Various features and analyst reports tell us that 2010 is the year for core systems replacement across the financial services sector. Sound familiar? We were told the same thing in 2009, and come to think of it, also to some degree in 2008.

Last year, a key rationale appeared to be that the slower pace of product innovation and customer demand during a recession would result in lower IT resource workloads and improved capacity to resource complex changes to core technology. This year, a key rationale seems to be that the credit crisis, and similar recent market developments have forever changed the shape of financial services operations.

Rather less has been explained, however, about how to co-ordinate the business case, including the justification and funding for these costly, complex and, to varying degrees, high-risk projects. An apparent opportunity for systems renewal within a financial enterprise, based upon market conditions and market needs and other external factors is easy enough for market commentators to highlight.

Funding was certainly a major challenge through 2009, with the financial services sector profitability under extreme stress as a result of depressed business revenues, high provisions, reduced investment income and asset losses.

A recent Sterling Commerce survey polled 300 European financial services companies about their current plans and project experiences in the area of core systems replacement. The research revealed that the business development community wants to improve customer service and repair defective CRM applications, forecasting improved revenue. However, different operations teams want to improve straight-through-processing and minimise processing exceptions, forecasting reduced costs. Each stakeholder group has choices to make about how its leading contender for change is replaced, and it may recommend one of the following options:

• If the enterprise owns the appropriate IT resource numbers and expertise, it can build a new system. The ‘build solution' may reduce direct capital expenditure in relation to other replacement options, but the indirect resource costs can be very high.
• If a positive return-on-investment for system replacement is hard or impossible to calculate, that may be a factor in determining whether the enterprise should outsource the associated processes to a third-party provider. An outsourced solution may result in relatively minor capital expenditure but significantly increased and recurring revenue expenditure.
• If a complete functional solution is known to be available from one or more external application vendors, the enterprise may buy a core systems application. This option normally involves relatively high capital expenditure plus recurring maintenance costs.

Each of these options has some major risks, however, so maybe the organisation has external market conditions that demand new core systems, some internal funding ability, and some appetite to invest in new technology. It knows what its internal stakeholders think they can justify, and it knows how they recommend their different objectives might be achieved.The problem now is that not everything on the list can be achieved.

There are three main reasons:

• Multiple stakeholder demands exceed available budget
• Replacing all core functions in exceeds available project resources
• Replacing multiple business-critical operations in parallel introduces unacceptable operational risk
• Some decisions are driven by a compelling event: systems consolidation following a merger or acquisition, or new compliance requirements and process changes mandated by an external regulator that perhaps can be satisfied only by priority investment in system replacement.

Most decisions are made at the discretion of the organisation's internal prioritisation panel. Here, the value of each competing business case is ‘weighted' by considerations including the professional credibility of the panel members and the relative probability of success in each project.

According to the survey, the top three core system function replacements qualifying through the selection process are:

• Customer service (including e-commerce, banking e-services, call centre operations, etc.)
• Customer relationship management
• Accounting and cash management

These priorities suggest widespread focus on restoring customer confidence and loyalty, and on retaining customers and market share following the financial crises and recession of the last two years, coupled with some response to the demand from most commercial sectors for improved liquidity.

But progress is slow. Of the 300 European financial services companies surveyed, only 58% had completed and implemented at least one part of their total core systems suite - in the last year.

A significant reason for the slow pace of change has been that systems replacement projects have been very challenging to execute:

• 20% of survey respondents (obviously all ‘solution buyers' by preference) reported a major risk of project failure as being their inability to identify a core system package purchase that would actually meet their requirement - the consequence presumably being that they would buy a sub-optimal solution requiring custom adaptation prior to implementation.
• 34% of survey respondents (mostly ‘solution builders') cited cost over-run and 38% cited timescale over-run.
• Integration of the replacement technology into the surrounding systems environment was the biggest common challenge for ‘buyers', ‘builders' and ‘outsourcers' alike. 37% of respondents cited internal systems reconnection and 38% cited external re-connection as the greatest problem.
• In relation to the big re-integration challenge, 71% of the 300 survey participants agreed that advanced business process integration cannot be regarded as a consequential feature of change, but must be funded as an essential pre-requisite for successful change. 56% of respondent organisations claim to have an enterprise-wide systems integration strategy, but rather fewer had business process integration technology that could comprehensively support that strategy. Less than one third of their integration solutions, for example, provided content-based routing or data security utilities.

The complexity of re-integrating replacement core technology may well account for the cost and timescale over-runs that are so common in these projects. Fixing connectivity and data movement problems with standardised deployment of current sophisticated business process integration technology will make a big contribution to the implementation of new core systems on time, on budget, and with interfaces that work.

Richard Spong is marketing manager at Sterling Commerce