Mistakes to Avoid When Purchasing New Hardware. Cornel McKay Manager, Hardware Solutions

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1 Mistakes to Avoid When Purchasing New Hardware Cornel McKay Manager, Hardware Solutions

2 Technology Procurement Present and Future According to a recent survey by American Banker Research, capital spending among banks is due to increase in 2013 and IT will be the leading recipient of the new cash. This December 2012 polling of bank executives stated that information technology will be the top beneficiary of new bank investment. During 2012, Celent also conducted research on how banks in North America will invest in technology. They found that hardware will occupy a consistent level of spending over the next few years. In fact, they predicted hardware spending of $6.8 billion in both 2012 and 2013 (Celent research report, IT Spending in Banking: A North American Perspective). They also predicted solid and consistent growth in software spending over the next few years. Banks are increasingly making use of external technology providers as they try to focus on core competencies. Spending on external software by U.S. banks was predicted to rise by a solid 5.9 percent to $9.1 billion in This figure is expected to grow, rising to $10.2 billion in 2014 as indicated in the following graphic. What types of technology will banks spend on? Many will invest in mobile banking, data analytics and other hot trends such as mobile wallets and cloud computing FIS and/or its subsidiaries. All Rights Reserved. 2

3 Top 10 Predictions Leveraging Technology Disruptors Is a Path for Success 1. The nascent community based clouds in the financial services industry will become the preferred cloud model in costconscious markets by striking the balance between lower operating costs and adequate service levels. 2. Banks will abandon social media as a customer service channel and focus on targeted marketing campaigns instead. 3. Competition between rival mobile wallets and point of sale integration technologies will result in a price war as competitors seek to gain market share and mind share. 4. Investments in big data and analytic solutions will top $6 billion worldwide as firms separate the opportunity from the hype. 5. Expense associated with risk and compliance will continue to increase, topping $74 billion worldwide. 6. Regulation will reduce financial services profitability by a third by 2015 unless institutions implement enterprise data management (EDM) strategies. 7. Global universal banks will continue to struggle to deliver the value of their complete franchises. 8. New formats will breathe new life into branch strategies, while investments in new channels will intensify. 9. Rising M&A activity in the financial services industry will drive the demand for more effective systems integration and interoperability. 10. Financial institutions will get serious about updating legacy systems. With this plethora of new technologies to invest in, combined with a loosening of the purse strings after the recession, American banks are primed to purchase. No doubt many of their executives will invest heavily in new technology on new hardware platforms. Given the tenuous state of the economic recovery and bank profits, we suggest they purchase wisely. The FIS Hardware Solutions team has assisted many banks in selecting, staging and implementing new technology platforms. Financial institutions fall victim to common errors when purchasing new equipment and systems. Here are four mistakes to avoid, which we believe will result in a better return on a bank s purchasing dollars. Mistakes to Avoid When Purchasing New Technology 1. Not considering total cost of ownership 2. Not avoiding the vendor selection circus 3. Not aligning with business objectives 4. Not testing the new systems as a whole 2013 FIS and/or its subsidiaries. All Rights Reserved. 3

4 Not considering total cost of ownership Total cost of ownership (TCO) is an analysis meant to uncover all the lifetime costs that result from owning certain kinds of technology solutions. Ownership brings not only the cost of the purchase, but also the costs for installing, deploying, operating, upgrading and maintaining the same technology. For this reason, TCO is sometimes called life cycle cost analysis. Many times banks seek only the lowest bid or purchase price on a new solution. This approach can overlook many of the aforementioned costs that can drive the ultimate price of the solution skyward. According to the Standish Group, all U.S. enterprises collectively spend more than $1 trillion per year on IT. These companies will seek to increase the value of their IT investments and to improve the efficiency of their technology platforms. Many organizations are moving to a more realistic examination of the full range of costs associated with operating technology. TCO comparisons therefore provide a real world gauge to more accurately determine the anticipated expenses associated with specific server platforms. TCO calculations do not have to become overly complicated, but in our experience, they must account for the following cost components: 1. Acquisition/physical hardware costs 2. Operating costs 3. Personnel costs According to the Purchasing and Procurement Web site, these are the three key components to TCO calculations. Based on our experience with bank technology and evaluating ongoing costs, we have added a fourth category: 4. Maintenance/support costs Acquisition costs Acquisition/physical hardware costs include the cost of equipment or property before taxes, but after commissions, discounts, purchasing incentives and closing costs. Sometimes this will include one time peripheral equipment or upgrades necessary for the installation or utilization of the bank s technology. Operating costs Operating costs include subscriptions or services needed to put the item into business use. This includes utility costs, direct operator labor and initial training costs. Personnel costs Personnel overhead may include administrative staffing, support personnel for the equipment, and facilities housing the equipment and operators. This may include ongoing training and troubleshooting labor for maintenance purposes FIS and/or its subsidiaries. All Rights Reserved. 4

5 Maintenance/support costs The maintenance and support costs include any contractual fees for ongoing upgrades and/or on site support that the technology may require. If the technology is customer facing, maintaining high levels of uptime is critical to bank revenue streams. Not Avoiding the Vendor Selection Circus Many financial institutions have firm rules governing procurement. When it comes to complex hardware and software solution purchases, these rules may need to be adjusted. Often the time spent tracking down and evaluating alternative solution suppliers takes away from solving the original business issue. Certainly commodity purchases require multiple bids or whatever the bank s procurement policy dictates. But more complicated solutions that leverage a partnership relationship need to be looked at differently. Much ground has been covered on beginning the vendor bid process and establishing standard vendor evaluation criteria. There are times, however, when those formal processes do not quite fit the need. We suggest banks consider these types of exceptions to the rules: A partnership exists with a key supplier If a bank has already established a long term partnership with a vendor, such as their core back office system provider, then incremental solutions purchased through that provider may not need the rigorous new vendor selection process. If the core vendor offers integrated solutions that the bank views as important labor savings, that benefit may trump solution providers who must maintain their product s integration to a core system they do not own or control. Technology is truly unique and creates a market advantage Sometimes new technology can provide an edge in a market, albeit for a short time. If one of the bank s missions is to provide leading technology to their customers, they may not be able to wait for a technology to mature with four or five providers of the same solution. Banks may have to take more chances for leading edge solutions, but if they can hedge that risk by purchasing through a partner (like their core provider), they can limit their exposure. Technology is very mature and vendor base is limited The converse of evaluating new technology from a limited number of vendors is having only a few vendors to select from for a mature market offering. Sometimes the effect of vendor consolidations leaves a bank with fewer options than their number of vendor response requirements dictates. In the ebanking world, there were a number of independent firms in the early 2000s. Currently, most independents have been consolidated into a few large competitors. Bank procurement executives should not become fixated on reading proposals from vendors who really cannot meet functional requirements FIS and/or its subsidiaries. All Rights Reserved. 5

6 Not Aligning with Business Objectives The purchase of hardware and related technology should match with a bank s strategic goals and the individual line of businesses objectives. Instances exist where technology remains underutilized or even undeployed because the ultimate business owners never really bought into a new system. This concept even extends down to inventory levels of equipment with an inventory that must be managed. Replacement technology and components need to be on hand to meet demand (aligning with sales objectives, for example) but should not exceed excessive inventory carrying costs. Banks can ensure their technology purchases align with strategic business goals and objectives by following these courses of action: Get a seat at the table Purchasing and IT executives need to participate in the bank s strategic planning sessions as active attendees. Banks are required by regulators to develop and follow a documented strategic plan, so if an IT manager is not privy to planning sessions, he/she should at least be familiar with the written forward looking plans of the financial institution in order to anticipate new technology requests and requirements. Walk around IT executives should observe and review how end users and customers utilize existing technology in anticipation of a new purchase. If an ATM is being replaced, how do customers currently leverage its features? How does bank operations staff service the machine? By getting out on the front lines of technology deployment, the IT staff will be more effective at fitting new technology into their banks environments. Share your IT strategy If the business units you support have limited business objectives and strategies to share with IT, then share your organization s plans and objectives. Often well documented plans create an impetus for others to follow suit. Keep your IT plans accessible to all IT employees so they understand what is mission critical and how the IT plan fits with the broader objectives of the financial institution. Not Testing the New Systems as a Whole Before purchasing a more complex hardware solution reliant on software from another source, the complete system should be tested. If a bank s hardware partner has a lab and/or warehouse facility to stage the technology, the bank should consider having the partner complete this testing for them. In fact, the partner could then image multiple systems and manage the deployment, if the technology needs implementation at multiple branches, for example. Testing and quality outcomes go hand in hand. The financial services industry often underestimates the quality assurance (QA) process for large scale projects. That the QA function can be undervalued at all seems inexplicable given the obvious 2013 FIS and/or its subsidiaries. All Rights Reserved. 6

7 challenges posed by the automation upgrades, system conversions, and wide scale integration initiatives it is often tasked to address. Not valuing QA and testing can adversely affect the deployment of new technology in any number of ways, including: Declining customer satisfaction Increased costs due to poor quality Impacts such as system outages Lowered software productivity Diminished ability to detect and fix software related issues It is in the best interest of the bank to have firm plans to test new technology and to value QA in the deployment of new technology. Summary It requires time and effort to avoid common mistakes in the purchase of new hardware and related banking technology. By taking an active and strategic approach, bank purchasers and IT managers can implement productivity improving systems that can improve service levels and bank prestige. When hitting on all cylinders, banks can achieve optimal IT performance as indicated in the graphic below FIS and/or its subsidiaries. All Rights Reserved. 7

8 Contact Us For further information, call , consult with your strategic account manager or visit FIS and/or its subsidiaries. All Rights Reserved. 8