The Modernization of Finance Institutes through IT Transformation


  • Finance institutes require powerful and flexible IT systems in order to support current business demands and enable future strategies

  • Modernization programs to break through the aporia of the flexibilization when reducing costs

  • Use data pools to identify the optimal standard software combination

  • est-of-Breed ist not a viable approach for IT transformations

  • Face the challenges of IT transformation in a goal-oriented manner



For businesses, a powerful and agile IT system is an increasingly important factor for success. This principle is especially true for IT-intensive sectors in which companies must constantly keep up with technological developments. In particular, large companies that have grown over the years face an enormous challenge regarding aging IT systems and simultaneously increasing cost pressures.

The financial sector belongs to the early adopters of information technology and is characterized by a high degree of IT intensity. Banks invest over 6% of their operating profits into IT, which is three times the industrial average (GartnerDB Research).

Banks use a majority of their IT budgets to run their systems (Run the Bank, RtB), in part due to their growing and aging system landscapes. They must then use their leftover resources to adapt their systems to new regulatory challenges, to transform their systems, and to implement innovations (Change the Bank, CtB). According to various sources, the ratio of RtB to CtB budgets lies between 70/30 to 80/20 (DB ResearchSAP Banking Blog).

The effort required for adapting to regulatory demands has visibly grown over the last few years due to the increase in regulation. This becomes clear in light of the large number of currently applicable regulatory norms as well as the frequent changes to these norms. While regulatory norms increased in Germany by a factor of 5 in the period from 2009 to 2012, the frequency of change during this period increased by a factor of 10 from 252 changes to 2,432 changes (Handelsblatt Jahrestagung Banken-Technologie 2012).

However, the amount of innovation resources available is currently below the amount needed to implement fundamental upgrades to the IT support infrastructure of the entire range of business processes. One indicator of this insufficiency is the fact the cost/income ratio of German banks has remained high for years, with an average of about 65% when compared to all banking groups (Bundesbank). Even when institutes recognize the need for strategic adaption, they do not possess sufficient means for carrying out these changes.

In this situation, it makes sense for many institutes to break through the knot of flexibilization and cost reduction with the help of a modernization program. This tactic brings with it the promise of using a one-time investment to create an IT system that will remain stable and flexible for years to come and whose future effectiveness is ensured particularly in regard to changes in strategy the business might undertake. Many institutes combine this modernization with a standardization of their IT systems by replacing proprietary systems with standard software. Between 2007 and 2011, businesses signed more than 1,900 new contracts to introduce standard software (IBS Intelligence).

In order to make a decision to modernize through an IT transformation, businesses not only consider the business case calculation and additional factors, but must also answer two key questions:

  • In the case of a standardization process, how can one identify the best software or software combination that corresponds to the specific requirements of the respective finance institute?

  • How can a finance institute master the enormous challenges involved in such an IT transformation?

Identifying Software

The market for banking software is diverse and contains over 90 providers with more than 100 systems. Various datapools and tools are available to help finance institutes orient themselves on this market.

In light of the range of banking focuses of finance institutes, a decisive element for narrowing down options in an initial selection round is the extent to which certain functional domains and business areas of the finance institute can be realized using specific standard software. The Database Banking Standardsoftware of the COREinstitute has aggregated the information about the systems available on the market. This database enables institutes to identify candidates for certain business areas in light of their additional functionality. In principle, this makes it possible to group banks according to domain – such as in the service landscapes of the BIAN – and to orient the software combinations according to these domains.

Regarding the desired standard, the question can arise whether it would be better to use a best-of-breed approach as opposed to standardizing the system. A recent article discusses this question in regard to situations that occur in mergers and acquisitions (M&A): Neue Möglichkeiten für Best-of-Breed-Ansätze bei der Verschmelzung von Retailbanken? In these situations, the question is often posed whether the best pieces of the IT systems of the businesses involved can be singled out in order to realize a higher quality IT system using this goal landscape.

The article points out the problems inherent in such an approach due to the high complexity that characterizes such transformation projects. The authors discuss possibilities for reducing the complexity of the transformation, such as with the help of Enterprise Architecture Management (EAM). They conclude that the means available for reducing the complexity are not sufficient to allow a best-of-breed approach to be recommended. When applied to the question of using best-of-breed approaches in IT transformations, the same findings hold true: as long as the initial and goal landscapes do not feature massive similarities and are not documented in detail, particularly in regard to interfaces, a migration strategy remains a better option than a best-of-breed approach.

When it comes to the aspect of flexibility, institutes would also do well to avoid a best-of-breed approach. A best-of-breed approach theoretically does allow for a more comprehensive or more specific functionality compared to a standard software solution. However, as the focus of finance institutes lies on business – and that means tending less toward rigid functionality and more towards flexibility – standardization remains the favored option.

Managing Challenges

The challenges involved in IT transformations are enormous as the complexity of transformation projects affects not only the management of but also the ability to steer the projects. When deciding to undertake an IT transformation, it is of central importance that an institute possess not only the know-how but also the capacity to ensure steerability during transformations.

The COREinstitute has summarized its expertise in IT transformations in the current White Paper “The Art of Adhering to Goals”. The paper discusses the central challenges inherent in IT transformations as well as proven solution templates. The authors begin by presenting their thoughts on the topic in regard to the phases of a transformation and then more closely address the issues of decision management, the necessary tools, and the integration of external support resources.


Finance institutes have a rocky road ahead of them in regard to necessary modernization and further industrialization. The transformation of IT systems plays a central role in this context because it can help solve one of the issues essential to the future of large businesses: aligning the flexibility of a business, in the sense of its ability to implement strategic changes, with efficient and effective IT structures.



DB Research…eye+on+efficiency.PDF

SAP Banking Blog

Handelsblatt Jahrestagung Banken-Technologie 2012

Deutsche Bundesbank…12/2012_09_monatsbericht.pdf

IBS Intelligence…emid=608

Datenbank Banking-Standardsoftware


Christian Horstmann/Mirko Schiefelbein/Martin Groschke, Neue Möglichkeiten für Best-of-Breed-Ansätze bei der Verschmelzung von Retailbanken?, in: BIT 3/2012

White Paper “The Art of Adhering to Goals”

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