareholder value for these organisations.
Banks and industry analysts alike believe that somehow the finance industry is ‘different' and that primary concerns like lock-in, latency, compliance, and loss of ownership to data make the cloud unreachable for typical financial institutions. You seem open to the idea that somehow the cloud will be reachable for such institutions?
Personally, I think that the concerns you mention are highly relevant and that short-term we will see a preference for in-house or standard hosted solutions. On the other hand, the facts that some financial institutions are happy to use hosted solutions, that most of the above concerns apply to both hosted solutions and the cloud, and that shared infrastructure technologies like VPN are spreading in the industry, seem to suggest that, yes, the finance industry may be ‘different', but only as a matter of degree.
What about issues related to security and risk?
I think we need to broaden the understanding of security and risk, beyond that provided by IT professionals. First, most financial institutions are in the business of buying and selling risk, they generally price it, they do not eliminate it. Second, it is not obvious that buying services from the cloud is intrinsically riskier than providing the same services in-house. Third, and most importantly, financial institutions are forced to take into account a much broader set of risks than for example, to put it simplistically, the internet going down. For example, what is the risk associated with not getting a new financial product out to the market; with incomplete reporting of risk, or with not complying with regulatory requirements?
How do you foresee that players in ECTRM space will respond to the challenges of the cloud?
First, I think fundamentally that the days of the thick client combined with an in-house server and operating with a perpetual license, the dominating design paradigm and the dominating licensing model in ECTRM, are gone. Any vendor clinging to this design paradigm and this licensing model is a dinosaur awaiting a slow death. I also believe that what will come instead is a web-based client, a hosted server, and metered usage. Third, I expect that sooner or later some cloud-based ECTRM offering will be made, likely by a completely new player in ECTRM space, with a focus on lower-tier and mid-tier customers; typically retailers and smaller hedge funds. We saw just the same with salesforce.com. Finally, the cloud has many layers, including databases, servers, services, and bandwidth and various ECTRM players may have different strategies at different layers.
From Navita's perspective we foresee that, at least until cloud solutions reach a critical level of maturity, a critical level of security, and a critical level of adoption, hosted solutions such as Navita's will continue to respond effectively and continue to be the preferred solution to the market's demand for cost variabilisation, scalability, flexibility, agility, and risk containment.
What advice will you give to your potential customers with regard to using the cloud to process and storing transaction data for energy and commodity trading?
Firstly, the cloud does not really exist in ECTRM space, and will not exist for some years. Secondly, when making a decision between an in-house, hosted solution and the cloud, I always recommend focus on the business fundamentals: ‘reasonable' functional support of underlying business processes, short implementation times, flexibility/reconfigurability/scalability, and risk. In the end, these factors drive the RoI of a system selection much more than going from 90 to 100 percent functional compliance. It's always important to remember that in trading a delayed profit is a foregone profit. When quantifying these factors, the business case most often favors a form of hosted solution.