In an express world where speed dictates the performance levels of everything from Internet to rollercoaster rides, today’s consumer has evolved to not only expect but demand on the spot results – no waiting, no delays.
This need for instant gratification translates into what we have come to recognise as acceptable customer service and has far reaching repercussions for not only the products we offer but how we market these products. The banking sector is no exception.
Many of today’s banks are struggling to keep pace with their customers’ needs as they are saddled with the unfortunate paradox of a customer centric vision, constrained by an IT system that hinders the realization of this vision. Many banks have reached the tipping point and are faced with the question of whether to continue to patch their legacy system to accommodate expanding customer needs or, in the face of a rapidly changing landscape and technology advances, to invest in replacing these IT systems. Further, the banking industry’s recent history is fraught with mergers and acquisitions and concerted decisions to avoid the expense of consolidating IT platforms have resulted in the bulk of the IT budget (70 per cent -80 per cent)being expended on maintaining and supporting a complex mix of legacy IT systems.
Finally making the decision to replace the legacy system is half the battle. It should consider not only external pressures such as regulatory requirements, customer demands and increased competition, but internal ones such as a need for improved system stability and flexibility, outdated and costly systems and processes and depending on diminishing legacy technology skills as the persons who implemented the systems have either moved on or are nearing retirement.
The second half of the battle is a tedious one and should be approached methodically under expert guidance. The first step is to identify, in tandem with your stakeholders, the business issues to be addressed to determine which systems need to be replaced. These systems should include components that develop, process and manage financial products and services, while maintaining a record of transactional information. Modules include deposit account, loan processing and client databases.
The next decision is whether to build or buy.
Historically this decision was simple – buy if you could not afford to build a system tailored to your precise needs – resulting in third party solutions being the exclusive domain of smaller banks. Today’s vendor-built solutions, however, have been tested with increasingly large and complex deployments and there is now a trend, with both large and small banks, toward third party scalable off-the-shelf functionality. The argument for third party solutions is primarily based on an ongoing need for scalability and global reach as the more successful entities continue to grow, mainly through mergers and acquisitions. It is also fuelled by a lack of documentation over decades of intermittent upgrades to the legacy system and a shortage of resources to continually develop and maintain these systems. While this option lowers the bank’s risk, the trade off is customisation – or a solution precisely suited to its needs. Once the build or buy hurdle has been surmounted the next decision is whether to deploy the new systems simultaneously across all lines of business, geographies and products, thereby minimizing the need for costly interim solutions, or to implement on a phased basis.
When you select a solution vendor you are entering into a long term relationship. The selection criteria should balance business and technical requirements and should include performance indicators such as product functionality and flexibility, vendor viability and implementation track record, vendor support and maintenance and, of course, COST.
The costs to replace legacy systems are often covert as they will encompass not only software and hardware purchase and maintenance along with the cost to implement these systems, but those associated with overruns from expanding project scope, recruiting and training staff, change management, and severance and redeployment of staff affected by the new technology. These costs quickly rack up and may seem impractical versus the immediate financial benefits of core system replacement, especially since these benefits are often derived from process efficiency and not reduced IT spending.
An accurate cost benefit analysis must consider soft benefits, which cannot be easily quantified but redound to the bottom line and are often pivotal in the decision making process. These include enabling the bank to respond more effectively to competitive, market and regulatory pressures and the rationalization of redundant and manual back office processes.
These are lucrative attributes that enable a bank to distinguish its service capabilities over another and engender customer loyalty.
The decision to replace a banks’ core legacy system is therefore a strategic, rather than simply financial one, requiring significant executive oversight and a comprehensive appreciation of the entity’s vision and strategy.
This decision, along with the system implementation, affects the entire organization and requires a collaborative approach including business strategy, technology integration, enterprise risk management and regulatory compliance.
In the past the seemingly insurmountable hurdle of high cost always presented a reasonable argument for maintaining a patchwork of legacy systems, but today, in the face of increasing customer expectations and competitive pressures, the question is no longer can you afford to replace your bank’s core legacy system but can you afford not to.