Does Core really matter? Some see it as a commodity. A 30-year veteran of the core banking...

In May of 2003, Nicholas Cart broke convention with most technology experts and wrote an article for the Harvard Business Review entitled, "IT Doesn't Matter." His theme was that information technology had become a commodity. He further stated that it was scarcity, not ubiquity, that makes a business

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Needless to say, Mr. Carr's article was met with an outcry from the technology community that has always touted IT as being critical to creating competitive advantage. After all, that IT has deep value was and still is very much the "sacred cow" of the technology industry.

For years, almost every core banking software vendor has made a similar claim-that their core software solution provides a financial institution with a competitive edge. On the other hand, consultants have often argued that the core systems available to banks today have become a commodity. Being that I spent most of my career selling core banking software systems, I always cringed at this notion. One can, however, see where this thinking has come from.

Other than the client/server systems that broke into the marketplace in the early Nineties, no single core banking software provider has introduced anything close to what one might call "revolutionary innovation." There were graphical user interface (GUI) front ends, open architecture, middleware, service oriented architecture, and Microsoft.net to name a few advances. But, in the absence of any earth-shattering news on the core banking front, one can see how the commodity label has stuck.

The argument that core systems create a true competitive advantage for a bank stems back to the late seventies and early eighties. It was then that small, more affordable mini-computers became available and community banking systems which ran on these systems came into vogue. It was a new alternative that let a community bank "control its own destiny" and have what they believed was true competitive advantage over those institutions who chose to remain with their service bureaus and correspondent processors. But that was then, where are we today? Does Core really matter?

Answering that question makes for an interesting debate among bankers, vendors, and the consulting community; but let's get some facts out on the table.

First, no single vendor organization or core software product can lay claim to the fact their product will deliver better results when it comes to ROA, ROE, or efficiency ratios than any other core product. Surveying the top performing 25 or 50 community banks in each of those categories will leave you with a list of progressive, well-managed banks, all having great success and yes, running on a variety of different core systems. No single vendor or product is clearly dominant in these measurement categories.

Second, if one digs deep enough into any vendor's user base, you will typically find a wide range of client satisfaction and success with the product. You have users that are ecstatic (typically the vendor references), some that are reasonably satisfied, and those that are totally dissatisfied and looking to make a change.

It's a puzzling phenomenon: The same core software from the same vendor organization, implemented using the same methodology, supported by the same customer service organization produces totally different degrees of satisfaction.

Understanding these two points and acknowledging that every core vendor has challenges to some degree integrating third party products with their core, one can see how consultants may have adopted their position that core systems are a commodity. So where does the hype end and the logic start?

Why new runs like old

Community bank consultant Art Gillis once said when speaking on the subject of core systems (and I am paraphrasing), it is important that you find the right system for your bank, not necessarily the best system.

So, a logical starting point might be, "Is your bank on the right system for your bank?" Like many bankers, you may feel your core system is lacking. Case in point, "core systems" is listed as the number three spending priority in the 2007 ABA/ABABJ Community Bank Competitiveness Survey. This is ironic if core systems truly are a commodity. But, before you take yourself down the time-consuming path of a complete due diligence study, understand that despite your concern, you may already be on the right system for your bank. Here's why:

It is an accepted fact among both core banking software vendors and the consulting community that banks, at best, use only 30-35% of the functionality available to them in their core systems. This happens for several reasons. Upon selection of a new core system, banks are faced with the dreaded and often very stressful implementation/conversion process. In order to simplify this process and reduce anxiety for the bank, vendors will often convert the bank pretty much "as is" introducing as little change as possible as part of the conversion. In doing so, the bank ends up running their institution on the new software very much like they used to run their bank on the old software. Much of the newer functionality is either lost or minimized.

Also, over time, there will be turnover at the bank among key individuals who may have been part of a core evaluation. As these people are replaced, the new employees often just "accept" that what the system does is all that it can do.

How to find if it's right

There is a logical process that any community bank can take to determine if it is on the right core system.

The first step your bank must take is not an IT step at all. It is to go through a formal strategic planning process/business assessment meeting. Your senior management team if not already doing this, needs to come together on an annual basis to honestly and candidly discuss the most critical aspects of everything you are attempting to do-from re-visiting your mission statement to determining what is (are) your market(s).

Most importantly, what specific, measurable business objectives will you set for your bank to measure your success in the coming year?

These all may sound like basic questions, but in my 30 years calling on community bank executives, you'd be amazed how many times I asked these questions only to be met by blank stares. This first step will help determine the basic criteria for identifying the "right" core system for your bank.

Second, you need to determine if, and how, your current core system can help you achieve your performance objectives. This is where you need to get your current vendor involved. Essentially, you need to have the vendor come on-site and

It is very important that you emphasize to your vendor that you wish to be presented to as though you are a "new business" prospect and not a current user. This way, you get to see the very best functionality that your vendor is currently selling. This exercise will help you uncover the true capabilities of your core system and help you determine the best course of action going forward.

It should become clear from this whether or not you are on a core system that is, or can be, the right system for your bank. If you are, you need to work closely with your core vendor to ensure you are on the most current version of their software and that you are taking advantage of any tools, advanced education, webcasts, user events, etc. to help you utilize your core system to the best of your ability.

It is critical that you maintain good lines of communication with your core vendor. In the core banking software business, everyone throws around the term "partnership" rather loosely. The truth is, it is only a true "partnership" if both parties work to make it one.

What should vendors be doing?

Overall, the core banking vendors deliver outstanding technology tools. That does not mean, however, there are not some areas for improvement. If there is a shortcoming, it most likely comes in the form of setting unrealistic expectations for the bank (e.g. seamless integration) and in how vendors educate (not just train) a bank's personnel as to how they can utilize the new technology most effectively.

The "train the trainer" concept has been around since the mid-1970s. How is it that some 30 years later, most vendors still utilize this concept as their primary mode to educate bankers about the new system they have just invested in?

In this day and age of advanced technology, it is time that vendors provide more advanced educational offerings for their client banks that go beyond the fundamental training they now provide as part of their delivery process. Many core systems, for example, now have functionality that can help customer service reps cross-sell various bank products. In talking about this aspect of their systems, vendors will often note how these features can help the bank create a 'sales culture.' It's time the vendor organizations helped educate banks on the actual steps they will need to take to establish that culture, not just what key to hit to advance to the next screen.

If vendors are going to sell the technology, then it only makes sense that they get very good at educating the people who are going to use it. This was horribly lacking when internet banking first came to the market, and it is an issue as banks attempt to sell remote deposit capture to their commercial customers.

Core banking vendors need to rise to the occasion and develop new methods to help educate their clients on how to more effectively use their core banking systems.

So, does core really matter?

My vote is in: Absolutely yes! Core does matter. Your bank's core system drives and controls the very lifeblood of your bank's business. Serving as the very foundation for your IT infrastructure, it impacts every facet of your operation. So it is important that you find, in Art Gillis' words, the right system for your bank, not necessarily the best system. As stated above, the core banking vendors deliver outstanding technology tools. It is important to remember, however, that your relationship with your core vendor is every bit as important as the product itself. You need to work closely with your vendor and maintain good lines of communication.

Do not make your core system your highest priority, however. Things like mission, focus, vision, and your people are more critical to the success of your community bank than your core banking system is. Do you really know what it is you are trying to do every day as a community bank? Answering this question is where effective use of technology has to begin. When you know this, when you have established a true sense of purpose for your bank, then evaluating all technology (including core systems) becomes a much easier process.

By Harold "Bud" Boughton. The author has spent the majority of his professional life marketing and selling technology-based solutions to the financial services industry. He now spends most of his time doing freelance writing and professional speaking engagements. He can be contacted at bboughton@inlinemarketingconsultants.com do a full-day product demonstration of their system.