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Will the recession affect opinions towards rip and replace?

04 August 2009  |  4286 views  |  0

The big question

Rip and replace has sparked business debate for many years. Long-established core systems continue to age and with tightening budgets and a fast moving business landscape the decisions around if and when to replace them are now harder than ever.

 

Choosing whether to rip and replace, or to optimise the technology that you already have in place, is of course not just about operational cost reduction. Other elements to take in to consideration include future-proofing; longevity; scalability; richness of function; changes in compliance requirements; inter-operability; and advances in technology.

 

Until recently, companies were mainly concerned with how their technology would cope with business growth. Now they are also worried about over-investment in solutions that exceed their future capacity requirements, perhaps because of future strategic outsourcing decisions. It is increasingly important that companies have the ability to adapt, should they need to downsize corporate operations, or merge with another company in order to strengthen themselves against the recession.

 

Businesses need to evaluate how new systems will increase operational efficiency whilst weighing this up against the cost, time and adjustment involved in the replacements, particularly from the viewpoint of integrating new solutions in an incremental programme that minimises risk while maintaining ‘business-as-usual’.

 

Considerations

Ripping out an entire systems infrastructure and selecting and implementing suites of replacement core systems is frequently seen as an attractive objective by many financial enterprises and corporate treasuries. The task of maintaining older technology, working around its inefficiencies and continually patching functions and process connections to align with changing operational standards and requirements is costly both in terms of time and resources.

 

On the other hand, and particularly in the current economic climate, the replacement option is often continually deferred as it is perceived as unrealistically costly. This is particularly true where the cost has to be justified and underwritten by improved revenue performance in business divisions that are, for the time being, operating in challenging and uncertain marketplaces. Currently, it is difficult or even impossible for those divisions to sign off a commitment to cover a systems replacement investment over a reasonable term.

 

In addition to the stakeholder divisions’ cost: benefit ratio, there are other factors complicating the debate, of which the most critical relate to several different types of risk.

 

The first strategy for recession survival is commonly widespread cost-reduction, but analysts suggest that some organisations are now in great danger of cost-cutting their operations to the point where they are actually damaging their business activities, creating competitive disadvantage rather than advantage.

 

Unfortunately, but somewhat inevitably, the priority candidates for system replacement are frequently those which, because of their length of service, are the most heavily embedded and inter-connected in the overall infrastructure. This means that the replacement project team frequently has to address the most challenging upgrades at the beginning of the exercise. These core processes are also frequently completely business-critical, but the challenge has to be met. Unless the core processes are optimised first, much subsequent investment in peripheral technology will be compromised.

 

Successful replacement of such sensitive core processes with numerous interconnects depends in large part on the employment by the project team of truly adaptable and agile business process integration technology.

 

New Priorities

Advice from the analyst community is that recent events in the financial markets dictate that this is the time for banks, insurers, and major corporations (particularly those with large multi-national treasury operations) to re-examine and replace as necessary their systems in three capability areas. This advice appears to apply almost regardless of the profitability issue. It is positioned to be more of a survival issue:

 

Financial risk management technology

Especially in terms of its range of coverage and its ability to consolidate truly comprehensive enterprise-wide data and reporting

 

Cash management technology

Including both current global liquidity and working capital analysis, but also accurate forecasting

 

Customer service technology

Enhancement of customer service and maintenance of customer confidence are both critical to business continuity and growth, and this technology area is especially important where online connectivity and e-commerce, perhaps across multiple distribution channels, are also supplying sales and revenue data back to central systems.

 

An experience I encountered at Sterling Commerce that was particularly relevant and an urgent illustration of the latter followed a short-notice banking acquisition earlier in 2009. The merged company acquired a population of significant corporate accounts that were accustomed to a significantly richer online corporate banking service portfolio than the merged enterprise could match. Major loss of business was averted only by the very rapid and successful integration of replacement service application processes.

 

Whether companies choose (and are able) to rip and replace at least these priorities, or can only invest in improving and extending the life of what they have, it is crucial to manage a period of staged transition to overcome inherent operational risks. 

 

Consolidated, efficient and agile data and process integration is a prerequisite for either strategy. It allows businesses to test and manage system changes: ensure continuing connectivity across all internal and external data movement processes: enable fall-back in the event of unforeseen systems migration difficulties: and maintain business-as-usual throughout the transition. Smart business process management technology is the first requirement for execution of either strategy – often this is largely a one-time investment that will produce a return on multiple deployments over many years, as even the largest core system infrastructures are incrementally upgraded and replaced.

 

Looking outward and forward

If integrating new technology as part of a wider system, it is essential that it works in harmony, not only internally, but externally, providing seamless e-connectivity to the systems environments of partners and customers.

 

Many financial services business networks today extend across multiple delivery channels. Technical infrastructures have to bridge out to call centres, shared service centres, outsourcing centres, contingency centres, clearing and settlement agencies and many similar classifications of partner enterprise.

 

At the same time, the systems architecture must reach out to an increasing and demanding online customer base, where corporate clients in particular are seeking better, faster and more diverse services that are delivered in the format and over the media that they specify. In the global corporate banking marketplace, there are no reliably consistent global data standards. Banks, insurers and others must exchange data and transactions with customers in the way that those customers demand – they must ‘speak’ the customers’ language.

Replacement systems must have the integration agility and bandwidth to service this complex financial community diversity.

 

The last, but by no means the least important consideration that more companies are beginning to draw into the equation is the environmental impact/opportunity of ripping and replacing technology. Reducing a company’s environmental impact is no longer just a marketing tool but an important initiative assessed by compliance to government directives and procurement requirements.

Therefore businesses are comparing the energy-efficiency of legacy systems with both the environmental benefits and the associated power cost benefits to be gained from their replacement.

 

Nobody can predict exactly what future new challenges and obstacles the global economy will throw at the global financial community, but companies should beware of allowing ‘recession mentality’ to compromise and limit the efficiency of their operations. Whether the right solution is to rip and replace technology, or to optimise what they have already, it is important not to base decisions only on the short-term situation, but to maintain a balanced longer-term strategic view. History encourages us to believe that those businesses that will do the best in the next decade will be those that are planning for the up-turn now.

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