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  A new Boston Consulting Group report tells European bankers: Take action to renew underperforming core banking IT systems or risk years of profit-dragging inefficiency.
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BCG report says European banks must renew core banking IT systems

European banks, struggling to cope with core banking IT systems that are becoming outdated, performing poorly, and draining valuable resources, must take a proactive approach to IT system renewal or risk being left behind by rivals that are turning information technology into a source of competitive advantage, according to a report released today by The Boston Consulting Group (BCG), a leading global management consulting firm.

The new report, “Renewing Core Banking IT Systems: Open Heart Surgery for European Banks,” explains key findings from an IT cost benchmarking survey in which comprehensive data were gathered from 21 leading banks in 10 European countries. The report is the third in an annual series that analyzes general IT performance data and their relationship to business performance, as well as investigates a chosen special topic in the industry.

According to BCG, successful renewal of core banking IT systems — the special topic of this year's report — depends on adopting a rigorous project framework that includes steps such as reducing complexity in the current business model, determining and prioritizing IT requirements and capabilities, weighing renewal options, and developing a target IT architecture. Core banking IT systems — which consist of applications for managing customer information, deposits, loans, and card accounts, as well as for processing and posting all types of transactions — will be increasingly important in terms of overall competitiveness and profitability over the next decade and beyond, the report says.

“Many European banks have core banking IT systems that have been developed and maintained in-house over many decades, and built using proprietary technologies that are now becoming outdated,” says coauthor Rainer Minz, a BCG senior vice president and global head of the firm's Information Technology practice. “Many are trying to function with a patchwork of legacy systems that not only cannot communicate or share data with one another but also require frequent and costly maintenance. The premier issue is whether they should opt for total renewal — the equivalent of open-heart surgery — or take a more moderate, less invasive approach.”

BCG notes that all of its survey participants currently engaged in renewing their core banking IT systems have experienced project delays, budget overruns, quality problems, organizational roadblocks, and in some cases project failures.

“Problems such as these illustrate that not enough banks are focusing on the critical factors for implementation success,” says coauthor Heinz Mollenkamp, a BCG vice president. “We feel there are four such factors: strong internal capabilities, careful selection of implementation partners, clear contractual parameters and roles, and rigorous project and change management disciplines.”

In terms of overall IT cost benchmarking, the report found that average total IT spending by survey participants continued to decrease, falling by 2.2 percent in 2004 following a decline of 0.1 percent in 2003. Average IT spending for 2005 is expected to show an increase of approximately 7 percent when final numbers are available.

The report further found that the downward trend in IT cost metrics continued in 2004, although there were wide variations among survey participants. On average, IT costs represented 9.5 percent of revenues in 2004, compared with 11.3 percent in 2003. IT costs as a percentage of operating expenses dropped from 15.4 percent to 13.6 percent, and IT cost per employee dropped from 22,000 euros to 20,000 euros over the same period. As in BCG's previous two studies on IT costs in the European banking industry, institutions with higher IT spending levels did not necessarily show higher overall efficiency.

The current study also confirmed a previous finding regarding IT and business mix: the greater the percentage of a bank's revenues that come from retail banking, the lower its IT cost metrics tend to be. The reason, according to the report, is that IT requirements are generally more simplistic in retail banking, with architecture and applications that are more standardized than in many other segments.
 
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