Core Competency: The Case for FSI IT Modernization

Ed Page - Protiviti ChicagoBy Ed Page
Managing Director, FSI IT Consulting Practice Leader




In the financial services industry (FSI), “too big to fail” has a corollary that applies to core data systems. Call it “too big to fix.”

FSI companies are technology businesses. Every product and service they offer is technology-enabled, and the rapid evolution of mobile banking and digitization of processing makes technology even more critical.

The technology at the core of many of these companies, however, is outdated – layer upon layer of aging information technology (IT) systems, including mainframe computers dating back to the 1960s.

This dinosaur-age infrastructure (in technological ages) means high maintenance costs, ever-decreasing supply of knowledgeable staff to support it, and degraded business agility, among other things.

Add to this mix next-generation financial companies and businesses, which enter the market unburdened by legacy systems and ready to reap the competitive advantages of new technology from day one, and you, the bank with an outdated core system, now face the very real risk of being left behind.

With this state of affairs, one would think banks are scrambling to modernize their cores. Not exactly: Less than one-third of companies are considering core modernization, according to the latest Protiviti research. This is understandable: Core modernization projects can last years and cost hundreds of millions, even billions, of dollars. An IT executive wishing to make a business case for a project of this size, when the old systems continue to chug along, faces an uphill battle, to say the least.

Instead, many financial institutions forced to meet current market challenges do so by wrapping the old core in new functionality. While this practice costs less in the short run, it just adds complexity, and kicks the outdated infrastructure issue can down the road for someone else to deal with later.

There is reason for hope, however. FSI respondents to Protiviti’s 2015 IT Priorities Survey identified some important catalysts driving them to replace core systems. The three main ones are risk mitigation (aging technology and/or aging workforce): 64 percent; cost savings: 20 percent; and revenue generation (e.g., greater product/service innovation, time-to-market): 15 percent.

As FSI IT managers, aided by these catalysts, seek to make the case for core modernization, there are several approaches they can take to reduce sticker shock and minimize the risk of service disruption associated with an all-in core upgrade.

The lowest-cost option, and a good starting point for any IT transformation, is to clear the underbrush. The evolving nature of IT infrastructure, over time, can lead to an accumulation of redundant and non-productive technology. Simplification can streamline processes without affecting customer-facing services, improve performance, and lay the groundwork for more aggressive core modernization.

When it comes to actual replacement, a phased approach is another way to ease the pain. The phased approach consists of launching new functionalities incrementally and slowly replacing portions of the core over time. This beats “big bang,” or full, core replacement in terms disruption and cost, and although maintenance of old systems will continue to be needed for a while, the problem is not pushed indefinitely into the future. A recent Protiviti white paper on the subject covers these and other core modernization options.

Managing change takes skill and courage. By developing a well-reasoned plan for IT core migration you can help your organization cut costs, increase revenue, and mitigate the growing risk of an embarrassing IT-driven strategic crisis. And while doing nothing is certainly an option, I wouldn’t suggest you stake your career on it.

One thought on “Core Competency: The Case for FSI IT Modernization

  1. Pingback: FSI CBOK Study: Effective Assurance Alone Is No Guarantee of Internal Audit Success | The Protiviti View

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