New regulatory requirements coupled with an increasingly competitive landscape are pressurising financial services companies to upgrade their technology, yet the costs and risks involved are enormous. Hennie Pretorius, director at Business Edge Systems (BES), believes many of the answers can be found in the evolution of applications consisting of function-rich, industry-specific components.
The financial services sector was among the earliest adopters of technology yet, ironically, this historic openness to innovation is probably the major cause of the stress-related migraine afflicting many industry CIOs today.
According to Pretorius, a combination of factors, including new regulatory requirements like the Financial Intelligence Centre Act, the Financial Advisory and Intermediary Services Act, the Basel 2 Capital Accord and the advent of competitors with flexible modern solutions, are forcing organisations to fast-track technology upgrades.
"Financial services organisations are often loath to replace their legacy technology due to the massive investments they have already made and, importantly, the risks associated with major system replacements.
"There`s also the universal reality of multiple disparate systems with some level of integration, that has led, in many cases, to organisations having inter-dependencies between systems that often complicate any system migration."
As new products and channels like the Internet were launched, organisations often implemented these separately, resulting in duplication of functionality, limited integration and ultimately an inconsistent customer experience.
High-risk replacement
"The reality, however, is that it is a challenging task to replace these systems. Too many procedures have been built around them and the risk is simply too high," says Pretorius. "Start-up organisations have a very clear advantage in that they can implement a modern, integrated solution from the word go. Established institutions, on the other hand, are still facing internal legacy integration problems."
Then there`s the realisation of the need to move towards becoming business process-centric organisations - where a single business process can involve multiple departmental systems.
"Many organisations are implementing workflow and business process management (BPM) solutions," says Pretorius. "While there are immediate benefits, it is clear that although BPM links activities in a business process, it still does not integrate legacy silos."
A gloomy picture, indeed, but what are the possible solutions? Organisations can look at total redevelopment through the adoption of new technology, but, according to Pretorius, this should be a last resort. "Projects like this are time-consuming, expensive, have in-house political implications and are fraught with risk. The financial services landscape is littered with failures."
Organisations also have the option of enhancing existing applications through adding more functionality and improving aspects of the architecture.
"This requires major redevelopment and often results in less than optimal solutions," Pretorius says.
Integration remains elusive
"Some organisations," he adds, "are looking to port their applications to new technology, using automated tools to convert legacy code to a modern language like Java. The result is a solution with the complexity of the new technology, without realising many of the associated benefits. Once again, the underlying problems such as lack of integration are seldom fully addressed."
And what about packaged solutions in the ERP mould? Many financial institutions have implemented ERP solutions at some level, but this has generally been limited to the adoption of low risk modules like human resources and general ledger.
"This has limited value to the business as a whole and we seldom see organisations replacing their core business applications with ERP solutions," Pretorius says.
The implementation of a portfolio of packaged solutions is often a more sensible approach, offering lower risk in more manageable projects.
"Organisations opting for this route have to be careful not to repeat the silos created by their legacy applications," warns Pretorius.
"However, there are a number of myths around packaged solutions and the most common is that they eliminate the need for project development work. The reality is that there is always customisation and integration to be done."
Next-generation solution
A hopeless scenario? Not so, according to Pretorius, who points to next-generation industry-specific solutions that have been developed around business processes, rather than departmental divisions. These are typically built on the J2EE platform, consisting of loosely-coupled business components that have been designed to be extendible.
"This is a step beyond, for instance, the current open source frameworks which supply the nuts and bolts of the application, allowing the organisation to develop business functionality as required. These business components implement industry-specific functionality and can either be deployed as a complete solution or as components."
A loosely-coupled architecture enables an organisation to use third-party components where required and facilitates the migration path. Applications that were designed to be extendible allow for easy customisation, while still protecting the upgrade path - something that has been difficult to achieve in the past.
"The advantages are clear. Organisations can plug-in components as they are needed, maintaining existing systems if required. This combination of the flexibility of custom-build and the benefits of the package approach offers the most painless path for CIOs looking to migrate from their core legacy applications," Pretorius concludes.
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