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Replace the core? More say "yes"

Regulatory, demographic, and strategic plan changes argue for an upgrade. Banks and vendors offer suggestions

Unlike the situation for many banks, the decision for Lake City Bank to completely replace its core system was easy. Its core vendor of 27 years announced that it was discontinuing the particular product the bank used.

“We had no choice but to consider what our next step would be,” says David Findlay, president of the $2.7 billion-assets bank in Warsaw, Ind. Nevertheless, he adds, “We looked on it as an opportunity to step back from our core operating platform and determine what we really liked about it, where there were challenges in the platform, and what we thought the future is going to hold in terms of requirements of us as a service provider for our customers.”

Many other banks, of all sizes, are starting to take that step back and re-evaluate their core systems. These include BBVA Compass, a $64 billion-assets bank in Birmingham, Ala., and Hudson Valley Bank, Yonkers, N.Y., with $2.6 billion in assets. That’s not too surprising. Research last year by Celent Inc., indicates that 23% of banks consider their core systems dated and uncompetitive, while 17% say they are highly likely to replace their systems in the next three to five years.

A wide range of factors lead to such consideration. “As a growing bank committed to providing our customers with the latest technology, we knew that we needed to look ahead to assure that our systems can grow with us, offer flexibility to quickly and effectively add new products, and support our overall short- and long-term strategic goals,” says James Landy, president and CEO, Hudson Valley Bank.

Similarly, Manolo Sanchez, president and CEO, BBVA Compass said in a statement, “In this new banking environment, having an efficient and highly flexible technology system is critical to outperforming the competition and meeting new regulatory requirements. We can increase our focus on the rapidly changing needs of our customers, provide them with more personalized and innovative services, and increase the efficiency with which we deliver our products and services to market.”
 
 
A daunting task
All that said, it is not an easy decision to make.

“A core conversion is the largest technology operations project the bank will go through,” says Anthony Jabbour, executive vice-president, FIS. It’s like a heart and lung transplant. Managing the risk is important. Communicating about it is important.”

“This process is difficult. It needs top-level buy-in to support the top-level business objectives of the bank,” adds John Macaluso, senior vice-president for bank solutions, Fiserv.

Bruce Voelker, managing director for banking in North America for Accenture, checks off the various factors pushing banks to take on this daunting task.

“There is tremendous regulatory change coming at the banks, so they have a lot of work to do to meet the compliance needs of new regulations. You have aging systems that are hard to maintain. There’s the growth challenge all the banks have. They are looking for flexibility and speed to market. Then there’s the shift going on from a product-centric to a customer-centric focus.”

Fiserv’s Macaluso expands on this latter topic. “[There’s a need] to drive and support the technologies that are around social media, 24/7 access to information, being able to allow the bank customer to do more self service,” he says. “The new dynamic, the new bank customers, want to be self sufficient but they want their relationship with the bank to be strong and loyal.”

Findlay, of Lake City Bank, echoes these sentiments. “Community banks like us, and even larger banks, we rely substantially on the core system for what we can offer our customers.”
 
 
Get everybody on board
Given all that, how do you convince all the stakeholders—board, staff, stockholders, and customers—that this is the right thing to do? Four words: It’s good for business.

“You have to be able to establish a business case around growth, customer satisfaction, and customer retention that makes this a worthwhile investment,” says Voelker.

“The first assumption is that you have a business plan that is led from the top, from the board level, that says we have to expand to or within a particular market, or we need to offer a certain set of services, or we’re looking at a particular demographic,” says Fiserv’s Macaluso.

“It was clearly a business-driven initiative,” says Howard Bruck, chief information officer at Hudson Valley Bank. “Every department head was intimately involved and the final recommendation was made by a committee of executives. The board was regularly updated on our progress and their strategic input was included into the process.”

“We try to get as many quantifiable metrics [such as ROI] in place as possible,” says FIS’ Jabbour. “It’s important to do that up front and all the way through the decision process, all the way through the implementation process, all the way through the annual strategy meetings we have with [bankers] or whenever we meet with them afterward, always coming back to ROI.”

Adds Macaluso: “For too many years there was a desire to do core changes or technology investment for the elegance of technology. Those days are over.”
 
 
Push the button or phase in?
In terms of how long a core conversion process takes, it depends on the size and complexity of the bank. The various vendors gave estimates of between “several months” to as long as two years. What seems the most reasonable estimate is, as Jabbour says, “The right approach is as long as it takes.”

In Lake City Bank’s case, it took a year between the selection of the new core vendor and the day the button was pushed to complete the change. Its conversion plan was somewhat unusual, though, as Findlay explains: “We had over 3,000 reports that were generated out of the old core system. Over 80,000 accounts resided on that system. It took a full year to do pre-conversion due diligence planning that all culminated on Friday, April 15. We effectively shut off [the old system] and turned on [the new system].”

While such an abrupt switch isn’t unheard of, vendors generally recommended a more phased-in approach.

“The most successful migrations are those that occur where you mitigate your bank customer-facing software changes, spread them out. When you get all of [those] done, then you do a back-end change,” Macaluso says.

Jabbour also urges a staged implementation, such as installing ancillary systems early—image archive, EFT, loan origination, for example. “Then when we do the final step of the core conversion you get the core functionality [plus] the benefit of integrating those already-installed channels. There’s a double lift.”


Some idea of what it costs
Cost is also hard to pin down. Again, it depends on the size and complexity of the conversion. Generally, the vendors say costs are market driven in a competitive environment. “I’d ask the question in a different way,” says Jabbour. “How much is it worth? What value does it bring?”

According to a 2008 ABA case study, Fauquier Bank, Warrenton, Va., then with $570 million in assets, committed $500,000 to convert its core system to a Fiserv product, or 17% of its IT budget. Cost savings over the six-year contract were expected to be $600,000. However, six months after starting the new system in 2009, that estimate had grown to $1 million.

Lake City Bank’s Findlay says there were significant costs, both soft and hard dollar, involved in the bank’s year-long conversion review and execution process. The bank had a conversion team of approximately 35 people that spent a majority of their time preparing for and executing the conversion, he says. In addition, nearly every employee spent time at Lake City University, the bank’s training facility, learning the new system.

“We did not see benefit to tracking these expenses as they were not incremental costs to running the business,” says Findlay. “We did budget for conversion-related hard costs such as travel expenses to visit potential vendor sites and for due diligence site visits. In addition,” he continues, “there were conversion execution bonuses, overtime and in-site meals that we also budgeted for. These costs were more than $100,000.

“While the costs inherent with the conversion were significant,” Findlay sums up, “they were well worth it as we are now able to deliver enhanced features and functionality with the FIS core that our previous core system could not.”


Unintended consequences

Things never go exactly as planned, so you need to allow for that.

“Regardless of how much planning you do, something will happen differently than you expect,” says Voelker. “There needs to be strong, centralized command and control throughout the implementation, so decisions can be made, directions can be changed, and things can be communicated quickly and consistently.”

Vendor-bank alignment is crucial, says Macaluso. “The No. 1 thing is a full understanding on both sides of what the objective of the conversion is…You have to line up the goals of both organizations, the vendor and the bank, to have a truly successful conversion.”

Findlay says his bank’s conversion went extremely well—with one exception having to do with the main call center. While the bank anticipated a heavy increase in calls by boosting staffing by 50%, the number of telephone lines coming into the center proved inadequate. For a while, customers only received busy signals, says Findlay, until new lines could be added 48 hours later.


Measuring success
Success can be measured by both tangible and intangible means.

“If we establish metrics up front and if we’ve had good communications all the way through, we should be able to look back and see how we’ve performed together,” says Jabbour. He adds a less-measurable, but compelling example regarding staff feedback: “After a branch conversion, he says, “one employee says to the CEO, ‘This changed my life.’ Just that one comment led to a number of other discussions we’re having with the bank.”

“In the end,” says Voelker, “customers and employees are where you see the results. Those are what turn into the financial results.”

At Lake City Bank, success is measured by the absence of complaints and the onset of customer compliments. Says Findlay: “We have been very pleasantly surprised by how many customers have taken the time to comment on the changes, the improvements in the system, and how much they’ve appreciated the added capability in the new core system.” •

Tagged under Technology,

John Ginovsky

John Ginovsky is a contributing editor of Banking Exchange and editor of the publication’s Tech Exchange e-newsletter. For more than two decades he’s written about the commercial banking industry, specializing in its technological side and how it relates to the actual business of banking. In addition to his weekly blogs—"Making Sense of It All"—he contributes fresh, original stories to each Tech Exchange issue based on personal interviews or exclusive contributed pieces. He previously was senior editor for Community Banker magazine (which merged into ABA Banking Journal) and for ABA Banking Journal and was managing editor and staff reporter for ABA’s Bankers News. Email him at jginovsky@sbpub.com.

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