Gettin' SAASy

How one com­pany’s product-to-ser­vice evol­u­tion is open­ing new mar­kets and demo­crat­iz­ing the bank­ing sec­tor

gettin-sassy

P&H Solu­tions Inc. (P&H) is the U.S. mar­ket lead­er in de­vel­op­ing cash man­age­ment and com­mer­cial bank­ing soft­ware. Foun­ded in 1983 and (there­fore) ini­tially ded­ic­ated to the de­vel­op­ment of DOS and Win­dows products, the com­pany’s product of­fer­ings are now en­tirely web-based. P&H today has an in­stalled base of over 100 fin­an­cial in­sti­tu­tions (FIs) in pro­duc­tion, in­clud­ing icons such as J.P. Mor­gan and Mer­rill Lynch but also nu­mer­ous cred­it uni­ons and smal­ler re­gion­al banks. P&H soft­ware serves as the in­ter­face between these in­sti­tu­tions and their cus­tom­ers, en­abling the lat­ter to per­form as­sor­ted bank­ing activ­it­ies re­motely.

As little as 5-6 years ago P&H sold 100% of its soft­ware on the ‘in-house,’ or ‘li­cense mod­el.’ Fin­an­cial in­sti­tu­tions ran their own hard­ware, bought Web Cash Man­ager ‘product mod­ules,’ and paid P&H sig­ni­fic­ant project man­age­ment fees for the per­son­nel and know-how re­quired to con­fig­ure the pro­grams and ma­chines in­volved and bring the new sys­tem to mar­ket (when FI cus­tom­ers would make live, money trans­ac­tions us­ing the sys­tem). Cur­rently, however, the ma­jor­ity of the deals P&H closes ad­here to an en­tirely dif­fer­ent mod­el.

One-half to a full two-thirds of P&H cus­tom­ers today are in­stalled in the com­pany’s ‘Out­source Solu­tion Cen­ter’ (OSC) With this of­fer­ing, P&H re­lieves fin­an­cial in­sti­tu­tions of the bur­den of host­ing and ad­min­is­ter­ing their own hard­ware. FIs choose from among the same product mod­ules as those offered un­der the li­cense mod­el but run them on ma­chines that P&H man­ages in part­ner­ship with a third party, NCR. The dif­fer­ence between mod­els is en­tirely trans­par­ent to the end-users (FI cor­por­ate cus­tom­ers).

P&H’s out­source mod­el was made pos­sible by a new tech­no­logy (the in­ter­net), and by the ob­ser­va­tion from mem­bers of a formerly-ex­cluded mar­ket seg­ment (small FIs) that the tech­no­logy could be lever­aged to put them on an even play­ing field with the big guys. This pa­per de­tails the cir­cum­stances lead­ing to the out­source of­fer­ing, the dif­fer­ences between the out­source and li­cense mod­els, and the pro­cess that P&H went through to set up its Out­source Solu­tions Cen­ter.

Back­ground

Through most of the 1980s and 1990s P&H de­veloped and sold DOS and Win­dows ver­sions of its cash man­age­ment soft­ware. Large FIs and their cor­por­ate cus­tom­ers in­stalled the soft­ware, which en­abled the lat­ter to sub­mit batch-based trans­ac­tion in­struc­tions via mo­dem. 1998 saw P&H’s re­lease of Web Cash Man­ager (WCM) – a move con­sist­ent with a soft­ware-in­dustry-wide trend to­wards web-based ap­plic­a­tion de­liv­ery and its in­her­ent eco­nom­ies. While in­stall­a­tion of P&H soft­ware was still re­quired on the FI-side, soft­ware dis­tri­bu­tion to FI cus­tom­ers was elim­in­ated as these could now use the ubi­quit­ous In­ter­net Ex­plorer or Nets­cape Nav­ig­at­or to in­ter­face with their fin­an­cial in­sti­tu­tions.

But al­most as soon as the ini­tial WCM re­lease was mar­keted, P&H sales people and ex­ec­ut­ives star­ted sens­ing that the move to an in­ter­net-based product prom­ised be­ne­fits far bey­ond those im­plied by just the saved post­age and lo­gist­ics of an elim­in­ated cli­ent soft­ware dis­tri­bu­tion re­quire­ment. “Our DOS and Win­dows products were really only avail­able to large in­sti­tu­tions be­cause of the sig­ni­fic­ant, up-front cap­it­al out­lays they re­quired,” ex­plains Terry Mon­teith, P&H Seni­or VP of Product and Mar­ket­ing. “Ini­tially this was true of Web Cash Man­ager un­der the li­cense mod­el as well. But around 1999, with WCM on the mar­ket for about a year, we star­ted hear­ing from smal­ler banks that if we could run the soft­ware for them, they’d be able to af­ford same tech­no­lo­gies as the big guys. So we gave it a shot.”

And the shot hit home. By as­sum­ing hard­ware and ad­min­is­tra­tion re­spons­ib­il­it­ies and of­fer­ing a rev­en­ue shar­ing-based pri­cing scheme (which in ef­fect amounts to a rent), P&H lowered the up-front out­lay re­quired of banks by a factor of 10. This proved the key to open­ing up en­tirely new mar­kets for P&H and the Web Cash Man­ager product, as il­lus­trated by the fig­ure be­low.

Fig­ure 1 Num­ber of U.S. com­mer­cial banks by total as­sets, with P&H’s tra­di­tion­al and newly rel­ev­ant mar­ket seg­ments high­lighted. Data as of 9/30/2006, provided by FD­IC.

The Two Mod­els Com­pared From an FI’s View­point

The ta­ble be­low sum­mar­izes the key FI con­sid­er­a­tions of price, pay­ment sched­ule, and time-to-mar­ket for the li­censed and out­sourced de­ploy­ment mod­els. Fig­ures are for the ‘En­ter­prise’ edi­tion of Web Cash Man­ager with all mod­ules in­stalled and full func­tion­al­ity de­livered.

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Product, Ser­vices, and Rents

When P&H switched its fo­cus from DOS and Win­dows to the in­ter­net, it did so be­cause of the evid­ent be­ne­fits that web-based soft­ware prom­ised in terms of cus­tom­er-base growth (as P&H is a B2B com­pany, the growth was to be in its cli­ents’ cus­tom­er bases but the value of this growth was of course to be shared). Product de­liv­ery, however, con­tin­ued in much the same way as dur­ing the era of the com­pany’s mo­dem-re­li­ant products. And in­deed many of P&H’s cli­ents still ad­here to this ‘li­cense’ mod­el, whereby the Web Cash Man­ager product is bought out­right and phys­ic­ally in­stalled on ma­chines at the cli­ent sites. The value of the product is bought and trans­ferred.

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Fig­ure 2 The tra­di­tion­al value trans­fer mod­el. FI buys Web Cash Man­ager out­right from P&H (as­sum­ing its value), rents re­quired con­sult­ing and sup­port ser­vices, and sells ac­cess to the product it now owns to its cor­por­ate cus­tom­ers.

In con­trast to the value trans­fer mod­el above, P&H has, for close to a dec­ade now, been de­vel­op­ing its OSC of­fer­ing. As de­scribed, this is a mod­el in which P&H does not sell the Web Cash Man­ager product it­self, but in­stead sells ac­cess to it. As the num­ber of FIs rent­ing this ac­cess has in­creased and the out­source op­er­a­tion has grown, P&H has found that it in turn has needed to pur­chase ser­vices from oth­er, third-party pro­viders. In ef­fect, the val­ues of the sep­ar­ate ser­vices ac­crue as we move down­stream along the chain.

Fig­ure 3 The out­sourced value ac­cru­al mod­el. PH rents host­ing (from NCR) and data re­dund­ancy (from Sav­vis) ser­vices; FIs rent Web Cash Man­ager mod­ules and sys­tem man­age­ment from PH; Cor­por­ate cus­tom­ers rent ac­cess form FIs to the Web Cash Man­ager func­tion­al­ity that lets them man­age their treas­ury op­er­a­tions.

Trans­form­a­tion Pro­cess

Al­most as soon as Web Cash Man­ager was re­leased, P&H star­ted hear­ing re­quests for an out­source op­er­a­tion from smal­ler banks who had too long been shut out of the big-tech­no­logy mar­ket. In re­sponse, P&H ef­fect­ively called the seg­ment’s bluff by hav­ing its sales force pro­act­ively ex­plore the idea dur­ing 1-on-1 sales calls to po­ten­tial cli­ents. The com­pany needed a pi­on­eer. “We felt from a gut level that there was an op­por­tun­ity there for us,” Mon­teith ex­plains. “We just wanted to get one bank to com­mit so that we’d have a con­crete reas­on to in­vest.”

Stage 1 – Pi­on­eer­ing

In 1998/9 they got their trail­blazer. Dur­ing what Mon­teith calls ‘Stage 1’ of the Out­sourcing ven­ture, P&H ran the WCM soft­ware for this ini­tial cli­ent, and those that tumbled in on its heels, on ma­chines housed at the com­pany’s headquar­ters in New­ton, MA, just out­side of Bo­ston. Ex­ist­ing com­pany re­sources were re­dis­trib­uted to sup­port the ef­fort.

It didn’t take long for the com­pany to re­cog­nize what it had spawned. “With­in the first year it be­came pretty clear to us that this was go­ing to take off,” Mon­teith says. “We had 15-20 banks in­stalled in our out­sourcing cen­ter and it be­came clear that we, in turn, were go­ing to have to out­source parts of the op­er­a­tion.”

FIs opt­ing for P&H’s new Out­sourcing Solu­tion Cen­ter were choos­ing to en­trust the non-core areas of IT in­fra­struc­ture and soft­ware ad­min­is­tra­tion to what was in ef­fect a second party – the com­pany whose soft­ware was ne­ces­sit­at­ing the in­fra­struc­ture and ad­min­is­tra­tion. As a soft­ware de­vel­op­ment firm, P&H had fairly ro­bust in­tern­al IT re­sources and ex­pert­ise that were able to ab­sorb the in­fra­struc­ture re­quire­ments of its early Out­sourcing Solu­tion Cen­ter ad­op­ters. But with 20 banks in­stalled and more knock­ing at the door, those re­sources were stretched and com­pany man­age­ment real­ized that it, in turn, needed to di­vest it­self of pieces of the op­er­a­tion not tied to its core soft­ware de­vel­op­ment and sup­port mis­sion.

P&H tapped NCR Cor­por­a­tion, with whom it had an ex­ist­ing re­seller agree­ment, for the job of host­ing the ma­chines and in­fra­struc­ture that would run Web Cash Man­ager in­stall­a­tions for OSC cli­ents. With the agree­ment, phys­ic­al hard­ware sup­port­ing the op­er­a­tion moved to Mary­land, U.S., while at P&H headquar­ters in Mas­sachu­setts a bare­bones team was kept on to re­motely man­age the in­stall­a­tions.

Fig­ure 4 Align­ment of act­ors and core com­pet­en­cies (in black) over time. Ini­tially FIs as­sume 3 main op­er­a­tion­al areas, only one of which is their core busi­ness. With the NCR deal, the 3 main op­er­a­tion­al areas have been dis­trib­uted to the three cor­res­pond­ing spe­cial­ists.

Stage 2 – Grow­ing Up

P&H had suc­ceeded in find­ing a cap­able part­ner to as­sume the hard­ware im­plic­a­tions of the Out­source Solu­tion Cen­ter. But the cus­tom­ers kept com­ing, and even hav­ing es­caped in­fra­struc­ture re­spons­ib­il­it­ies, those in­volved with the out­sourcing project found them­selves kick­ing hard to keep their heads above wa­ter. “At 25 to 30 in­stalled banks, we star­ted feel­ing some pain,” says Mon­teith. “It’s boot­strapped, fly-by the seat of your pants stuff and we were hav­ing a hard time keep­ing up. We ba­sic­ally ad­dressed this through staff­ing, and through bring­ing in out­side ex­pert­ise”

P&H was no longer treat­ing the Out­source Solu­tion Cen­ter as an ex­per­i­ment or side project, but rather as a profit cen­ter of huge po­ten­tial to which ded­ic­ated re­sources needed to be de­voted. And as the com­pany be­came more ad­ept at man­aging the en­vir­on­ment with more suc­cess stor­ies to share, the pro­files of the banks who were sign­ing up di­ver­si­fied. Quoted in 2001, Mike Thong­pait­hoon, who was then P&H’s dir­ect­or of cli­ent ser­vices, de­scribed P&H’s out­sourcing cus­tom­ers. “They are typ­ic­ally re­gion­al and smal­ler com­munity banks that need to com­pete with the big boys. But we also have some big cus­tom­ers – banks in the bil­lion-dol­lar plus range – out­sourcing be­cause they just don’t want to deal with the hassles."

Over the next years, as the num­ber of in­stalled banks climbed to­wards 60, more big banks would come, each pre­sum­ably bolstered in con­fid­ence by the one that pre­ceded. The sign­ing of a $10b FI in­to the Out­sourcing Solu­tion Cen­ter was a mile­stone un­til re­cently, when a $70b bank chose to out­source to P&H. “The stakes are def­in­itely get­ting pretty high, “ says Mon­teith. “And or­gan­iz­a­tion­ally, we’re start­ing to look at Out­sourcing as one of our biggest cus­tom­ers.”

Stage 3 – Matur­ing With the En­vir­on­ment

As P&H has ma­tured in its man­age­ment and de­liv­ery of out­sourced solu­tions, so too has the reg­u­lat­ory en­vir­on­ment in which it op­er­ates. Today, the chal­lenges P&H faces with the Out­source Solu­tion Cen­ter de­rive from both the size of its cus­tom­er base and a set of gov­ern­ment rules that has grown up around the in­ter­net bank­ing in­dustry. A par­tial list of these in­cludes:

• Man­age­ment of WCM patch and up­grade in­stall­a­tions
• Man­age­ment of mul­tiple ‘pods’ or ‘en­vir­on­ments’ for cus­tom­ers in dif­fer­ent time zones
• Gov­ern­ment-man­dated SAS Level I and II se­cur­ity audits
• Sar­banes Ox­ley com­pli­ance
• Dis­aster re­cov­ery and fail­over cap­ab­il­ity (in es­sence, backup solu­tions)
• Gov­ern­ment-man­dated user sign-on au­then­tic­a­tion

“We’re ba­sic­ally now re­spons­ible for any­thing reg­u­lat­ory hap­pen­ing in the en­vir­on­ment,” says Mon­teith. Fin­an­cial in­sti­tu­tions, in oth­er words, out­source not just the day-to-day op­er­a­tion­al as­pects of an en­ter­prise-level soft­ware im­ple­ment­a­tion, but also all as­so­ci­ated com­pli­ance con­cerns. As a res­ult, P&H has brought in top gun man­age­ment for the Out­source Solu­tion Cen­ter from the out­side and de­veloped new com­pet­en­cies in know­ledge areas it con­siders spe­cif­ic to the core ser­vice it provides with the op­er­a­tion. It con­tin­ues, however, to pen deals with oth­er pro­viders for ser­vices and third-party products it views as an­cil­lary. Re­cently, for ex­ample, P&H brought on a second hard­ware host­ing com­pany, Sav­vis, which has as­sumed dis­aster re­cov­ery and fail­over du­ties for the out­sourcing op­er­a­tion – ba­sic­ally run­ning mirrored in­stall­a­tions of the NCR ma­chines in Mary­land.

Out­come and Fu­ture Dir­ec­tions

By any meas­ure, the P&H Out­source Solu­tion Cen­ter has proven a re­sound­ing suc­cess. Talk­ing to Mon­teith, and in­deed any­one who has been in­volved in the ef­fort, about the ex­per­i­ence of get­ting the op­er­a­tion off the ground eli­cits from them terms and phrases such as ‘fren­et­ic,’ ‘rap­id growth,’ ‘hanging on by the seat of our pants.’ At every step along the way, growth in the in­stalled cus­tom­er base has met or ex­ceeded in­tern­al pre­dic­tions.

Dur­ing the near-dec­ade that P&H has been run­ning its Out­source op­er­a­tions it has ac­quired mar­ket know­ledge and Pro­fes­sion­al Ser­vices ex­pert­ise that the com­pany now lever­ages by of­fer­ing con­sult­ing ser­vices to large fin­an­cial in­sti­tu­tions. And in a bid to ap­peal to even the smal­lest banks and budgets, the P&H mar­ket­ing group is now ex­plor­ing the idea of what it calls ‘pro­cessor op­tions.’ With this op­tion, banks could, in ef­fect, choose to share in­stall­a­tions of WCM with oth­er in­sti­tu­tions that were will­ing to fore­go cus­tom­iz­a­tion for price. A cook­ie cut­ter ver­sion of the soft­ware at an even lower price point.

Fig­ure 5 Schem­at­ic (NOT to scale) de­pict­ing re­l­at­ive sizes of three P&H seg­ments and mar­ket share in each. Grey bar rep­res­ents num­ber of in­sti­tu­tions in each seg­ment; black bar por­trays P&H’s pen­et­ra­tion of the seg­ment. Dol­lar signs in­dic­ate the com­par­at­ive rev­en­ue rep­res­en­ted by a typ­ic­al deal closed in each seg­ment.

For all P&H’s suc­cess, however, the amaz­ing thing in this B2B en­vir­on­ment is that after 23 years in busi­ness and de­pend­ing on who you talk to, P&H’s total in­stalled cus­tom­er base (in­clud­ing out­sourced and in-house in­stall­a­tions) is between 100 and 150 fin­an­cial in­sti­tu­tions – ap­prox­im­ately 2% (us­ing the more op­tim­ist­ic fig­ure) of the sev­en-to-eight thou­sand banks de­tailed in Fig­ure 1, on page 2. Should P&H de­cide to mar­ket ‘pro­cessor op­tions,’ the de­cision will have been made, in ef­fect, in or­der to blanket all seg­ments with of­fer­ings. It cer­tainly won’t have been made be­cause the com­pany has ex­hausted the mar­kets it cur­rently finds it­self in. The choice P&H cur­rently faces with its Out­sourcing Solu­tion Cen­ter is one between breadth and con­cen­tra­tion.

Takeaways

The Fol­low­ing dicta are based on four as­pects that proved key to P&H’s suc­cess­ful growth of its Out­source Solu­tion Cen­ter, and which should be con­sidered in any B2B product-based to ser­vice-based mar­ket­ing evol­u­tion.

1. Dip your toe in first… prefer­ably with a part­ner When P&H first star­ted hear­ing mur­murs about how an out­source of­fer­ing could po­ten­tially provide the keys to a hitherto locked mar­ket, dol­lar signs must have flashed in more than a few sets of eyes. To the mar­ket­ing group’s cred­it, however, the com­pany didn’t lurch for­ward with an if-you-build-it-they-will-come ef­fort. In­stead, it cour­ted a part­ner with whom to test the wa­ters. P&H got guar­an­teed rev­en­ue for its ef­forts and the trail­blaz­ing cli­ent en­joyed spe­cial treat­ment. Had the ven­ture proved a flop, P&H’s losses would have min­im­al. But it didn’t, and we know the rest.
2. Buy Ser­vices to Provide Ser­vices One of the most in­triguing as­pects of P&H’s ma­ture Out­source Solu­tions Cen­ter is the string of ser­vice-pro­vider agree­ments it com­prises (see Fig­ure 3, page 2). The value chain is in fact a ser­vice chain. As P&H’s out­sourcing op­er­a­tion grew, the com­pany found it­self hav­ing to de­vote an in­creas­ing pro­por­tion of en­ergy and ex­pert­ise to ex­tend­ing its core com­pet­en­cies of WCM de­vel­op­ment and ad­min­is­tra­tion. Less and less band­width was avail­able to ab­sorb man­age­ment of the sup­port­ing in­fra­struc­ture, which in it­self was be­com­ing more in­tric­ate with the ex­pand­ing op­er­a­tion, and so the com­pany con­trac­ted with third-parties who spe­cial­ized in hard­ware and fail­over. In short, P&H found that by out­sourcing parts of its out­sourcing op­er­a­tion, it was able to con­cen­trate on max­im­iz­ing the dif­fer­en­ti­at­ing value for its cus­tom­ers.
3. Bal­ance Eight years in­to the Out­sourcing ven­ture, Mon­teith says that find­ing the right equi­lib­ri­um is cru­cial to suc­cess. “The chal­lenge be­comes how to keep func­tion­ally com­pet­it­ive, be on top of the all reg­u­lat­ory re­quire­ments, of­fer qual­ity im­ple­ment­a­tion ser­vices, and de­liv­er this at a good price point. It’s really a big bal­an­cing act.” On top of free­ing P&H to con­cen­trate on its core com­pet­en­cies, the third-party deals ref­er­enced above let P&H de­ploy the re­quired hard­ware at a cost sig­ni­fic­antly lower than would have been pos­sible oth­er­wise. P&H has spent ap­prox­im­ately \$5m on hard­ware, pays NCR and Sav­vis their rents, and em­ploys twenty people to run the Out­source Solu­tion Cen­ter. With 60 out­sourcing con­tracts worth between ​\$2m and ​\$5m each, the mod­el has proven prof­it­able. Non­ethe­less, should the bal­ance Mon­teith de­scribes be dis­turbed – should the tech­no­lo­gists, for ex­ample, suc­ceed with an in­tern­al sell of the latest in­ter­net tech­no­logy for the WCM product without de­term­in­ing if its value would be per­ceived and bought by P&H’s cus­tom­ers – the profits which are now healthy could well prove to be eph­em­er­al.
4. Book the Re­cur­ring Rev­en­ue If P&H’s out­sourcing op­er­a­tions had proven just a means to open new mar­kets, cel­eb­ra­tion would have been jus­ti­fied on this count alone. In fact, however, the very pri­cing mod­el that sud­denly made small banks a vi­able seg­ment for the com­pany also proved a boon to the com­pany’s plan­ning cap­ab­il­it­ies. The deals P&H signs for in-house in­stall­a­tions bring the com­pany im­me­di­ate rev­en­ue in today’s dol­lars. But the rev­en­ue shar­ing mod­el in­her­ent in the Out­source Solu­tion Cen­ter deals brings something just as valu­able – a pre­dict­able, re­cur­ring rev­en­ue stream, or an an­nu­ity. Know­ing the pro­por­tion of a fu­ture year’s rev­en­ue goals that has already booked al­lows the com­pany to de­vel­op co­her­ent, long-range plans for growth.