In our series about how SaaS helps actuaries, we’re taking a look at three different dimensions.
The first dimension, what the software does, is explained in a few articles: (How SaaS software benefits actuaries, Applying an Actuarial as a Service mindset, and a case study on SaaS modularity).
The second is related to hardware, and refers to where the software resides.
Software and hardware work together. Software does the software stuff; the calculations, the processing, the pretty picture outputs.
Hardware does the hardware stuff, like allocating tasks to worker machines, consolidating results, storing them in a database, keeping everything safe from hack attacks, creating redundancies and backups, etc.
This article is about the different options for all that hardware stuff and how you can decide what you need if you’re investigating a new solution for your operations.
As mentioned in the opener, there are two ends of the spectrum for this: a fully-hosted solution or an on-premises deployment. (And, obviously, if there is a spectrum, there must also be blends in between. You’re smart, you’ve probably already figured that out on your own.)
On-premises solutions are those which the end-user maintains themselves. That is, perhaps your company buys a set of servers (anywhere from $500 to more than $10,000 per unit) to load the software on to. These servers will then do the hardware stuff mentioned above.
In addition, the on-premises solutions must be maintained by the on-premises staff. That’s usually an IT department that is also working on all the other situations which come up – website maintenance, local workstation maintenance, remote access and security, etc. That maintenance isn’t cheap, either. It’s an investment of time and money to ensure those servers are kept up-to-date with the software running on them, power and security, etc.
Fully-hosted means that all of that infrastructure stuff is taken care of by an external provider. As a service, a vendor will take on that infrastructure maintenance for many clients at once, usually in a specific industry, and thereby provide economies of scale. They can become experts at network maintenance because that’s all they do. They can buy or lease servers in bulk, lowering the cost per unit. And they can set up regular upgrades that keeps them at the forefront of compliance regulations, so that users don’t have to track those on their own.
So, if you are considering an on-premises or fully-hosted solution (maybe it’s your actuarial system, maybe it’s an admin system, underwriting, claims, or even your HR and payroll), how should you decide? Here are some pros and cons of each. At the end we’ll offer up some questions your team can ask during the investigation phase to refine your prospect list.
Pros of On-Premises Deployment
This is a big one for many users, and it aligns with Control below. When users are in charge of the security of their own systems, so the argument goes, they will be better able to ensure that nobody from the outside is getting in. They will know the standards they are setting and the protocols they are following, so it is easier to validate that they’ve done the right thing.
Since everything is connected using local networks, large data transfers can happen much quicker. On-premises solutions do not require internet access, which, as we’ve seen, isn’t always the most reliable.
Having everything under one roof means that it’s easier to integrate everything together. Rather than having disparate standards for various systems, everything can be set up to integrate and work seamlessly.
Taking care of everything yourself means that you’re less reliant on external partners. You are not at the mercy of the decisions that others take about prioritization, capabilities, or maintenance cycles.
However, it’s not all positive for on-premise deployments.
Cons of On-Premises Deployment
Since you’re traditionally “buying” on-premise materials, you will often have a large up-front cost to get started. We can let the accountants argue how to depreciate those costs, but the fact is that start-up costs usually mean it’s significantly more expensive early on to use on-premises solutions.
Generally when buying a set of hardware, the decision-makers look into the future to see what may be necessary in terms of storage and processing power. Because they may not want to go through the hassle of purchasing and installing multiple times, they often buy more than they need immediately in order to accommodate that future state. Which means there’s unused capacity sitting around until you actually get there. Which is an initial waste of money and time.
This is an area where a lot of “hidden” problems emerge. Once you own and are responsible for maintaining servers and the data stored on them, you are going to have to take charge of everything. That can include updating server software, managing backups and redundancies, and even planning for replacement when the legacy hardware approaches the end of its useful life. This takes time and money, something that sometimes isn’t budgeted for when making the initial decision. Ignoring these maintenance costs is a pretty big risk to your future operations.
Performing all of the data security compliance, especially in the age of various data privacy laws (GDPR, CCPA, and the rest of the alphabet soup of regulations), can be an onerous task. If you are holding all data and operations yourself, this kind of compliance falls to you. On top of everything else you’re doing with your regular job.
Let’s take a look at the pros and cons of a hosted solution, then. As you might guess, they’re pretty much the opposite of the pros and cons of an on-premise solution.
Pros of Hosted
One clear advantage is that hosted solutions are generally much more scalable with usage than on-premises solutions. Remember, on-premise solutions need to be able to handle what might happen in the future. If you’re expecting a lot of growth, there could be significant unused capacity early on. Hosted solutions often have easy access to both computing resources and storage that scale with use. Which means that users will only pay for what they need or use, and as that grows (or shrinks), there is much less waste.
Since the hosting provider takes on the responsibility for maintaining the infrastructure, this essentially disappears for users. They don’t have to worry about patching server software, updating hardware as it becomes outdated, or planning for the inevitable time when their old servers are no longer supported by anyone.
Economies of scale
Hosting providers generally have an advantage over single end-use customers, in that they can buy hardware in bulk and essentially act as a broker for the end-user. This is similar to how SaaS vendors can do things once for multiple customers.
Lower up-front costs and more frequent updates
Using a hosted solution means that users are essentially “leasing” operations costs. Depending on the specific pricing structure, it can take anywhere from five to ten years to see equality of costs compared to the large initial outlays of on-premises solutions. If you’re tracking costs for ten years, more power to you. However, the advantage is that throughout that time the hosting provider has an incentive to continuously upgrade to the latest and greatest technology, ensuring that there will always be a reason to keep the subscription active. During that same ten years, your hosting provider has probably upgraded two or three times, while you’re still on the version from a decade prior.
And, of course, there are some objections to hosted solutions. (Even though we think they’re easily overcome.)
Cons of Hosted
Internet access required
Internet access is fairly ubiquitous these days. But even so, sometimes it’s inconsistent or slow, which might significantly impact the way someone would work with a system. Plus there is sometimes a bit of hesitation about security of data in transit, though we know that encryption protocols are advancing all the time.
Lack of control
Yes, your hosted vendors should have certificates that they have complied with whatever regulations are required. Still, you’re giving up that opportunity to vet solutions for yourself to whatever authority has issued the certificate. Some organizations don’t appreciate this or still have questions about security, despite the abundance of validation of those external certifications.
There may be hidden service contract costs you don’t know about or that you assumed were part of the regular fee. Sometimes this emerges because there were obscure usage costs that you didn’t expect would be charged, or were suddenly growing out of control as you grew the team.
So, with all those pros and cons, how would you decide? Here are a few questions to ask during your decision phase.
How big is the team of users? How much data will we be storing?
If your team is small and/or you expect very expansive growth or reduction, it makes more sense to do a hosted solution. Again, since most hosting providers have a “pay as you use” pricing structure, you can often scale costs as usage increases (or decreases). That way, you’re not stuck buying 20x of the capacity that you need now and not using 95% of that capacity while the team (and the data stored) grows.
Do we have the knowledge & skill in-house to manage all this?
Maintaining the internal infrastructure is often something that takes more time than expected. And for actuarial work, that can be substantial. You may have both storage and computing power needs for initial big data set analysis, actuarial projections, results storage, and visualization tools for post-processing. If you don’t have in-house support on the IT team, then you’ll need to outsource (again for a cost) or ask actuaries to manage it (not something they’re good at).
Do we want to spend time managing the process?
If not, then the hosted solution is an obvious choice. Remember, hosted solutions mean you’re letting those hosts take advantage of economies of scale. Just like SaaS development, when those providers do it once for multiple clients, this kind of shared maintenance agreement makes sense for end-users.
How soon do we need to get started? How quickly do we want new users to have access?
If this is immediately and without delay, then the hosted solutions are going to be better. Purchasing new equipment at the outset or piece-by-piece as teams expand is a headache. For hosted solutions, that process is often no more difficult than contacting an account rep and asking for an upgrade to the plan, or by doing it yourself in a user-friendly interface.
What about backups and redundancies? How do you want to maintain those?
Because most hosting solution providers provide automatic backup protection, you’re not managing that process. When you have everything on-premises you’re at risk for some kind of unusual event taking out both the original and the backup. If that were to happen, you’ve lost a whole heck of a lot. With hosted solutions, the original and backup are disparate, so even if something appears lost, it’s not really gone.
Caution – Not all cloud solutions are the same
Don’t fall into the trap of assuming that “cloud-accessible” or “cloud-enabled” are the same thing as “cloud-native”. The latter category (SLOPE is cloud-native, naturally) are built from the ground up to take advantage of the scalability, integrations, and redundancies natural to cloud-based applications.
“Cloud-accessible” or “cloud-enabled” applications, on the other hand, may have a way to get time on a bank of servers for processing, but it’s not the same.
They are, at the most fundamental level, still the same legacy software and hardware, just given a fresher “veneer” on top. The fancy term for this is “cloud-washing”, where legacy applications add that extra pipeline to the cloud, so they can pretend they’re giving the benefits of modern practices and technology, but aren’t really doing so.
It’s pretty clear that there are major differences between on-premises solutions and full-hosted ones. We believe that hosted solutions will be the way actuaries and just about any professional do their work in the future. We’re not alone – it’s been estimated that the use of hosted solutions will grow about 30% a year for the next half-decade alone.
As capabilities advance, security improves, and the technological arms race continues, the question becomes: do you want to do it all yourself? If so, that might be a losing battle. Consider a hosted solution for your actuarial work, and you will be keeping up with the competition much, much better. And perhaps even leaving them in the dust.