Modernizing legacy systems in banking

The need for app modernization is accelerated by the growing shortage of legacy talent, which makes it increasingly difficult and expensive for banks to operate and maintain their existing core systems.

Legacy business and technology experts are retiring in droves, leaving a dangerous vacuum of technical and institutional knowledge. For example, COBOL programmers are rapidly aging out of the workforce, making them increasingly scarce and expensive. So too are long-tenured employees with deep knowledge of a bank’s existing systems (and the embedded business rules that contribute to the bank’s competitive advantage).

To make matters worse, today’s top technical talent has little desire to work with antiquated systems and platforms, making it hard for banks to attract the experts and innovators necessary to survive and thrive in the age of digital transformation.

Modernization helps address the talent shortage by creating an IT environment that’s attractive to top talent and by shifting much of the talent burden from your in-house IT department to external IT vendors with the scale and resources to tackle it more effectively. Modernization also captures the priceless institutional knowledge that’s locked up in your legacy systems—and in the heads of employees who support those systems—transferring it into more advanced solutions that can carry your business into the future.

The modernization process typically involves moving from mainframe-based legacy platforms to solutions based on cloud and other modern digital technologies.

Legacy modernization

As you move from a customized set of legacy mainframe applications to a configurable set of cloud-native applications, it’s essential to preserve the valuable intellectual property in your existing business rules. In-depth, accurate knowledge of business rules can help your organization resolve critical issues that could impede its efforts at application modernization and digital transformation. Also, the right modernization approach can build on this knowledge in ways that preserve hidden intellectual property for use in upcoming projects, helping you generate the maximum business value from your existing and future applications.

With core and app modernization, the IT model shifts from in-house, on-premises banking legacy systems to modern cloud-based systems provided by third-party vendors. In addition, the philosophy for IT development shifts from complex customization to simple configuration.

Banks now have multiple platform options that can enable them to not only modernize their applications but also infuse the new applications and processes with their own business rules through business rules extraction.

Today’s core banking platforms fall into three broad categories:

● Legacy platforms. These “one-stop-shop” solutions run on a proprietary or closed platform (often a mainframe system). They tend to be complex to implement and usually have a multiyear, license-based model.

● Service-oriented platforms. These platforms are designed around a service-oriented architecture (SOA) and enable real-time processing. They’re typically offered as hosted software-as-a-service (SaaS) solutions and generally feature a license- and subscription-based model.

● Cloud-native platforms. These are platforms that leverage microservices-based architectures with application programming interfaces (APIs) that provide access to and from other internal and external services. They support real-time processing and—because they’re cloud-native—typically have a pay-per-use subscription model.

To determine which option is best for your business, you need to establish a modernization profile based on the sustainability of your existing platform, your appetite for risk, the need to innovate your product and service offerings, your urgency to transform, and the complexity of your data strategy.

Modernization produces a wide range of benefits, including:

● Digital competitiveness. Enables core systems to support the digital features and capabilities required by today’s marketplace.

● Smarter use of talent. Reduces reliance on increasingly scarce and expensive legacy specialists (e.g., COBOL programmers) and creates a more attractive technology environment for today’s top talent.

● Better service. Supports improved service levels, customer satisfaction, and product innovation.

● Lower risk. Reduces regulatory compliance and internal controls risk—particularly for service changes.

● Lower costs and improved efficiency. Reduces service delivery costs, with potential savings from day one. Enables optimization of sourcing strategies by capitalizing on commercial platform vendors’ expertise and scale economies. Improves user productivity and efficiency, evaluation of technology options, etc. Also, moving from a “customize” to “configure” deployment model helps eliminate technical debt.

● Business value creation. Improves business process cycle time and deployment of new application functionality to drive performance, growth, and compliance. Enables data insights and cognitive automation that can create new opportunities to serve clients.

● Readiness for the future. Modern languages and modernized platforms will be cheaper and easier to maintain and modify in the future.

● Flexibility. Cloud-based solutions enable strategic flexibility and scalability.

● Institutional knowledge capture. Extracting business rules from legacy systems allows a bank to retain the treasure trove of institutional knowledge that gives it a competitive advantage. Those rules can then be imported into industry-standard software packages.

Core system and app modernization enables a bank to offer the innovative digital features and capabilities that customers now expect. It also enables delivery models that are much more compatible with today’s technology and talent environment—models that are streamlined, standardized, and scalable both up and down in response to changing market needs.

We’ve identified several key practices that can boost your chances for success:

● Be creative about funding. Most banks don’t provide much investment funding for legacy modernization, except in crisis situations, so you will need a creative funding model that’s very cost-efficient (and ideally self-funding). Maintenance of your existing platform can be optimized to generate savings that can be reinvested in the modernization effort.

● Deliver quick wins. To succeed, your modernization efforts need to generate benefits almost immediately. Many business leaders are understandably reluctant to sign up for a multiyear improvement effort since they might be gone before the benefits are delivered. Fortunately, with the right approach it’s possible to achieve guaranteed savings in total cost of ownership from day one of the modernization process.

● Focus on business value creation, not just technology replacement. When modernizing your banking legacy systems and technologies, take advantage of the simultaneous opportunity to improve your business processes and to extract and capture the business rules and institutional knowledge that give you a competitive advantage in the marketplace.

● Automate migration and business rule extraction. Accelerate your mainframe-to-cloud migration and extraction of business rules by taking advantage of the latest digital tools and automated APIs (application programming interfaces).

● Migrate without disruption. Carefully choose a modernization approach that minimizes disruption to your business.

● Focus on business impact, not just technology features and cost. The best technology solutions are the ones agile enough to produce new apps quickly in response to shifting business needs, such as market changes, new regulatory requirements, and rising customer expectations.

● Focus on total cost of ownership (TCO), not just purchase price. TCO is the truest, most relevant way to measure cost.

● Don’t just delegate modernization to the IT function. Modernization is a strategic business issue, not a technology issue. If you throw the task over the wall to IT, you will probably just end up with updated apps (after waiting two or three years).