The Core Systems Dilemma

Banks looking to upgrade or replace legacy core systems have a choice: Do it all at once or gradually. Many factors go into deciding which is better for a specific bank.

Jonathan Camhi also contributed to this story.

One of the major issues the banking industry is tackling is whether to upgrade or replace legacy core systems long past their sell-by date. As banks increasingly focus on getting a complete, cross-channel view of the customer, upgrading core systems technology is a vital part of that.

But as more banks pursue core replacements, they face a choice: Go with a "rip and replace" approach, which can carry more risk but offers more immediate benefits, or opt for what many see as the safer "evolutionary" approach of upgrading piece by piece. Both approaches have pros and cons, and which path makes sense for a bank depends on many factors.

Big Bang: Customer-Centricity Comes Faster

According to Bob Vokes, a partner at New York-based management consulting firm Novantas, the choice between a "big bang" approach to core replacement and a piecemeal one boils down to risk mitigation vs. business creation.

Bigger banks must keep in mind when considering a big bang approach their ability to effectively lock down the business while they do it, Vokes says, whereas a smaller institution needs to consider whether it's able to take on the risk associated with such a project. And while those risks are real -- "the road is littered with failures much more than successes," Vokes says -- there are also many benefits, too.

By completely replacing a core legacy system all at once, a bank gets closer to achieving a complete cross-channel view of the customer, Vokes says. "The benefit is having systems that can get you real-time feedback, seeing how the customer's position is changing, and how they interact with the bank in all the different channels," he adds.

Another important factor to consider when looking at the big bang approach is making sure there is executive and company-wide support for the project, says Eric Stine, senior VP of financial services for SAP America Inc., the New York-based arm of business software provider SAP. "It really is a cultural question," Stine says. "There needs to be an executive commitment and a grassroots commitment to making this change."

Stine also advises banks pursuing this approach to have a contingency plan in place in case the project is delayed, even if it costs more to do so. "With a single cutover, if one function gets delayed it all gets delayed," he says. "Money spent on temporary interfaces may seem like a throwaway, but the cost if the project is not delivered on time will be greater."

Stine also acknowledges that there are many institutions in the risk-averse banking industry that may shy away from this type of core conversion, despite the benefits.

"Given the current regulatory environment, the level of risk aversion in U.S. banks is higher than anywhere else in the world, and the progressive modernization approach is seen as lower risk," he says. "But even though these projects might be more risky, they allow you to accelerate the benefits" of having an updated core.

However, not all banks are as risk averse, says Don Trotta, senior VP and global head of financial services at SAP. In economies doing relatively well, such as Canada and Australia, banks have been more aggressive in putting in new systems, he says.

Also, he says the size of a bank matters. A large Tier 1 bank "is probably not going to do a rip-and-replace in one weekend," he notes. "But a smaller, highly integrated organization can be at a point where it makes sense."

Small Bank Advantage?

The big bang route may provide the most value to smaller banks looking at a core transformation, says Tom Berdan, VP of product management at Lake Mary, Fla.-based Harland Financial Solutions, whose clients include community banks. "It can be very costly for smaller banks if they try to deploy or manage multiple core systems over time," he says.

Coming out of a big bang core replacement, banks will benefit from moving from an account-based system to a customer-based one, Berdan says, because they won't have to look up multiple accounts to see how much a customer is worth to the institution. Also, he notes, doing a piecemeal or evolutionary replacement has the downside of creating a duplication of efforts during the migration from one system to another. "Running two systems for a period of time can be a burden on a bank's staff," he says.

Ultimately, what matters most for a bank considering the big bang approach is having the necessary project management and discipline, Berdan says. "It takes commitment from the bank's executive leadership team," he adds.

Whether a bank chooses to go big bang for a core replacement also depends on whether it's looking at a best-of-breed approach to its core systems or a fully integrated, single-vendor solution, says Joe Reilly, executive VP and CIO of Zions Bancorporation ($53.4 billion in assets) in Salt Lake City. A bank with a best-of-breed core system would find it extremely difficult, if not impossible, to go with a big bang replacement, he contends.

Like Berdan, Reilly believes the big bang approach may be best suited for smaller banks with fewer systems to be concerned about. "Smaller institutions running an integrated 'bank-in-a-box' system can do a cutover over one weekend," he says. "But the larger and more complex the bank is, the more you have to think about how you're going to mitigate risk."

Step-By-Step: Less Risk, New Challenges

While smaller financial institutions may be able to pull off a big bang core replacement, larger ones with more complex systems usually opt for a phased approach.

Banks with more than $5 billion in assets tend to do a staged replacement, and those with under $5 billion usually do a rip and replace, says Anne Miela, VP of program and product management at Open Solutions, a core provider in Glastonbury, Conn. "The larger ones have a more spread-out branch network and their data centers can be more spread out, too," she says. "They could have their headquarters in Detroit, but their mortgage center is in Dallas."

Many banks of all sizes simply have too much complexity in their legacy systems to be able to pull off a big bang core replacement. "You have to consider the complexity of the current systems, the architectural complexity and the number of users, as well as the vintage and range of systems. Some places have 30- to 40-year-old systems in place. That makes it impossible to do a big bang," remarks Ashwin Goyal, VP of product management at Oracle Financial Services in Redwood Shores, Calif.

However, while the step-by-step approach reduces risk for these larger core replacements, it also presents new challenges, such as working with coexisting systems during the replacement and managing such a large organizational change over time.

Oracle recently released a core banking system targeting bigger banks looking to replace their aging legacy core systems. It's designed to help them do a step-by-step core replacement; each architectural component of the core system can be broken down and managed on its own without affecting the other parts of the system, Goyal says. This eliminates a great deal of risk in the replacement, which is part of the trade-off in taking a phased approach: There's less risk since the whole system isn't being replaced at once, but it takes more time and more money.

Oracle's system lets architectural components of the core moved to the new system function with the architectural components still on the old system during the transition. This helps address one of the chief challenges of a step-by-step core replacement, Goyal says: working with coexisting core systems during the replacement. He compares a phased core replacement to open heart surgery (a common analogy in IT), where the old and new veins (systems) are running at the same time during the surgery (upgrade).

It's critical for banks to plan how to manage coexisting systems during the testing phase, Goyal notes. He recommends that they avoid splitting the customer relationship between the old and new systems during the replacement. Doing so, he says, can lead to confusion for customers and front-end associates, costing time and money.

Although a gradual core replacement can be a drawn-out costly process, Bruce Livesay, CIO of First Horizon, the holding company of First Tennessee bank, managed to complete a step-by-step core replacement for the bank under budget and ahead of schedule a couple of years ago. The Memphis bank ($26 billion in assets) broke the project into manageable short-term goals and that helped the project gain momentum as those goals were met. If you do the replacement with incremental deliverables, "you can get some wind in your sails," he says. "Focus on shorter-duration goals and celebrate them when you've accomplished those goals," he says. "That helps in dealing with burnout."

Managing Changes

Making sure that the staff doesn't get burned out while also managing their training, expectations and morale during such a big organizational transition is often one of the biggest challenges for banks doing a phased replacement, Livesay says. It's often difficult to get those working on a bank's business side to buy into an IT project that takes so much time and money, and that also changes the way everything has been done for years at the bank.

First Tennessee handled this challenge by creating change management teams that helped address issues arising during the replacement. Each team was headed up by someone from the business side of the bank. This way the business units really felt that they were part of the project and were motivated to participate in the changes taking place, Livesay explains.

If management of this kind of sweeping change isn't done well, it can unravel the whole project, says Chris Williams, the head of core banking services in North America for Accenture, an outsourcing and consulting firm. He recalls one core replacement project where the core conversion went well, but not all of the bank's branches did the training and adopted the new business practices that were required for the new systems.

Constant communication is required across all levels of the organization to maintain project buy-in and focus when doing core replacements, Williams stresses. "Managing the business case for the project is very important … Banks with the most success manage their business case throughout the process. The business case is a living, breathing document. This is key to attaining commitments from each part of the organization in this endeavor," he says.

Williams recommends that banks start by taking on smaller parts of the conversion in the first steps of the replacement. This will help them learn lessons during the early stages of deployment that they can then apply to the more important steps later on: "First you crawl, then walk, then run," he says.

[Core System Modernization Makes Customer Centricity Possible]

Open Solutions' Miela agrees that banks should take small steps at first with the core replacement, adding that most of them start out by transferring their core deposits to the new system, as First Tennessee did. Front-office parts of the business, such as deposits, are usually less complex and easier to convert than lending and commercial accounts, which are usually saved for the later stages of the replacement.

The most important part of managing a staged conversion may be simply setting a deadline beforehand to get each stage done, says Lizette Nigro, VP of product and brand marketing at Open Solutions. Some banks that have worked with Open Solutions only set deadlines for switching their deposits during the first stage of the replacement, she says. Without additional deadlines to keep them on target further along in the process, some of these banks gave up on the project midway through the conversion as costs and delays mounted. "You have to have a master plan and stick to the schedule," she urges.

Having that master plan laid out before the conversion helps the bank keep its eye on the project's long-term goals as it deals with the interim communication and organizational challenges.

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio