The banking industry is undergoing a rapid transformation, driven by changing customer expectations, emerging technologies, and increased competition from fintech companies. To stay competitive and adapt to the evolving financial landscape, banks must modernize their legacy systems. In this article, we’ll delve deeper into the five key steps banks should follow to achieve next-generation legacy modernization and provide relevant statistics that showcase the importance of this transformation.
Define the target state: A recent Gartner report shows that 80% of the banking industry still relies on legacy systems, which can be costly and difficult to maintain, as well as hinder innovation. To begin the modernization process, banks need to create a clear vision for the future. This involves defining the target state for their IT architecture, considering aspects like simplifying and standardizing systems, modularizing and decoupling, and leveraging cloud and data technologies. For instance, banks that have adopted cloud technology report a 20–30% reduction in infrastructure costs and increased scalability.
To define the target state for their IT architecture, banks should:
- Assess current systems and identify pain points, inefficiencies, and potential risks.
- Analyze banking industry trends, emerging technologies, and competitors’ strategies to identify opportunities for improvement and differentiation.
- Establish a set of guiding principles that focus on simplification, standardization, modularization, decoupling, and leveraging emerging technologies.
- Collaborate with key stakeholders to define the desired future state, considering aspects such as customer experience, operational efficiency, and regulatory compliance.
Develop the modernization roadmap: Once the target state is defined, the banking industry must develop a modernization roadmap. This includes setting priorities, defining clear objectives, and identifying key milestones. According to a McKinsey survey, only 30% of banks have a clear roadmap for their digital transformation journey. By developing a strategic roadmap, banks can align their IT investments with business objectives and ensure a smoother transition to a modernized IT infrastructure.
Creating a modernization roadmap involves:
- Identifying the key initiatives required to move from the current to the target state.
- Prioritizing initiatives based on factors such as business impact, risk, and feasibility.
- Defining measurable objectives and key performance indicators (KPIs) for each initiative.
- Developing a detailed project plan that outlines timelines, resources, and responsibilities for each initiative.
- Communicating the roadmap to all stakeholders to ensure alignment and buy-in.
Adopt a flexible, iterative approach: Traditional waterfall approaches to software development have proven to be less effective in today’s fast-paced environment. Banking industry should adopt an agile, iterative approach to modernization, which allows them to respond to evolving business needs and continuously improve their systems. Research shows that organizations using agile methodologies are 28% more successful in delivering projects on time and within budget compared to those using traditional approaches.
To adopt an agile, iterative approach to modernization, banking industry should:
- Implement agile methodologies, such as Scrum, Kanban, or Lean, to improve collaboration, flexibility, and speed in delivering projects.
- Break down initiatives into smaller, manageable chunks, or iterations, to reduce risk and enable faster feedback loops.
- Establish cross-functional teams that include business and IT experts, fostering collaboration and knowledge sharing.
- Implement continuous integration and continuous delivery (CI/CD) practices to automate testing and deployment processes.
- Embrace a culture of experimentation, allowing teams to test new ideas and learn from failures
Engage the organization and manage change: Modernizing legacy systems is not just about technology; it’s also about people and processes. The banking industry must engage the entire organization and manage change effectively. This includes involving stakeholders, addressing cultural barriers, and providing training and support to employees. A study by the Project Management Institute reveals that effective change management can increase the likelihood of project success by 29%.
Effective change management involves:
- Identifying and engaging key stakeholders, including senior leaders, managers, and employees, from the beginning of the modernization process.
- Establishing a change management team responsible for developing and executing a comprehensive change management plan.
- Communicating the vision, objectives, and benefits of modernization clearly and consistently to all stakeholders.
- Providing training and support to employees to develop the skills and knowledge required for the new IT environment.
- Addressing cultural barriers and fostering a culture of collaboration, innovation, and adaptability
Invest in talent and capabilities: According to the World Economic Forum, 54% of all employees will require significant reskilling and upskilling. Modernizing legacy systems requires new skills and capabilities, such as cloud computing, data analytics, and agile development methodologies. The banking industry must invest in hiring and developing talent with the right skills to drive their modernization efforts forward. This investment will also help banks stay competitive, as 77% of banking executives believe a lack of digital skills is a key barrier to their digital transformation initiatives.
To build the necessary talent and capabilities for modernization, banking industry should:
- Conduct a skills gap analysis to identify the required skills and capabilities for the target state.
- Develop a talent acquisition strategy that focuses on hiring talent with expertise in emerging technologies and methodologies, such as cloud computing, data analytics, and agile development.
- Implement reskilling and upskilling programs to develop the existing workforce’s skills and knowledge.
- Foster a culture of continuous learning by providing access to training resources, workshops, and certifications.
- Collaborate with educational institutions and industry partners to develop talent pipelines and stay abreast of emerging trends and best practices.
Next-generation legacy modernization is crucial for banks to remain competitive in the fast-evolving financial industry. By following these five key steps—defining the target state, developing a modernization roadmap, adopting a flexible iterative approach, engaging the organization, managing change, and investing in talent and capabilities—banks can successfully transform their legacy systems into a more agile, efficient, and innovative IT infrastructure
