CIOs at banks lack the job security required to transform IT by replacing legacy systems that have been in place for decades.
IT heads at banks are lucky to get two years in the job, so to take on a multiyear project as complicated as legacy replacement is seen as professional suicide.
As a result, UK banks have legacy systems that have been in place for decades. Meanwhile extensive merger and acquisition activity has meant some banks have dozens of different legacy systems. One source told Computer Weekly that one of the UK’s main banks has 40.
It would be a risky project for a CIO to replace core systems and would not necessarily be good for the CIO’s CV, because you would be replacing systems with systems that just do the same thing.
Chris Skinner, chairman at the Financial Services Club, said that CIOs usually don’t stand much chance of lasting long. “In the first year they spend their time trying to work out what their predecessor did wrong. The second year they try and sign contracts with suppliers and plan how to fix what is wrong. In the third year they implement the changes and then, by the following year, there will inevitably be problems with the project and the CEO gets angry and fires the CIO."
But it is possible. Skinner referred to Michael Harte, CIO of Commonwealth Bank of Australia (CBA). He said, over the past five years, he has replaced the bank's core systems, moved much of the banks services to the cloud and created many apps and innovations. He achieved it through creating the right partnerships with suppliers, said Skinner.
Rik Turner, analyst at Ovum, said there are two features of the banking industry that add to the complexity of core banking renewal: “During economic booms and downturns executives at banks regularly move on, so taking on a five-year project, they will not be able to complete will not look good if they are judged on it,” said Turner.
“UK banks in particular have acquired businesses over the years and not replaced these individual core systems and, as a result, they have lots.”
He said replacing core banking systems is akin to changing the engines on a Boeing 747 while in flight.
“These systems work, so bank IT leaders think, ‘Why rock the boat?’” he said.
Currently banks will use middleware to enhance systems and replace the hardware that supports them, but the risk won’t go away. Eventually banks will have to replace core systems or they could see costs increase dramatically and could face pressure from more agile competitors.
The longer banks leave it, the more difficult and costly it becomes to replace legacy technology. In 2008, when German banks Commerzbank and Dresdner Bank came together as part of an £8bn deal, legacy proprietary systems made it more complex.
One example was Dresdner's fund accounting system, Paladign, which it used to balance the books at the close of business. It was old and had been modified so often that few IT people could work with it. Dresdner's trading platform, called Imagine – which covers parts of the bank's investment business – is another.
Turner said the European bank replacing legacy systems at a pace is Spanish giant Santander. The bank has been on a major acquisition strategy. In the UK it has acquired finance firms such as Abbey National and Alliance & Leicester. A key part of its acquisition strategy has been to acquire businesses and migrate the acquisition’s systems to its own in-house developed system, known as Partenon.
The system enables Santander staff to be able to access all customer information from one point, rather than having to access multiple legacy systems. This is known as straight-through processing.
These [legacy] systems work, so bank IT leaders think, Why rock the boat?
Rik Turner, Ovum
As part of its acquisition of Abbey Santander moved 10 million savings accounts, four million current accounts and eight million card accounts to the new platform from Abbey's systems. Santander expected to make £300m cost savings after integrating Abbey with Partenon. It plans to make efficiency savings of between £30m and £50m by integrating Alliance & Leicester with its Partenon core banking system.
“The fact that core platform replacement is part of its acquisition strategy means it does not have a problem getting CIOs to do the projects, because everybody has to do it – whether they like it or not.”
Nationwide building society is another finance firm that has taken the brave step of putting IT transformation at the heart of its strategy. Nationwide embarked on a £1bn IT transformation in 2008 just before the financial sector entered crisis. This involved replacing legacy systems with off-the-shelf systems from SAP and Microsoft. By making the IT renewal part of its strategy, Nationwide ensured the entire company is behind it rather, than a single CIO having his or her life depending on its success.
David Sherriff, CEO at banking system supplier Microgen, said there is a lot of activity in banking IT departments as they attempt to meet new regulation. But he said this is largely being done piecemeal and is likely to have to be changed again in the future, at extra cost.
He said banks are taking a “Pac Man” approach and replacing systems and replacing systems bit by bit.
“No finance CIO will take on a programme to replace legacy systems. You have to keep taking bits out and building new bits,” Sherriff said.