System Selection: Strategies for Success

by Jimmy Sawyers

This is the first installment in a five-part series on system selection by Jimmy Sawyers, Director of Consulting at Reynolds, Bone & Griesbeck PLC in Memphis, Tennessee. The following excerpts appear in the book, IT Auditing for Financial Institutions, written by Jimmy Sawyers and published by Alex Information.

Installments will include:

System Selection: Strategies for Success
The Anatomy of a System Selection
20 Questions for Vendor References
20 Rules of Vendor Negotiations
The Outsourcing versus In-House Debate Settled Once and For All

One of the best ways to reduce technology risk is to follow a structured approach to system selection. By performing the necessary due diligence, financial institution management can make informed decisions that support the financial institution's strategic goals.

Rarely is a financial institution completely self-sufficient when it comes to information technology. Most financial institutions rely on vendors and multiple service providers for critical business functions. This reliance makes due diligence imperative.

The ABA Banking Journal Community Bank Competitiveness Survey released in February 2002 noted that core processing has unseated Internet banking as the top technology spending priority for bankers. This shift in spending priorities may be attributable to the significant number of five-year core processing agreements signed in 1998 as many banks prepared for Y2K. These contracts will renew in 2003 and while technology spending growth is flat or negative in most industries, the cyclical nature of bank technology spending is evident once again.

Clearly, the cost and related complexity of the system will determine the extent of due diligence. For example, the choice of an Accounts Payable software package will not require the same amount of due diligence as a Core Processing decision would. The latter is a long-term relationship that has a direct impact on the safety and soundness of the financial institution. Accordingly, the decision must be informed and documented.

Considering the difficult nature of most conversions, financial institution management must have a compelling reason to switch systems. To that end, it is a good practice to consider the incumbent as the leader until unseated by another vendor. Oftentimes, financial institution management will find that the incumbent vendor can meet system requirements if the current system is properly reviewed. Financial institution management may not be aware of all of the system's capabilities, or the vendor may have developed a new module that "breathes new life" into an old system. Giving the current vendor an opportunity to show what is new can be a good practice.

The Importance of Leadership
The management team without a strategic plan is most likely the same management team who does not perform the necessary due diligence when selecting a system. Their haphazard approach to planning extends to system selection decisions. You are not likely to find this management team defining the financial institution's requirements for the system, developing a well-written request for proposal (RFP), or evaluating several vendors on a level playing field. Instead, the modus operandi for this group normally involves seeing which vendor will:

A. Wine and dine them the best (got a corporate jet or a membership at Augusta?)

B. Be the low-cost provider (this group is typically "penny-wise and pound foolish")

C. Install the system quickly to meet a fast-approaching deadline (remember, this group doesn't plan)

This group normally has painful and disastrous installations because decisions are made without complete information and with no input from end users. As a result, the users will most likely reject the system as "not as good as the old system" because proper buy-in was not obtained.

Technology risk can be greatly reduced through proper due diligence and a structured approach to system selection. During IT examinations and audits, examiners and auditors are now requesting and reviewing all documentation related to significant system selections. The documentation should consist of more than just a spreadsheet.

Vendor Financial Stability
Given a financial institution's dependence on its core processing software and the potential difficulty that a forced conversion could bring, it is imperative that the management of any financial institution review the financial stability of its core processing software provider, and other major vendors on at least an annual basis. Hopefully, a review of the vendor's financials was performed when the vendor was selected, but an ongoing check of the vendor's financial health will alert financial institution management to any negative trends or warning signs.

Given the dot com failures of 2001 and 2002, financial stability is more important than ever. As many unprofitable technology companies captured the minds and imaginations of millions during the dot com boom, some of the old rules were cast aside in favor of blind optimism and euphoria. As a result, many companies who discounted the importance of a vendor's financial stability were rudely awakened. Terms like "cash burn rate" became part of the IT vernacular as companies raced for profitability before their cash ran out. As the market spiraled downward, the wellspring of easy cash that had existed during the boom dried up. Venture capitalists who had plowed such fertile and forgiving ground during the late 90's, now faced angry investors on one side and the unraveling of years of hype on the other side as technology companies failed at record rates.

Fortunately for financial institutions, most of the big names in financial institution technology weathered the storm just fine. As we now see today, steady, well-capitalized and profitable still wins the race.

A good practice is to have the senior credit analyst in the financial institution review the vendor's annual report and financial statements. The review should be documented and reported to the board of directors. Chances are, if you wouldn't make the vendor a loan due to financial instability, you may want to reconsider doing business with them.

The next segment will feature The Anatomy of a System Selection.

First published on BankersOnline.com 5/13/02