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Top 10 challenges banks face when implementing core banking transformation

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Top 10 challenges banks face when implementing core banking transformationCore banking implementations are one of the most complex IT programs. Most CEOs in Europe and the US are hesitant to change legacy core banking systems because of high failure rates. Bret Bolin, CEO of Misys, summarizes, “The risks associated with replacing a core banking system are considerable and the cost of failure is high. It is no surprise that banks’ CEOs and CIOs will only reluctantly replace core banking systems.”

“Changing a core system is a painful and difficult process,” said Bart Narter, Research Director, Celent. “Ripping out and replacing a mission- critical core banking system is not only very costly, but it can dramatically increase risks.”

At the same time, large European banks are faced with a dilemma brought on by a shifting business environment and stricter regulatory controls, which make change inevitable. Legacy systems are complex and costly to upgrade and maintain. Banks have to find a way to extend the use of their existing systems, while enhancing them.

When we look at the reasons for failure, some patterns and trends emerge. Based on our experience of core banking implementation, we offer the following insights into these challenges.

1. Identifying tangible and measurable business benefits – Core banking transformations execute over a span of several years. Organizations often fail to articulate their business benefits at the beginning of the program. In an ever-changing environment, where bank managements change periodically, new executives always face a challenge of cutting down on large scale expenses thereby inspecting Core banking programs under a microscope. Without well-articulated business benefits and sufficient buy-in of senior stakeholders such programs are always at the risk of being scrapped.

In a survey of 21 leading European banks from 10 countries conducted by The Boston Consulting Group in 2005,, respondents said that “most IT core banking renewals are suffering from significant overruns to cost and time, with current delays varying between roughly 25 and 60 percent over the original time schedule and budget excess varying between 10 and nearly 100 percent over the original estimates.”

2. Scope creep and change in requirements – Without well-documented business benefits, banks can easily lose focus.

Banks face mainly two types of challenges:

a. Availability of large budgets and commitments allow critical stakeholders to add unrelated requirements to the scope, thereby increasing the risk of delivery

b. Evolving and tightening regulatory scenarios force banks to adapt to changing environments at a faster pace. Banks often make the mistake of finding solutions to all regulatory changes in the core banking implementation, thereby risking the critical success factors of the program.

Multiple stakeholders often come up with divergent new requirements increasing risk as well as time and cost overruns. In a short time, business stakeholders lose interest and it becomes an IT-driven program. Most organizations fail to get senior stakeholder sponsorship and suffer from lack of direction, conviction, budget and guidance in the long run.

3. Ignoring Business Process Re-engineering (BPR) – Most organizations try to replicate their age-old practices and processes and make an attempt to fit old wine in new bottles. Legacy systems have developed on a

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need basis. Their architecture is complex and the banks themselves have limited documentation on how individual systems interact with each other. There needs to be focus on product portfolio rationalization and business process re-engineering with an aim to adopt, rather than adapt, the new package.

4. Underestimating the role of a systems integrator – Banks often fail to identify core banking transformations as key strategic programs, thinking of them as tactical solutions instead. Such transformational programs have the momentousness of open heart surgery, as opposed to regular enhancements which may be likened to routine treatment most banks are used to. Core banking will touch and impact almost all proprietary legacy systems. Underestimating such programs leads to ineffective management of risks and projects struggle with execution complexities, timeline extensions and budget overruns. Experienced systems integrators understand this challenge and work on an inclusive methodology to effectively manage risks on the hub as well as on all the spokes. Experience in large transformational programs lead system integrators to identify the black swans in any of the spokes much earlier.

5. Governance, communication and stakeholder management – Large banks operate in the model of Functional Organizational structures. Such a governance model seldom works for core banking implementation. When a program intends to transform and even rewrite entirely how business in future should be conducted, organizations need to be pragmatic and realign themselves as Projectized Organizations. In case

organizational challenges do not allow for complete re-alignment, a Strong Matrix Organization structure is best suited. The program team should be chaired by a senior management representative who can influence domains and has direct access to the board and executive committees within the bank. It is imperative to communicate and manage stakeholders effectively. This creates a positive buzz internally within the organization and in the external world. It also keeps skeptics away and brings the entire team to focus on a winning strategy.

6. The Big Bang Theory – Banks are faced with a question of whether to go for “big bang” transformation or phased implementation.

Such a choice needs to be made based on:

a. Availability of a skilled team

b. Risk appetite versus value realization

c. Ability to execute

61% managers reported major

conflicts between Project and Line

organizations

32% of companies performed redundant

work because of unharmonized

projects

Source: The Art of Project Portfolio Management, by Sacha Meskendahl, Daniel Jonas, Alexander Kock and Hans Georg Gemunden

In April 2006, Emirates Bank decided to revamp core banking using Finacle. In 2007 the Bank merged with National Bank of Dubai forming ENBD. This increased risk as requirements of the merged entity now needed to be looked at. The program went live on a Big Bang Strategy in Nov 2009 with schedule slippage of 7% and cost overrun of 18% even though merger had doubled project size. In a field where massive overruns are common, that’s a spectacular achievement.

Source: Why your IT project may be riskier than you think - By Bent Flyvbjerg and Alexander Budzier

http://www.sbs.ox.ac.uk/centres/bt/Documents/RISKYICTHBR3%200REPRINT.pdf

In a survey conducted by The Boston Consulting Group, in 2005 involving 21 leading European banks from 10 countries most respondents prefer a mutli wave approach as against a Big Bang implementaion.

Source: The Boston Consulting Group suvery conducted in 2005 involving 21 leading European banks from 10 countries on the topic Core Banking IT-System renewal

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d. Control over change requests

An incorrect choice may lead to dilution of the program and increase risk of execution.

7. Implementation methodology and winning formula – Transformational programs need robust and proven implementation methodologies. “One solution fits all” attitudes seldom work. Banks need to step out of their comfort zone of internal implementation methodologies and embrace methodologies suggested by experts who have been there and done that.

8. Customizations – Customizations are necessary and imperative in core banking systems. These help the bank create sustainable key differentiators in the market and provide added value aligning to the core business objectives of the bank. However, it is important to evaluate how much customization is necessary. Banks often make the mistake of customizing so much that they stop harnessing the benefits of choosing a package, build a complex solution that becomes difficult to maintain in the longer run, create exit barriers to upgrade and increase total cost of ownership. Banks should challenge each and every requirement and only customize when the business

benefits of doing so outweigh the complexity of the solution and the impact on timelines and costs.

9. Integration with best of breed solutions – A core banking system can succeed only when the integration with legacy and best of breed solutions is seamless. Key design decisions should be arrived at carefully, with a focus on data redundancy, performance impact, workflow automation, and as far as possible, straight through processing. The complexity of the solution needs to be minimized, where design decisions are driven by strategic solutions aligned to simplified solution architecture.

10. Data Migration – Old legacy systems often come with lack of documentation, missing data and inadequate expertise. Data mapping, cleansing, extraction and transformation turn out as biggest bottlenecks. The complexity increases manifold when there is a need to migrate data distributed across multiple legacy systems. Faulty designs and incorrect migration can derail the execution plan. Banks should focus and put a lot of emphasis on this aspect of the program.

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Venkatesh S. GIndustry Principal, Finacle, Infosys

Arindam GhoshPrincipal Consultant, Finacle, Infosys

References 1. w w w. i tp.net/590787-misys-announces-

m o m e n t u m - b u i l d - i n - c o r e - b a n k i n g # . UNrmX-Q8CSo

2. w w w. i tp.net/590787-misys-announces-momentum-build-in-core-banking#.UNrmX-Q8CSo

3. www.bcg.com/documents/file14774.pdf

4. en.wikipedia.org/wiki/Black_swan_theory

5. pmstudycircle.com/2012/08/what-is-a-functional-organization structure/#axzz2GHE8Of2d

6. pmstudycircle.com/2012/08/what-is-a-projectized-organization-structure/#axzz2GHE8Of2d

7. pmstudycircle.com/2012/08/what-is-a-matrix-organization-structure/#axzz2GHE8Of2d

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