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When should financial institutions move to the cloud?

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Many financial institution executives are struggling with the decision about whether to have an on-premise or cloud-based information technology (IT) infrastructure. Further complicating the matter, in many situations, a strong business case can be made for both options. To create an effective and efficient technology infrastructure, financial institutions must understand potential options and factors that help determine when, or if, they should consider a move to the cloud.

In either scenario, financial institutions must develop a cohesive IT infrastructure strategy that encompasses all hardware and software investments, such as servers, network communications equipment and storage appliances. Choosing between on-premise and cloud deployments can be difficult, but the differences between the two platforms and specific business indicators can provide guidance in the decision-making process.   

Understanding the on-premise model

With an on-premise IT framework, key technology applications and critical data are physically located inside the financial institution’s facilities. Technology systems are owned and managed by internal technology personnel, and the financial institution is the owner of data security measures, disaster recovery planning and all compliance requirements.

Why have an on-premise model?

Financial institutions typically choose on-premise technology deployments when there are network communications limitations, or if leadership within financial institutions want hardware, software and data to reside within their own facility. Until recently, financial institutions have also chosen on-premise technologies because vendors did not offer cloud-based solutions.

Benefits of an on-premise model

An on-premise technology infrastructure can provide several benefits, including maintaining full control over decisions regarding architecture, network management and the support of the core system and key business apps. In addition, the technology capital investments can be depreciated. An on-premise infrastructure may also be a better fit than a cloud solution for financial institutions in areas that have network communications limitations that lead to frequent outages and business disruptions.

The negatives of an on-premise model

On-premise solutions require the financial institution’s IT department to have the knowledge and skill sets required to responsibly manage the technology infrastructure and protect critical data. This could be an issue, since a financial institution’s IT staff is not likely to have the same level of technical expertise and available resources as a cloud provider, or have the budget to pay for the same level of security and disaster recovery capabilities. In addition, with experienced technology personnel in high demand, consistent staffing can be a challenge, with productivity suffering if key personnel leave.     

Understanding the cloud-based model

Cloud solutions have much of the same underlying technologies as on-premise solutions, but the technologies and data are located remotely at datacenters, also known as the cloud. Cloud platforms are subscription-based and typically include all technology upgrades, maintenance, information security and disaster recovery solutions as part of the subscription cost. The financial institution is still responsible for the network connectivity to the cloud environment and any other on-premise technologies and data.

Why have a cloud-based model?

The shift to a cloud-based infrastructure is driven by financial institutions having to spend significant amounts of money to keep up with emerging technologies, continually upgrade apps and refresh aging solutions. Also, as technology platforms have become more complex, internal IT knowledge requirements have increased. Cloud-based solutions are turnkey solutions with maintenance and information security included.

Benefits of a cloud-based model

The cloud has enabled financial institutions to essentially leverage an a la carte technology model, with the ability to quickly add services without the need for additional internal equipment or personnel. Cloud-based solutions provide communication redundancy to access applications and data, and also allow for robust disaster recovery options. In addition, the dependency upon internal IT personnel lessens since the complexity of on-premise technologies is decreased.

The negatives of a cloud-based model

However, a transition to the cloud does not come without risk. When a financial institution moves all of its data to a cloud provider, the level of control it has over security implications, staffing, policies and procedures decreases. While a vendor will likely have more significant security and disaster recovery measures, it will also likely be a larger target for hackers. It is also important to note that cloud-based solutions may be more expensive than on-premise models.

When is the right time to move to the cloud?

Several indicators can help a financial institution understand when it’s time to move to the cloud. The most straightforward scenario is if examiners or regulators force a financial institution into that decision. However, the choice becomes more difficult when internally determining when it is best for the business.

In this situation, a move to the cloud must be supported by a strong business case, not simply made as the result of an IT decision. The following questions can provide insights into when a move may be the most beneficial for your financial institution:

-          Do you want to be in the business of managing IT? Maintaining hardware and software is a challenge, and staffing challenges are more daunting as technology becomes more complex.

-          Is your core service provider focusing on moving future upgrades and new products to the cloud? If your provider starts charging you more for on-premise hardware and software upgrades, if it starts offering more options for cloud solutions, if it no longer develops solutions for on-premise implementations, if you sense increased sales pressure to push you to the cloud, or if you learn that a number of the provider’s clients are moving to the cloud, then it may be time for you to start thinking about moving as well.

-          Would a move to the cloud increase efficiencies? Cloud solutions are typically more streamlined technology offerings, with fewer disruptions, and with all locations and business units residing on the same platform.

-          Would a move to the cloud decrease internal IT staff? The cloud-based solution may allow for fewer, and less technical, internal staff, because only an internet connection is required to access cloud-based data and solutions.

-          Will your financial institution be more competitive in the market with service offerings only available in the cloud? As customers demand more expansive technology services, and the cloud becomes more prevalent, vendors are designing and releasing emerging technology platforms designed specifically for the cloud.

-          Will your financial institution have less risk with a move to the cloud? With multiple customers, cloud providers can typically develop more extensive risk management solutions, including disaster recovery and business continuity planning, perimeter security, ongoing audits and testing, and monitoring and alerts.  

-          Does the cloud provide flexibility with vendor selections? In many cases, cloud-based solutions will allow you to select the best vendor solution, or change to a different vendor more easily than if you own and manage on-premise solutions.

-          Will cloud benefits outweigh the costs? Your financial institution will incur costs when moving to the cloud, but ultimately, an effective cloud strategy can reduce risk, with a more consistent, predictable technology cost.

Conclusion

In a recent RSM poll following a webcast with mostly financial institution stakeholders attending, over 79 percent of attendees indicated they are utilizing the cloud in some form today. However, many attendees are cautious about the cloud, with data security (76 percent), privacy (61 percent), total cost (39 percent) and loss of control (33 percent) being the biggest concerns.

As mentioned earlier, the decision about moving to the cloud is not easy, and your financial institution should evaluate the indicators of when (or if) a cloud transition makes sense. It is important to not only focus on the impact on IT, but also be sure to measure business impact when making your decision. No decision is final, but you will want to be directionally correct for at least a three- to five-year period, because shifting back to an on-premise framework can be a time-consuming and costly task.

It is also important to note that you may decide that it is best to create a hybrid solution, where some of your technologies are on-premise and some are cloud-based.  In fact, it may not be possible to move everything to the cloud, even if that is your ultimate plan.

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