The use of "he" throughout this blog is only for the author's convenience. "He/she" is intended because there is no distinction in performance as far as the author is concerned. This opinion is based on 56 years of casual observations in the IT industry.
No survey had to tell me that.
First, allow me to come clean and state that I do not possess all the IT knowledge that exists in the world. Oh, you say you are not surprised! This blog is only about the knowledge one needs in order to make reasonably good decisions, especially regarding
the area of core system transformation. Core systems include four major parts: all deposit systems, all loan systems, financial systems within the bank, and customer database.
In the conduct of my client work for banks (321 of them), I focus on one thing. Teach them everything I know. And what I know is core systems and approximately 23 major categories (each category averages eight applications) of ancillary solutions that feed
and live off core.
These days, bank tech vendors are looking down their nose and seeing crumbs for revenue growth, while very large, generic systems integration companies, that don't know much about banking, at least have the benefit of being on the outside of "we've always done
it that way." These giants are viewing the early signs of a transformation brewing that will provide them with 20 years worth of billings. And with recent annual revenue declines, these are billings they sorely need.
So that we are all singing from the same hymnal, let me define the two groups of providers. Bank tech vendors include core companies such as FIS, Fiserv, Jack Henry, D+H, Temenos, Misys, Infosys, SAP, and 20 other smaller companies. They sell near ready-made
solutions to thousands of homespun community banks as well as approximately 200 top-tier banks located in money centers throughout the world. They know banking, they own solutions, they know how to implement, and they know how to support financial institutions.
These are very good bank tech companies and their market share numbers prove it.
Generic systems integration companies include IBM, Accenture, CSC, HP, Xerox, Cognizant, PwC, Deloitte, CGI Group, SAIC, and any defense contractor that would love to get a slice of the commercial market now that the U.S. seems to be getting out of the wars
business. (Did you hear that, Vlady?) These generic systems companies sell new ideas that they then build into proprietary IT products for clients. Think large for this group. They'll spend a million dollars of their own money to fund a proposal to a prospect,
because they know that contracts are in the multi-millions to billions of dollars, and they last for many years.
Transformation refers to moving banks from their 224-year-old business model (you noticed I didn't say anything about technology, and I meant business model) to the one that Amazon, Google, Apple, Microsoft, Linkedin, online retailers, and any Internet-based
businesses use. Simply stated, in terms of common characteristics, new-idea companies use more technology and fewer people to sell, deliver and service their wares. Banks, on the other hand, are still operating in the old business models, with some technologies
glued to them, using expensive human resources and facilities to do what technology can do quicker, better, more adapted to new-breed customers, and for less cost. Today's large banks spend 20% of their operating expense budget on technology, 55% for employees
and their benefits, and 25% to house and maintain their impressive outlets. This mix is killing them, and when banks make dumb mistakes like subprime mortgages and other bad loans, they either fail or get government bailouts. Not good business model options
in a world of volatility, swifter competition, new customer demographics, and real-time, on-the-go delivery channels. The solution for this antiquated model appears to be a much stronger adoption of technology-based banking to a level that produces reliable
margins for banks without scaring off valuable affluent customers, who for at least one more generation, will live by "touchy-feely" dependancy.
Since the 2008 crisis occurred, government regulators have been advocating risk management systems as appropriate remedies. Nice band-aids, but not effective as long-term solutions. Large banks have been paying fines and promising to do better, and indeed,
better they are. Until the next crisis hits.
There are 21,000 financial institutions in the world. Just in case small banks are now freaking out about my prognosis for transformation, rest assured this crisis affects only about 200 large banks worldwide. These large banks will be facing a major shock
- how to migrate to a new infrastructure without blowing up during the process. For them, this will not be just another horrendous conversion. It will be a six-year disruption project for each bank with a real possibility of failure at the end. To calm
the nerves of the uninitiated, I can promise that corrections in banking do NOT happen quickly, and therefore, there will not be a mad rush to this idea of transformation. If you see two large banks per year engaging in this daring exercise, it will be representative
of what another species does when confronted with danger - freeze and stare down the headlights.
The following "road map" to a new core system is presented to any bank's Project Manager. Here are the important steps when any financial institution embarks on a mission to replace its core system. And can we all agree that we're not talking slam dunks here?
Phase One - Discovery
• Know where the bank is heading (business strategy), and please make sure it is real, not just a wish.
• Know what's good about the present system, not just what's wrong with it. You'll need this to make sure you still get the stuff you like that your present system delivers.
• Listen to all complainers: customers, employees, management, regulators, board of directors, stockholders, and the press. Yes, in the case of the press, they love to take pot shots at the deficiencies of banks. Some are valid. Most are flattering. That's
how they sell papers and magazines.
• Do a fair and objective evaluation of all gripes. For example, these days, "legacy" is a negative label. Make sure legacy alone is not a reason to switch. Focus on what your present system cannot do because of legacy. Right now, 77% of new core sales
are so-called legacy systems. Did those banks make a mistake? Are successful vendors wrong to be selling core systems that carry an apparently derogatory label?
• Prepare a Requirements Analysis document that fits the bank, not the "Harvard Business Review." And certainly not Chase, BofA, Citi or Wells Fargo. The reason for the first task in this phase is to make sure you really know your bank so you can select
the core system that best fits your bank.
• Bring everyone together for a down-to-earth skull session. Arguments are invited; frothing at the mouth is discouraged. "Everyone" means anyone who wants to participate. Do not invite by title. In a small bank, it means every employee. In a large bank,
it means you can't keep the good ones away. In a mid-tier bank, every employee has skin in this game.
Phase Two - Analysis
• At this point, the project manager has the most important job in the bank. He has to be a consultant, financial analyst, bank CEO, salesman, systems engineer, operations manager, customer service manager, data security officer, marketing manager, cashier,
head teller, compliance officer, risk management analyst and auditor. Impossible you say. I agree. But somebody's got to do it, or don't waste time doing this project without the right leader.
• This analysis should result in two conclusions. Proceed with the replacement of the present core system or not. Consensus is an absolute requirement. Requests for further study are a cop-out. Indecision means the project failed.
• The project manager should be a person who has achieved widespread credibility within the bank. Title doesn't matter. He should support whatever conclusion is reached and convince the bank to follow him.
• A clean analysis is the best way to convince people to say yes. Smoke, mirrors and charm are the worst.
Phase Three - Recommendation to Proceed
This project becomes a no-brainer if the decision is to stay with the present system. That was the decision with 26% of my projects, and I made it for my clients. They were relieved; I went home happy.
• Create a work plan. List every task, person responsible, time allocated.
• My work plans are five months long, but not full time. Never missed a deadline.
• Fire anyone who says he can do it in less than five months.
• Nine mothers can't make a baby in one month.
• There is a built-in lag in these projects and inertia is in charge. Don't force it.
Phase Four - Vendor Evaluations (best candidates)
• I use 36 tools before I get enough confidence to face the lions. When the tools are ready, then I'm ready. All I can say is I have won 321 battles.
• There are at least 75 brands of core systems on the world market today, offered by 33 companies. I have that list. I can trim the list down to a dozen products after two days on a client assignment. Two weeks later the list shrinks to four and then we
get into serious evaluations. So far, this isn't magic. Most experienced consultants can do the weeding out. The toughest part is selecting #1.
• Train the evaluators - In a mid-tier bank, there are typically 35 bank employees that have skin in the game of the choice. They should know how to examine and line up their best impressions of core systems.
• Vendors are invited to spend two days to demonstrate their systems to an audience that will get to the real differentiating specs. Vendors know me and they know their target. They send their 1st Team to present. No rookies here, and you won't hear "I'll
get back to you on that."
• The audience completes my score cards with no fuzziness. They made their choice.
• We meet to see who won. It's not easy. Every vendor had a strong attribute, but we can't award four contracts. I then break the log jam and explain the reasons. Consensus is reached. We have a winner.
Phase Five - Final Report
My final reports are written for the bank examiners. Bank management knows what has to be done because they were part of the project's reporting phases. Bank examiners show up a year after go-live and they have to believe in what the Project Team has done.
My reports are complete, and they are not pretty because they contain full disclosure. Every document produced during the project. The bank examiners always grant a "1" to the bank.
The rest is between the selected vendor and the bank's implementation team. I'm off to my next assignment.
My next blog will cover Chase, BofA, Citi and Wells Fargo. They will NOT be part of the core transformation movement as only they and I know. Read it and you too will know why.