BAI Banking Strategies
6 August 2014
Retail banks have managed to get by for decades with complex, overlapping and aging IT systems. Any pressure on banks to simplify their environments has, in many cases, been suppressed by the complexity, high cost and risk associated with major technology programs. The recently published Kelly Review identified the failed re-platforming program of the UK’s Co-Operative Bank as a major contributing factor to its sudden capital shortfall, highlighting just how significant the risk of failure can be.
Despite the risk of failure, the problems of aging and overly complex IT environments must be addressed and the pressure to do so is increasing. Banks that do not take action risk high-profile system outages and will also find it harder to innovate and meet their customers’ needs.
There are understandable reasons for retail banks to have complex IT environments: the broad range of products requiring a large number of specialist systems; the differing technology foundations for these systems; and the ever-evolving methods used to connect these systems. As a result, each system will have its own customer data, product definitions and business rules. In addition, having grown by acquisition, many organizations have not merged their systems onto common platforms, preferring instead to maintain different environments for each brand.
This complexity comes with an increased cost of ownership, not just in hardware and software licenses, but most significantly in development and integration costs as each business and regulatory change must be replicated across many different systems. This situation also leads to increased risk, due to the large number of possible failure points and difficulty in understanding the impact of changes.
However, reduced margins, increased competition and high-profile systems failures are finally pushing systems simplification up the agenda. Within the first quarter of 2014, banking system outages have occurred across the globe and include Barclays PLC, Nationwide Building Society in the UK, Bank of Austria, Australia’s ANZ and TD Bank in the U.S., amongst many others. This highlights both the stresses that legacy systems are under and the increased expectation of 24x7 availability of banking services.
Simplification is vital to ensure the on-going viability of the business, which will lead to large, high-risk programs. How should banks proceed with these programs, when so much is at stake?
Follow a methodical process. Architecture designs, technology solutions and implementation techniques can reduce the risk of a major legacy technology replacement. Service Oriented Architecture, Business Process Management and Agile are good examples of each. None of these are, however, “silver bullets” to guarantee success. It might sound boring, but the usual principles of having a clear, well communicated understanding of the objectives, appropriate levels of forward planning, on-going stakeholder management and a pro-active risk management approach must be followed. Business units cannot step back and allow IT to “get on with it.” Getting new technology into production shouldn’t distract from the underlying and complex business goals.
Take incremental steps. Although a major modernization or re-platforming program (known as "core replacement" in the U.S.) should be designed to set-up the bank for future success, this does not mean that it should provide all of the desired functionality and innovation immediately, or even that all existing legacy features will be retained. These programs are inherently complex, and every effort must be made to contain the risk by managing scope and focusing only on the core of what the business needs. There will be inevitable compromises in functionality that can, and should be made, to contain the cost and complexity of the solution. Challenging the stated requirements robustly, both within IT and the business, is essential to ensure that every customization is justifiable. This could require analysis of real-life business practices that have never been carried out previously, but as the sorry tale of the Co-operative Bank has highlighted, avoiding biting off too much is of critical importance.
Clear lines of responsibility. As banks start to tackle their legacy technology challenges, it is vital that each level of governance within the bank has a clear understanding of the program’s status and risk level. This needs to be extended all the way up to the appropriate board committee, as a core system replacement will impact the very core of the business. This cannot be achieved simply by requesting a report from the program. To achieve this, a culture of openness and transparency must be nurtured; otherwise bad news and un-mitigated risks will never be raised. Secondly, executive and senior management must have a strong understanding of both the nature of the program and also the general and specific risks involved.
Success in simplifying IT systems demands a level of rigor and diligence much higher than any typical program of work within any given bank. However, the reward for banks that are able to simplify their IT environment while containing the risk and cost of such a program, are plentiful.
Dr Simon Williams is a banking technology expert at PA Consulting Group