Many bankers assume that taking advantage of the benefits of modern technology means first improving economies of scale, but this need not be the case.

Financial institutions have a viable alternative to striving to get bigger.

Those that want to improve their technological performance can do so by harnessing the practical and proven applications of client/server technology, and by using selective outsourcing of applications development, processing, and network management to cover skill gaps during transition.

This transition from legacy-based mainframe systems to the "brave new world" of technology can be achieved either through incremental change or through comprehensive redesign.

Most if not all banks will attempt this transition. Their success will depend on how well it is managed.

Economies of Scale?

Most bank chief executives come face to face each year with a daunting bill from their data center and network operations management - a bill for upgrading hardware networking capabilities.

This bill is always in the multimillion-dollar range, yet a good portion of it is not for new technologies; it is for the development and maintenance of legacy systems.

Of the $2.1 billion spent on bank technology in 1995 exclusive of large- scale outsourcing and service bureau costs, $1 billion went for that purpose, Tower Group estimates.

These vast sums are being spent on processing data on mainframes, and developing and maintaining legacy systems. Such systems are designed to handle a large volume of transactions. They are driven by economies of scale.

The demands for large-scale processing have increased in recent years, as the pressure for product differentiation has driven banks to add complex functionality to their legacy systems to support alternative delivery channels.

These legacy systems, designed for simple accounting transactions, require a lot of hardware and network resources in order to accommodate the demands of alternative delivery. The programming procedures required to deliver higher functionality, and to circumvent the lack of relational data bases, add to processing costs.

As the complexity of legacy systems increases, so do testing needs. Since most code in legacy systems was written with little structured analysis, adding layers of functionality requires extensive testing as the only way to maintain and assure quality.

Emerging Alternative

A combination of client/server technology - which essentially calls for data to be stored, processed, and accessed where it is most cost-effective - and strategic outsourcing of selected applications development, processing, and mid-level management functions, can provide the tools for transition from the world of scale-dependent legacy systems.

The architectural design of a new bankwide system should include:

*Moving to vanilla core application systems to support deposits processing, loans accounting and the general ledger.

*Outsourcing the development and maintenance of most core application systems.

*Developing and implementing a clear retail and commercial delivery strategy.

*Developing and implementing a data warehousing strategy to support the delivery strategy.

*Developing and implementing a client/server network to extract and process data from the data warehouse.

Effective Transition Execution

The following steps are needed to successfully implement the transition to a new technology architecture:

*Develop a specific, detailed transition plan to fit your business strategy.

*Identify and recruit the project managers and key technical specialists required to implement the transition.

*Implement the transition.

The central challenge this presents to a bank's chief executive is ensuring that the skills are in place to both develop the technology transition, and to tie these skills to the resourcing and implementation steps.

Two alternative approaches to transition are available to bank managements: incrementalism and comprehensive process redesign.

Incremental Technology Transition

In this approach, individual profit centers in each line of business drive the transition process by funding incremental projects which require aspects of client/server technology and outsourcing (through use of vendor packages). There are advantages and disadvantages to this approach

Pros:

*In the short term, each increment in the technology transition can be cost-justified and tailored to individual profit center requirements.

*Each incremental investment in new technologies is cost-justified in supporting a specific business requirement, e.g., customer marketing and tracking data bases in the trust and commercial areas each can be supported by separate and distinct solutions tailored to each profit center.

*As the incremental projects are implemented over a period of time, the bank has the opportunity to evaluate a range of vendors and gain a hands-on understanding of the evolving client/server technology.

Cons:

*In the long term, duplicative functionality and multiple data storage, processing, and network platforms will result in significantly higher costs of technology maintenance and upgrading.

*Discrete investments in "the best available" technology for specific business solutions to support individual profit centers will lead to duplication in functionality with mushrooming maintenance costs.

*The need for systems supporting individual business units to talk to each other will require the development and subsequent maintenance and administration of multiple and complex interface network applications, leading to significantly high costs.

Comprehensive Process Redesign

This approach requires top management's total commitment and attention to the redesign process. Ideally, the redesign should include:

*A technology diagnostic to assess the current state of the bank's systems applications, hardware, and network platforms.

*A current-state assessment of each line of business.

*The identification of major technology themes to drive the transition from the current state to the future architecture.

Pros:

*The lines of business requirements drive the change in the bank's technology architecture.

*The change is built off common platforms, minimizing duplications in functionality and the need to develop and maintain complex interfaces.

Con:

*This approach exposes the entire bank to change in a very short period of time.

Given the intensity of the redesign approach, the bank will need to have in place, early on, a technology transition team, to help the lines of business develop technology-based solutions and then use the specific business ideas as the basis for developing the new, overarching technology architecture.

The technology transition team will have the following top level technology management combined with a number of specialist contracted resources:

*A top technology manager, such as the bank's chief information officer.

*Specialist technology management skills: systems architect, data base administrator, network manager, and senior project manager.

(Whether these resources should be in-house or contracted will depend on the size of the institution and its current skill base.)

*Contract resources: network management, capacity management, and performance monitoring, data modeling and data management, client/server applications development, and project management.

Almost all banks are either facing a technology transition or will over the next few years. A few will address comprehensive process redesign to drive changes in technology architecture. These will end up with a strong technology team - avoiding the twin pitfalls of wasting money on legacy system Band-Aids or seeking a merger in the name of illusory technological scale economies.

Mr. Allen is chairman and Mr. Kalawar managing director of Aston Limited Partners, a bank investment and redesign advisory firm based in New York.

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