By Julian Goldsmith, 6 June 2007 11:07
NEWS
Banks all over Europe are becoming increasingly hamstrung by their own legacy systems, allowing new players an easy entry into the market because existing ones can't react quickly enough.
silicon.com Financial Services
Get the latest financial services news straight to your inbox. Sign up for the FS newsletter today!
Established banking organisations are typically relying on core systems built in the late 1970s and early 80s, according to financial services analyst TowerGroup. These systems have survived because the risk and cost of replacing them has deterred their owners from ripping them out. Some of the few replacement projects that have gone ahead have ended in failure, said the analyst - damaging the careers of the IT leaders put in charge of them.
As a stop-gap, core systems have been shored up by what TowerGroup senior analyst Bob McDowall refers to as palliative solutions, with the encouragement of technology vendors.
But he said: "It's not just a technology issue any more, it's a business issue. Banks cannot now respond quickly enough to competition from non-banking new entrants to the market."
McDowall acknowledged CIOs are wary of suggesting replacing core systems at the risk of ending their own careers should the project fail. However he urged them to educate their boards on the commercial dangers if they don't.
He said: "This a main-board issue. CIOs need to demonstrate that unless they migrate from legacy systems to solutions based on open systems architectures, and can provide such functions as data mining, these organisations will erode shareholder value."
Seen in business rather than technology terms, hanging on to legacy systems will increase the cost and risk of failure of a merger or acquisition bid. It will also increase the cost of divesting any part of the business.
Cheat Sheets
♦ Basel II
♦ MiFID
♦ Sarbanes-Oxley
McDowall said: "One insurance against the risk of migrating from legacy systems is sharing the risk of the project with a specialist contractor. There is a cost to that, of course. A last resort would be to establish a greenfield technology operation running in parallel. It would be a bold organisation to do that."
Whatever they do, banks across Europe that rely on legacy core systems need to address the problem soon, said McDowall. "Those organisations that don't have a migration strategy are just building up a bigger stack of cards. Their ability to respond to commercial pressures will just get slower as time goes on," he said.
Comments
There is 1 comment. Join the discussion
1. Julian Dobbins
TowerGroup’s assessment of legacy systems completely underestimates the continuing value they bring to many businesses today. Although conventional wisdom tells us that new is better than old, CIOs needn't worry that the business will face “commercial dangers” if they choose to maintain their core legacy systems - legacy applications have proven their value to the business over time, and often incorporate critical business information that cannot be discarded. The key ingredient is to do so from an informed basis.
CIOs should be looking to identify the business value in what they already have, rather than resorting to large-scale and often damaging rip and replacement projects – or, as the article points out, doing nothing for fear of failure. Today, organisations can increase the agility, profitability and efficiency of their IT systems without losing the accumulated valuable wisdom within them. Far from being a hindrance, CIOs now have the luxury of choice when it comes to modernising their legacy.