Reluctance to Replace
It is only natural to expect, a typical large (tier 1) bank, with numerous partner systems linked to the core system, to be seriously concerned about the implications of any change to the core system or the processes around it. Some of these systems which would need to have one way, two way, online or batch interfaces with the core system are: payment and clearing systems, treasury, trade, securities, corporate loans, billing, credit and risk monitoring, reconciliation, regulatory reporting and data warehousing.
It is not just these interfaces and systems but the answers to several other complex questions, often with more than one approach or solution, which make the decision of core system replacement one of the most complex and challenging assignments for any banker. A sample of some of the other important and common issues and questions are:
- How can one ensure that organization-wide benefits of single customer view, common chart of accounts, common standards and processes are introduced without sacrificing the country specific variation like legal, regulatory, clearing and local market practices?
- What part of the product processes and core areas should be replaced or what needs to be left alone and interfaced as they may already be in a highly evolved and desirable end state and pose a franchise risk if replaced?
- Should it be a big bang approach or should it be a phased approach with a proper interim co-existence strategy until the clearly targeted end state is reached?
- How should the vendor’s product deployment and development phases be dove-tailed with the bank’s implementation schedules and the overall project plan?
As you can see, there’s no single approach suitable for all these issues. In spite of these and several other risks, banks cannot avoid the crucial decision of replacing the legacy core system.
Managing the Challenges of Change
The reason for procrastination is fear of the unknown, i.e. the consequences of the change rather than the cost of the change. In most cases it stems from the lack of effective justification and a case for replacement put forth forcibly to the senior management that addresses all of the attendant risks and the approach for mitigating the same. It is the responsibility of the IT department to act as the catalyst for the change process. The role of the vendors of the core system also needs to evolve considerably from the current ‘sellers’ of these solutions to ‘buying facilitators’. Considering the numerous failed core system replacements in the past, scepticism is not totally unfounded. But, for all of these challenges, there are several success stories. Banks like Citigroup, UBS, Shensei Bank and Deutsche Postbank have proven that these complex changes, however daunting they may seem at the beginning, can still be managed and do bring significant gains and advantages.
One of the biggest challenges is that the very people, possibly a couple of generations older, who introduced and have been a part of the current legacy systems and who have so efficiently tended to and extended the lives of these legacy systems, are likely to be scarce and unavailable. If the new requirements in areas of compliance and market pressures are anything to go by, then core system replacements are just waiting to happen and are just around the corner. These systems have been waiting too long and in some cases for 20 or 30 years. They are waiting to be replaced by something more modern and in step with the latest demands from regulators to comply with risks. Customers also deserve better banking alternatives and, of course, shareholders expect better returns for their investments.
The mainframe based legacy core systems that are reliable, stable and secure have served banks well, but are fast becoming too expensive to maintain and operate. Any bank that thinks it can continue to address the expectations of the ever evolving and sophisticated customer by continual patch work on the existing legacy core systems, thereby trying to extend the life of the ageing systems, will end up as a major loser in several ways. However, if this approach is just to buy time in order to make a prudent choice for the new system, then this could be justified as part of a long-term strategic decision. Yet, one cannot be oblivious to the fact that all costs and efforts invested in an old system would in the end be a ‘throw-away’ effort and cannot form part of the desired end state.
Before one embarks on the challenging task of replacing the core system, one must have a clear plan for all of the activities and also the teams involved. One should make provision for the fact that the key resources involved will be busy with their day-to-day activities as well. Hence, there is a need to identify a team of people to augment the core project expectations. One would also need to ensure that while the top management is fully engaged and involved, the stakeholders are fully aware of their responsibilities and are fully committed. The chain is only as strong as the weakest link and hence, in a project as critical and important as this, all issues must be fully addressed and there can be no compromises. One should provide adequate time and be realistic in ones’ expectations of the new system.
In the context of core system replacement, all efforts should be made to ensure that any chance to make necessary improvement is not lost. Since the replacement of the core system is not an event that happens frequently it would be the responsibility of those making the change to ensure that they do not include any process which would be seen as compromising existing benefits. They should also ensure that they do not miss this golden opportunity to introduce the best practices and standard processes.
One should look at the whole replacement project as an opportunity rather than a painful process to be completed and done away with as soon as possible. Hence, it is important not to focus the introduction of the new system on the technology areas of the bank. There should be a fair share of transition responsibility shouldered by the business arm and the branches impacted by the process of change. Unnecessary haste would only introduce completely avoidable risks and defects into the new system. It would also expose the bank to serious operational losses. Thus the very purpose of replacing the legacy core system would be defeated and it would neither be the software nor the technology but the lack of proper planning and execution that would be to blame.
Test and Train
The process of change will not be painless nor will it be short. It would certainly have to be a long haul. During the entire process of change, there has to be rigorous testing. The people need to be adequately trained to use the newer functionality so carefully and painfully introduced. One should consider all expenses incurred in training as an investment for the future. The introduction of a new system into the bank is akin to an organ transplant. The very success and acceptance of it in the new environment depends on this crucial aspect of effective training of the end users. Any new system is only as good as the use it is being put to. Thus, just introducing a new system without selling the concept of change and getting the users to use it optimally will not help the bank realize the true potential of the changed processes and systems.
Banks that take calculated risks will continue to reinforce their leadership position and make huge strides and significant gains before the rest manage to catch up.