OPTIMIZE. Core Banking System Replacement. OPTIMIZE Advisory Note. The Issues. Key Recommendations

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1 Building a Business Case fr Cre Banking Systems Renewal Mark Flynn, 7 th Feb 2012 DcID: The Issues Cre banking system replacement is the mst challenging IT prjects that a Bank can face. Such implementatin prjects typically require substantial: Business resurces IT resurces f the bank Budget (CAPEX and OPEX) Advisry Nte Given the csts and risks assciated with such prjects many Banks struggle t articulate a business case that drives the renewal. In certain cases this delays any decisin until actin becmes a necessity and the Bank has n ther ptins available but t devte significant resurces t implement a new cre within a very cmpacted time frame. The purpse f this Advisry Nte is t define a Business Value f IT (BVIT) framewrk within which banks can start t build a business case fr CBS renewal in an bjective manner which is linked t the strategic directin f the Bank and the benefits that a new cre will bring. The apprach hwever des nt slely fcus n a cre renewal and the alternative f retaining the status qu. Rather the apprach is mre hlistic in that it identifies a wide range f feasible ptins and cmpares the ptins against the BVIT framewrk. Key Recmmendatins Build a business case fr cre banking system renewal when the idea is first discussed the results may r may nt indicate that a renewal is desirable fr the bank at that mment in time Cnsider mre ptins than replacing the cre r retain the status qu there may be ther viable ptins fr the bank Use a defined framewrk within which t build the business case Ensure that there is a clear understanding f the benefits that are expected t be realised frm the CBS renewal as this is a key input int selecting the vendr 2012 Optimize and its affiliates. All rights reserved. Page 1 f 7

2 BVIT Framewrk The BVIT framewrk is a methdlgy develped by Optimize t carry ut IT investment appraisal and t prve the business value f IT. The BVIT framewrk is build arund the fllwing five pillars: Strategic alignment Payback Architecture Business prcess transfrmatin Risk Fr a mre detailed explanatin f the BVIT framewrk please refer t the advisry nte Achieving Real IT Benefits DOC ID: Advisry Nte Overall Apprach The verall apprach cmprises f the fllwing steps: Define the varius ptins that are available t the bank Evaluate the varius ptins each will have its wn specific strengths and challenges: Use the BVIT framewrk t build the qualitative benefits that are t be expected fr varius scenaris Quantify the benefits identified int defined scres fr each valid scenari Develp a high level AHP mdel arund the BVIT framewrk and the number f valid scenaris (e.g. retain status qu, Upgrade, CBS renewal) Define weight f each f the criteria in the framewrk by the Senir Management team Input the defined scres int the AHP mdel t prvide a ranked list fr each f the scenaris We recmmend that a cmbinatin f business and IT drive the evaluatin scenaris and scre each f the valid scenaris. Weighting the BVIT criteria shuld be dne by Senir Management f the Bank as this team is best placed t define the strategic directin and risk appetite (nte they may need t be given sme educatin sessins n the framewrks by the team) Optimize and its affiliates. All rights reserved. Page 2 f 7

3 Definitin f the Viable Scenaris When lking at CBS renewal there are at least tw scenaris which must be cnsidered, namely: Retain the status qu Ttal CBS replacement These are at ppsite ends f a spectrum but in fact there may be ther viable scenaris which may have a better risk/reward trade ff. Fr example while assisting a client in develping a business case we develped the fllwing scenaris: Retain the status qu with additinal develpment fr majr pain pints Develp a new branch frnt end Upgrade the existing cre Implement new satellite systems (fr example lan riginatin) Implement a new retail slutin Ttal cre systems replacement Advisry Nte Naturally these ptins scred very differently fr each BVIT criteria. Hwever if a bank des nt dcument and evaluate a full range f viable ptins then the business case will be incmplete. Evaluatin f the Viable Optins Using the BVIT Framewrk The strengths and challenges f each identified scenari shuld be evaluated n the basis f the BVIT framewrk criteria. The fllwing are the high level BVIT criteria but there are many factrs t be evaluated under each pillar and here we have prvided sme examples: Strategic alignment Payback Fr example frm a strategic alignment perspective we need t understand hw well the ptin fits current and future business requirements. This may vary quite dramatically between the ptins. Fr example a Bank with a Crprate fcus (and a cre custmised t Crprate business) in a specific gegraphy lking t mve int retail will have very different scres fr strategic alignment between retaining the status qu (ptentially lw) and implementing a new universal cre (ptentially high) This is always the mst difficult evaluatin criteria. In sme cases there may be clear CAPEX and OPEX cst savings fr specific ptins. Fr example in ne case a client had a highly custmised mainframe envirnment which was expensive bth in terms f vendr csts (hardware, perating system etc.) and internal sftware maintenance. A mve t a mre pen platfrm had sme medium term direct cst savings. Hwever in ther areas (fr example quality, prductivity, emplyee perfrmance) it can be difficult t estimate the payback in mnetary terms but there are ways f ding this Architecture (technlgy change, flexibility) Frm an architectural pint f view the varius ptins may have significant issues bth in terms f the inherent architecture f the package as well as the verall architecture f the bank. Fr example the ptin f retaining the status qu 2012 Optimize and its affiliates. All rights reserved. Page 3 f 7

4 may invlve maintaining a cmplex integratin architecture with multiple pint t pint links and data duplicatins. Cnversely a new cre may prvide many architectural benefits including flexible channel integratin, straight thrugh prcessing and autmated wrkflws Business prcess re-design Risk Many existing cre banking systems are legacy and inflexible. They d nt supprt streamlined business prcesses (i.e. STP) nr d they allw flexible wrkflw which can be changed as business prcesses change. In cntrast mdern cres prvide a flexible prcess platfrm. The key questin is whether the existing business prcesses are adequate r whether they are inefficient and cntain many unnecessary steps. If the current prcesses are inefficient then implementing arund the defined prcess in a new cre may significantly reduce any custmisatin cst. If the prcesses are seen as a cmpetitive advantage and are currently well supprted by the current system then retaining the status qu may have merit Risk must be evaluated fr all the ptins cnsidered. Even the ptin f retaining the status qu may have sme risk assciated with it (e.g. high level f peratinal risk). Key factrs which need t be cnsidered when evaluating the risk include: Prject scale and rganisatin scpe. A cmplete cre replacement is a very large prject and tuches almst all aspects f the Bank s prcesses frm riginatin t payments. Other ptins may have less f an impact but clearly: the mre impact n the Bank, the mre risk Organisatinal readiness fr change. Banks d nt typically g thrugh cre changes ften and therefre there is usually little institutinal memry f pain f a cre replacement prject. In certain cases the need t change may nt be unifrm thrughut the bank and peple may see n value in the change frm their perspective Vendr stability. If the current cre is frm a vendr des the vendr prvide an upgrade path, is the vendr stable? There are many examples f acquisitins f cre banking system vendrs which have resulted in frced upgrades System stability. Fr example is the current cre maintainable in the medium term if it is in-huses develped (in many cases we find skills sets have erded ver time) r is the vendr withdrawing supprt and frcing an upgrade (we recently had a case were the hardware vendr was withdrawing supprt fr the cre platfrm) Time scale. The lnger the timescale withut prducing any tangible results the greater the risk. This dramatically increases the risk f a new cre ptin which can take mnths Advisry Nte Cre banking renewal prjects are cmplex and risky. Any impetus t change must be driven by the failings f the existing cre: these shuld be analyzed in sme detail in rder t understand what benefits any ther ptins will bring. In ther wrds, the status qu must be used as the benchmark against which the ther scenaris are evaluated. Nt evaluating the existing system in sme detail can lead t de fact decisins fr cre replacement where in fact given the time and risk f such a prject, retaining the status qu r ther ptins may be better. We came acrss such a situatin recently where there seemed t be a widespread cnsensus within a Bank that a cre replacement was required. Hwever a systems audit identified that the issues were primarily arund branch autmatin and retail lans/depsits. Withut this audit the scenaris f implementing a new branch frnt end r a new retail system wuld nt have been cnsidered. Neither shuld the implementatin f a new cre be viewed as a panacea t all the Bank s functinality issues. T successfully implement a new cre 2012 Optimize and its affiliates. All rights reserved. Page 4 f 7

5 withut majr and cstly custmizatin requires a majr adaptin by the Bank t the prcesses the cre supprts. The evaluatin f each f the ptins shuld be as bjective as pssible. Hwever the BVIT framewrk is such that payback is nly ne f the criteria, ther criteria tend t be mre subjective in their nature. As such the evaluatin is heavily fcused n a qualitative analysis at this step. In the next step an attempt must be made t put quantitative scres n these criteria. AHP Mdel The Analytic Hierarchy Prcess (AHP) is a structured technique fr rganizing and analyzing cmplex decisins. AHP first decmpses the decisin prblem int a hierarchy f mre easily cmprehended sub-criteria, each f which can be analyzed independently. Within this cntext we use the BVIT frame as the decmpsitin. In the example prvided here we have nly decmpsed the criteria int a single level. Hwever further decmpsitin is necessary when a mre cmplex mdel is required. Fr example strategic alignment can be brken dwn by business line (crprate, treasury, trade finance, retail etc) while payback can be brken by direct payback, prductivity etc. The table belw prvides a sample AHP framewrk where 4 strategic alternatives were identified. Advisry Nte Table 1 Sample Cre Banking Strategic Optins AHP Framewrk Criteria Weight Status Qu New Branch Frnt End New Retail Cre New Cre Raw Weighted Raw Weighted Raw Weighted Raw Weighted Strategic Alignment 0 Payback 0 Architecture 0 Business Prcess 0 Risk 0 Ttal The next step is in many ways the mst difficult in that the qualitative analysis develped in the previus step needs t be given a quantitative scre under each f the BVIT criteria. At the highest level this can be quire daunting but if the mdel criteria are decmpsed t a secnd and third level it is easier t cmpare the alternatives. NB: this full mdel shuld be defined prir t the evaluatin step as the evaluatin f the ptins must be dne within the framewrk f the fully decmpsed criteria. Table 2 shws a sample mdel where quantitative scres have been applied t each f the criteria fr each ptin based n the specific cntext f the Bank Optimize and its affiliates. All rights reserved. Page 5 f 7

6 Table 2 Sample Strategic Optins AHP Scring Criteria Weight Status Qu New Branch Frnt End New Retail Cre Strategic Alignment New Cre Raw Weighted Raw Weighted Raw Weighted Raw Weighted Payback Architecture Business Prcess Advisry Nte Risk Ttal 0% Fr the final step Senir Management f the bank need t weight each f the BVIT criteria t cme up with a ranked list f ptins. Again this can be difficult as different parts f a Bank may have very different views n hw the varius criteria shuld be weighted. Typically we see the final weights being decided in a wrkshp setting using either a cnsensus based apprach r alternatively taking an average acrss the senir management team. Table 3 shws a sample f a cmpleted mdel which prvides a ranking f the varius ptins. Table 3 Sample Strategic Optins AHP Weighted Scring Criteria Weight Status Qu New Branch Frnt End New Retail Cre New Cre Raw Weighted Raw Weighted Raw Weighted Raw Weighted Strategic Alignment 50% Payback 15% Architecture 10% Business Prcess 15% Risk 10% Ttal 100% Optimize and its affiliates. All rights reserved. Page 6 f 7

7 In Brief A cre banking system replacement is the largest prject mst banks face. A cnsiderable amunt f wrk must be dne t build a business case which justifies r therwise the cre change. We have seen situatins where the business case was ttally infrmal. Hwever we d nt think that this is wise. A slid business case is required t justify the expenditure as well as the pain that the Bank will g thrugh with a cre transfrmatin. A slid business case fr cre transfrmatin can be used as a cmmunicatin tl t educate all the Bank s emplyees abut the desirability f such a transfrmatin prject. Our apprach t building a business case is based arund the BVIT framewrk built int an AHP mdel. There are ther appraches which can be as effective but the key issue is t frmally dcument the business case s that it is actively discussed befre any decisin is taken. Advisry Nte 2012 Optimize and its affiliates. All rights reserved. Page 7 f 7