The Value of Bank Software is Based on a Bank's Skill in Using It, Not the Vendor's Price

Before I go any further, I know what you're thinking. I'm not talking about ASP, or outsourcing, or cloud computing (if that idea ever becomes popular in banking), where the cost model is based on how many transactions a vendor processes for a bank. Nor am I talking about tiered pricing where the license fee for core software is geared to the FI's asset size, from $50k to several million dollars. My point is more subtle. It's about how much value a bank can squeeze out of a piece of standard applications software. I can best describe the situation with examples.A prospective buyer is looking for a vacation home. He makes an offer as follows: "I plan to use my condo no more than two months throughout the year and it will be vacant the rest of the time. So what if I pay you one-sixth of your price?" Only in Arizona, Florida and Vegas will that work, and it has nothing to do with usage. And it certainly won't work with any software vendor.

Bank tech vendor A sells a new IT system to Bank X. Whether it is an in-house solution or an outsource service doesn't impact this example. We all know that in the case of in-house the bank will own the resources and be responsible for operations. In the case of outsource, the bank relies almost exclusively on the third party processor. So this is not a discussion of in-house vs. outsource. Regardless of the method used, there is a huge waste of money spent because most banks never get to the point of using the software to the fullest of its capabilities. And please understand that in both in-house and outsource, the vendor is charging for the full price of the software, not the extent to which it is used.

Sometimes the low usage of software is deliberate. The bank wants something equivalent to an automated posting machine. After you learn the basics, you're done. Sometimes it's elusive. There's a huge gap between the workers and the management of a bank. The workers are content if they complete a transaction such as in the case of a teller. Management, on the other hand, looks for the esoteric attributes the software vendor promised, but hardly ever does an ROI exercise a year or two after the acquisition to determine if the new optional capabilities are paying off. Sometimes the problem is employee turnover and related to that, the lack of training for the replacement. Every time an employee leaves, a piece of knowledge leaves with her/him. What is the cost to replace five or ten person years of system experience? What does it cost to train a new employee? And finally, there is the question of system evolution. Bank software has grown exponentially, while bank employees have not kept up with the sophistication of software. Ask any bank how much they spend on formal IT training and you'll hear two answers: "zero" and "they pick it up on the job."

The net result of this predicament is banks use only a portion of today's rich and robust systems. Saying it with a touch of Bill Maher sarcasm, bank software is a lot smarter than bankers. If you believe the gossip mill among vendors, their software is used only about 20% to 60% of its capacity. I know from first-hand experience, it's not as high as 70% and that's bad enough. What do you buy that you use only 70% of?

In every case, sub usage is deleterious to any bank's performance, and part of the problem may be that vendors are not selling their consulting services to their customers. I'm sure every respectable IT vendor has a legitimate rebuttal. So in defense, I should confess my job here is (1) to prove the problem exists, and (2) why I'm highlighting the responsibility of the vendors.

I know the problem of sub use exists because on every assignment I have conducted I classified deficiencies of a bank's IT operations according to seven categories. The most popular deficiency was, "The capability exists in your present system but employees don't know how to use it."

I know that vendors are not aggressive about selling their consulting services to existing customers because only two core vendors in my report supplied a solutions profile called "Consulting Services." In a report where vendors are competing for more is better, does that sound like someone did an oops and left out the service? Vendors know their products better than anyone. So their sales pitch should begin with, "We have a vested interest in your ability to produce high performance, data security, risk mitigation, superb customer service, loan management, recovery of unanticipated disasters, regulatory compliance, account profitability, increased marketshare, and ad hoc reporting, using the power of our systems. Let us come in and show you how your bank can score higher grades in those areas."

I recently blogged about the fact that I read all press releases. They all announce product successes, but I have never read one that said, "Our customers are more successful because we help them achieve their goals by making sure they use our products to the fullest."