United States

4 steps to an effective core system decision

How to make a strategic decision driven by your business needs


From opening and servicing loans to handling depository transactions to dozens of other critical functions, core systems perform operations vital to every financial institution. Yet, when it comes time to consider replacing their core system, many financial institutions are not sure where to start. And that can lead to trouble.

Because the core system is one of the key components to any financial institution's information technology (IT) infrastructure, institutions sometimes expect IT staff to drive the core system evaluation process. While your IT department will play a key role in any implementation and in the ongoing maintenance and operation of the system, the question of which system to choose, or indeed whether your institution needs a new system at all, should be a strategic question driven by input from throughout your organization. The intersection of your institution's unique needs and a core system's capabilities are the vital considerations, as are vendor financial stability and the compatibility of the vendor's vision with yours.

1. Make sure you need to make a change.

Too often, institutions that are frustrated with their core systems start by asking which new system they should choose, when they should first be asking whether they need to replace their system at all. It is not unusual for an institution to have been running the same core system for many years. Over that time, your business will have changed. The core system should have been changing, as well. If system capabilities are not meeting your needs as well as in the past, it may be time to review the capabilities that are currently available. You may have needs now that you did not when the system was installed, but that the system is capable of addressing with proper upgrades, configuration and training of your personnel. Make sure that the business line subject matter experts, such as loan processing specialists and branch service specialists, are engaged in reviewing system capabilities so that they understand options and limitations, as well.

Capability issues may indicate the need for a new system, but be sure that a change will offer clearly defined improvements first. Switching core systems is an expensive and taxing undertaking. Without clear ROI on both the money and effort invested, it is only a drain on your resources.

Recent years have seen considerable merger and acquisition activity in the financial sector. A transaction obviously requires a fresh look at your core system, as, at a minimum, you will need to migrate operations from one system to another. But first make sure that either system is the right choice. Your newly combined operations may have new needs that require a new solution. Even if the merging or acquired entity is significantly smaller than the surviving or acquiring entity, don't dismiss the smaller institution's core system out of hand. Although it might be a more difficult task to migrate to that system, it may have capabilities that would be of great value to the newly formed organization.

2. Get the right help

If you determine you do need a new core system, the selection process can be daunting. There are many options, but usually only a few of them are appropriate for any given institution. Unfortunately, the only core system you really know is likely the one you already have. Organizations often choose to work with a consultant to help make a more objective, informed selection.

If you choose to engage a consultant, you'll want a consultant with broad experience in the financial institution industry who understands that there is no single best choice in the market. The consultant should start by working with you to define your precise business needs, and only then should they begin to match them with the capabilities of the various available systems. Your consultant will also need considerable knowledge of the vast landscape of specific solutions and applications available in the market and in use at your institution, as your core system will need to be integrated with dozens of those ancillary systems.

Once your consultant works with your team to identify the few best options for your organization, they can then help you to craft a request for proposals (RFP) that effectively reflects your business needs, performance requirements, partnership expectations, installation and integration issues—the whole range of concerns that will allow you to make a fully informed choice.

3. Get it in writing

Once you've identified the system that's right for your institution, your consultant can play a key role in helping you negotiate a contract that effectively protects your organization and helps ensure that your vendor and your system follow through on their promises. A good consultant will understand that price is not the only object. The goal is an effective relationship between your organization and the system vendor. Key contract issues include:

  • Service level agreements that make it clear who you call if you have an issue, how quickly the vendor will respond, how long you should expect any repairs to take and your recourse if those promises are not met
  • Dispute resolution language that spells out exactly how any disagreements between you and the vendor will be resolved
  • Limits on pricing changes during the term of the contract
  • A termination clause that clearly defines the length of the agreement, when the agreement must be renewed and how much notice you must provide if you plan to make a change.

4. Get the most from your investment

When implementing your new system, don't automatically configure it to replicate your existing processes. There are almost certainly opportunities to re-engineer your operations to more fully exploit the new system's capabilities. Remember, you're investing a lot of money, time and effort in choosing and installing a powerful tool. Limiting that new tool to your old tool's role means wasting the chance to realize the return on your investment.

Financial institutions are facing tumultuous times. Having the right core system in place and taking full advantage of its capabilities is one way to succeed in them. Make that decision carefully, and with the right help.


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