Banks today face a critical challenge: how to evolve and thrive in a rapidly digitizing landscape while grappling with the inertia of their often aging, complex legacy systems.

In a recent LinkedIn poll, I asked my community about the best approaches for banks to handle legacy technologies. While none of the three options (gradual modernization, complete overhaul, or ecosystem integration) emerged as a clear favorite, there was a general dislike for the idea of a complete overhaul. This article reflects the valuable insights shared by several contributors, with special thanks to Ewan MacLeod for suggesting the Greenfield Approach.

Charting the Course: Considerations for a Successful Transformation

The optimal approach for each bank depends on a unique blend of factors, including size, risk appetite, budget, strategic goals, and the complexity of their legacy system. Careful consideration of the benefits, challenges, and pitfalls presented by each approach is crucial for informed decision-making. While gradual modernization might suit larger banks prioritizing stability, smaller, more agile players might favor greenfield development. Ecosystem integration offers a collaborative avenue, but complete overhauls require meticulous planning and significant resources.

Let’s have a look at the 4 approaches

1️⃣ Gradual Modernization - Minimizing Disruption with Measured Steps

The gradual modernization approach prioritizes a measured climb, tackling key areas like customer-facing applications or core processes in stages. This strategy offers the advantage of minimizing disruption to ongoing operations and the customer experience. It leverages existing investments in legacy systems, allowing for targeted improvements in areas with demonstrably high impact. However, this measured approach can be a slow and piecemeal process, potentially hindering overall effectiveness. Integration issues may arise between new and old systems, and perpetuating outdated functionalities can hinder the adoption of truly innovative solutions. The pitfalls of this approach lie in a lack of a clear long-term vision, leading to a patchwork of solutions without synergy, and delaying crucial upgrades, which can render the bank less competitive in the long run.

Many incumbent banks are following the path of gradual modernization, such as Deutsche Bank, Barclays Bank, or Citibank.

2️⃣ Bold Overhaul - Embracing a Future Unburdened by the Past

The complete overhaul approach takes a more audacious path, aiming for a clean slate by replacing the entire technology stack with modern, integrated systems. This bold move unlocks several benefits, including fostering agility, scalability, and future-proof technology. Streamlined operations and potential long-term cost reductions are alluring prospects. However, this disruptive and resource-intensive process carries significant implementation risks, with high upfront costs and the potential for delays and budget overruns. The loss of institutional knowledge and expertise embedded in legacy systems also presents a challenge. Poor planning and execution can lead to chaos and operational downtime, while neglecting employee training and change management can breed resistance and hamper adoption.

Some incumbent banks, such as the Commonwealth Bank of Australia, are known for successful bold overhauls, albeit at very high costs, while others, like Deutsche Bank, didn’t succeed.

In February 2011 we learned that the Irish bank AIB is suing Oracle over a failed, €84 million implementation of its Flexcube banking software. And in July 2011 the Union Bank of Carlifornia has cancelled the implementation of Infosys’ Finacle Solutions - two years after the start of the program. A Boston Consultant Group survey on Renewing Core Banking IT Systems in May 2006 reports that all survey participants said that they had struggled to deal with expanding project scope and changing requirements.

Experience shows that there is a high failure rate of core banking system implementations. We can assume that 25% of core banking system transformations fail without any results, 50% do not achieve the transformation objectives - costs and implementation times double or triple and only 25% of the transformations can be called successful.

Possible causes of the bad success rates of core banking system transformations are widely unknown. Concerned banks, integrators and core banking system vendors keep quiet about failed implementations. 

Bent Flyvbjerg, professor at Oxford University, studies megaprojects. Generally spoken, he argues that people involved in mega projects overestimate their capabilities and underestimate risks. His late research indicates that black swans (very rare events with large scale impact) occur much more often in software mega projects than in any other mega project. Applied to core banking system transformations this means that there is a high likelihood that a single aspect handled wrongly leads to a disaster of the transformation as a whole.

Therefore it is essential for a successful core banking system transformation to understand, plan, control and execute all aspects of a CBS transformation program, comprehensively.

Over the last five years I have analysed more than 100 core banking system implementations, globally and derived best practices for successful program delivery.

Here the first six best practices which I have identified to run a successful core banking system transformation

1. 1.Shared Strategy: Strategy, objectives and scope are widely shared and changes are managed well by all stakeholder group
   

2. 2.Prepared Business Processes: All as-is and to-be business processes well documented and maintained in BPM tool, roadmap in place and maintained
   

3. 3.Measurable Benefits: Detailed phased business and benefit plans are followed up and kept up-to-date
   

4. 4.Minimum Customization: Customization requirements are kept minimal and are well known to all stakeholders, documented, put into contracts and budgeted 
   

5. 5.Real Partnership: Vendor is seen and respected and trusted as partner, agreed split of responsibilities, good communication, both partner help each other if necessary regardless of responsibilities
   

6. 6.Strong Governance: Flexible governance structures across landscape, portfolio, program and projects in place. Interdependencies are well understood and managed actively.
   

At this point in time it is clear that the identified best practices are not sufficient to ensure a successful core banking system transformation. But knowing the occurrence of black swans in mega projects it seems to be obvious that if a bank manages one of the six best practices badly the bank will suffer significantly and add another case to the list of unsuccessful core banking system transformations.