Before a bank embarks on core banking targeted modernization, it needs to build a strong business case to justify the investment. Properly executed, a business case provides objective justification for the endeavor, based on both qualitative and quantitative analyses. This can empower bank executives and decision makers to agree on the merits of the business objectives for targeted modernization; it will help them to “buy in” to the future-state vision and the time and money that it will take to get there.
Core banking targeted modernization will only happen when there is a positive business case and strong support from the internal stakeholders on the necessity for targeted modernization. The decision makers will need to critically determine whether investing into new systems is warranted based on an assessment of the benefits versus the costs involved, along with evaluating the possible targeted modernization risks to ongoing business and existing systems, as well as the risks and costs of trying to maintain the status quo. Building a business case is essential to this process.
Where to start? A good first step is to outline, in the form of a Modernization Assessment, the bank’s business and technical strategy and short-term tactical business goals as well as the longer-term strategic goals over the next three to five years:
- Identify and articulate current pain points (the catalyst for change)
- Evaluate the competitive landscape (build versus buy)
- Envision how you want your bank to evolve (target operating model)
Include targets for market share, future product portfolio, customer base, customer retention and business operational costs. Having these points of strategic insight will assist with the decision, providing crucial information to have a true understanding of the total cost of modernization (TCM).
The Modernization Assessment has two dimensions. It examines the benefits of targeted modernization in terms of non-financial aspects, such as increased brand perception (customer retention), more satisfied customers (customer experience) and greater competitive advantage (increased customer adoption). Additional considerations include the impact on time to market, ensuring regulatory compliance, opportunities for cross-selling, product innovation and overall customer experience.
The Modernization Assessment also evaluates the projected costs and benefits in financial terms. Measures include the total targeted modernization costs involved, as well as proposed areas and calculations of potential cost-savings that will be achieved post-targeted modernization. Calculations should typically include upfront and recurring cost projections.
In terms of cost analysis, the core banking targeted modernization costs are comprised of upfront implementation expenses and ongoing maintenance fees. Upfront charges generally include payments for hardware, software or SaaS cloud environment and implementation services. Modernizing a core banking system also requires changes to supporting ancillary systems/solutions, interfaces, hardware and network. Likewise, there are training and implementation costs associated with re-skilling and re-deployment of people on new systems.
Over time the core banking targeted modernization costs are typically offset by savings in terms of FTE reduction by way of process optimization/rationalization, business and technical operational improvements, customer servicing improvements, reduced IT maintenance and more favorable cost of consumer deposits. For example, business gains come from higher revenues through increased sales per customer and growth in customer acquisition and retention; labor savings result from automation and improved employee productivity; and operational savings come from front-to-back office integration, which enables straight-through processing and consolidation of customer information.
When replacing legacy core systems with a new technology platform, the overall IT maintenance costs will come down, and future upgrades should become easier. Core banking targeted modernization improves competitiveness due to faster rollout of products, product innovation and product differentiation. This leads to tangible revenue-generating benefits such as an increase in market share and enhanced competitiveness due to reduced costs of consumer deposits.
The Total Cost of Ownership (TCO) for core banking targeted modernization, measured over time, is a key indicator. In some cases, the implementation services and any configuration/customization costs, can exceed the initial license fee. Therefore, the total cost of core banking targeted modernization, rather than just the initial license or subscription fee, becomes extremely important when deriving a targeted modernization strategy and assessment approach that best fits your bank.
The payback period for core banking targeted modernization will be expressed in a matter of years, the specific length of which will depend on the scale of the targeted modernization and the targeted modernization strategy and solution that is selected. The business case you develop will help connect the dots between the bank’s objectives, the short- and long-term costs of targeted modernization, and the ultimate benefits for your bank.
Don’t underestimate the importance of building your business case for core banking targeted modernization; it’s an essential first step in any successful core banking modernization journey.
In a future blog post, we will explore what business and technical domains should be considered during a core banking Modernization Assessment.