The Remedy Blog

Thoughts on Outsourcing Your Core Software

| by Charlie Kelly | 0

In a previous life working at one of the largest core vendors, I had the opportunity to evaluate the decisions of over 100 financial institution clients who migrated their core software from being hosted in-house (I/H) to being hosted in an outsourced (O/S) environment at their vendor.

Let me explain what this migration entails. To understand the difference between running your core software I/H vs. running it O/S, think of software running on a server somewhere within your financial institution’s walls as I/H. If you opt to take all of that software and move that over to the vendor to run it within their data center, that would be O/S.

There are other common terms for an outsourced environment. It is referred to as “Hosted”, “ASP (Application Service Provider)”, “SAAS (Software as a Service)” as sometimes even “In-the-Cloud”, although that term is a more generic representation.

These experiences might be helpful to CEO’s who have yet decided if they want to migrate. Let’s discuss them by putting them in the questions that CEO’s should be asking their vendor and internal teams.

1. What will I gain if I move to a hosted environment?

The migration of financial institutions (FIs) from I/H to O/S has been happening for quite a few years. The reason most FIs migrate is that their vendor has a more secure environment for their hardware, has strong disaster recovery processes, and gains efficiencies in hosting multiple FIs on the same hardware and software. The question is whether they are willing to pass those efficiencies on to you. The vendor is centralizing a function that allows the FI CFO to concentrate less on buying hardware and hiring technical experts and spend more time running your FI.

2. What will I lose in the migration?

Most migrations from IH-to-ASP seem to go smoothly as long as the FI does not try to change core vendors and migrate to outsource at the same time.

Probably the biggest complaint we hear when clients move their core to a centralized environment is that any customization that the FI has made to their environment outside the standard vendor software build will likely no longer be supported in an O/S environment. The reason that the customization is not supported is that the vendor gains efficiencies primarily by supporting a vanilla version of the software in order to host multiple FIs in a single data center. Simply put, vanilla is much easier to support centrally.

We always ask our clients to map which software will move to an outsourced environment and which (if any) will remain hosted at the FI location. The reason for this is that the communication between software and hardware hosted in multiple locations may cause problems that the vendor may not predict. These are called environmental issues and if they occur they may lead to system latency (aka -why is this thing so slow?) or other technical issues that vendors are often not adept at handling.

3. Will outsourcing cost me more or less?

In general, software hosted by your vendor will lead to a larger invoice from the vendor. But, when you look at total cost of ownership, you will no longer be paying for the servers you used to run in your branch, the annual software maintenance, floor space if you can quantify that, and likely result in reduced salaries from the individuals that used to handle operating system maintenance, database administration, and possibly software development.

A driver of your final invoice is what you currently pay for your IH software. This might be a good time to consider hiring a consultant to analyze your product options and total cost of ownership before and after. A good consultant will have experience in I/H-to-O/S migrations, will analyze your products and ask questions you may not be considering, likely can find enough vendor cost reductions to offset any fees they may charge.

4. What else should I be considering?

Timing will be critical when making this decision and many FIs underestimate it when planning. A few questions to ask:

  • When does your I/H contract end?
  • Any technical people retiring or likely to quit in the next 24 months?
  • When is your hardware or operating systems software due to expire?
  • How much lead time do I need to run my analysis?
  • How much lead time does the vendor need for the migration?

I hope this helps anyone considering a migration. Good luck and feel free to reach out if needed.

Trusted Advisor to Banks and Credit Unions

Remedy Consulting helps financial institutions (FI) thrive through best-in-class fintech consulting services specializing in System Selections, Contract Negotiations, Outsourcing/In-House Advisory, Bank Mergers & Acquisitions, and FI Strategic Planning. As a trusted advisor to banks and credit unions located in Wisconsin, the Remedy Team has executed over 700 system selection and vendor negotiations since 2016. Our clients receive a cost reduction on their core vendor contracts and increased efficiency with Remedy's Price Repository. To learn more about Remedy Consulting, contact us today!

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