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Eiichiro Yanagawa

Legacy modernisation in Japan's financial industry

BY EIICHIRO YANAGAWA

This post examines the current status and future outlook of legacy modernisation in Japan's financial industry based on a survey Celent conducted in 2015. The survey targeted insurers, financial institutions, and brokers. Additional information was gathered in follow-up interviews through 2016.

Key terms of the survey are defined as:
- Legacy modernisation: Updating an existing system.
- Legacy system: A system that has been developed and in place for many years and possesses many features but is difficult to upgrade.
- Modern system: A system built with high-performance, cutting-edge features that enable easy upgrades and are able to separate code and business rules.

The survey focused on these key research questions:
1. At what state are Japan's financial institutions in terms of legacy system modernisation?
2. To what extent are business cases being considered in the legacy modernisation process?
3. To what extent are companies looking at employing new technologies, and how is this affecting modernisation?

Findings
The state of modernisation
More and more organisations are seriously considering legacy modernisation and, on the whole, institutions are entering the implementation stage. The norm in terms of replacement strategy is a new system replacing the older system, new code is written and the platform replaced; the reasons for this are that this strategy tends to be most closely aligned with organisations' risk tolerance and the best match their IT skills competencies, and cost parameters.

As organisations progress to the implementation stage of replacement projects, they do not always sufficiently consider potential solutions such as software as a service (SaaS) or business process outsourcing (BPO). The greatest challenge for companies is selecting the optimal program. Companies expect the following from vendors: strategic advice, new and old system expertise, and a proven track record.

Business case perspectives
When companies look at their IT environments, they see new product and customer service considerations as greater challenges than processing costs and regulatory considerations. Evident modernisation benefits include reducing IT costs and making operations more agile, but merits are not being seen when it comes to optimising business operation costs, revenue, increasing business opportunities, or entering markets.

Business cases are generally only used as tools to monitor progress rather than functioning as live documents. The bulk of costs are being allocated to IT projects, in particular upstream aspects of the process (legacy analysis and defining requirements). It is too soon for any valuable information to come from analysing and assessing modernisation costs.

New technology adoption and its impact on modernisation
Technological challenges include system integration, a lack of flexibility among apps and data model rigidity, and IT duplication and integration difficulties. Companies have yet to reach the stage where they are actively considering data conversion and migration.

Faith in the competency of IT units is extreme – either extremely strong or extremely weak. Changes in the roles of business and IT units that have accompanied advances in modernisation have yet to translate into changes in the responsibilities of these units.

Recommendations
Celent recommends that Japan's financial industry consider legacy modernisation and its merits. Ultimately, we find legacy modernisation to be a synonym for business modernisation, and a smart move when it comes to digital innovation.

We examined innovation – that is to say Joseph Schumpeter's concept of "new combinations." Unfortunately, legacy modernisation in Japan demonstrates a distinct lack of dynamism when measured against the innovation of the Industrial Revolution.

Let it be stressed that in Japan's financial industry, "legacy modernisation" is merely a synonym for creative destruction, and, at its heart, is nothing less than a corporate strategy for growth.

Digital financial services
First, we will address the relationship between things digital, innovation, and legacy modernisation. We advocate that companies revisit how they frame the legacy modernisation challenge and stop thinking about it as a system unit or cost center issue. Companies talk the talk and undertake digital projects, but these are often limited to the front office – that is to say, the contact point with the customer.

At the same time, today's digital consumer is increasingly comfortable with digital processes. In Europe and the United States, digital native financial services have undertaken modernisation of core business processes to such an extent that they will not consider adoption of a process that cannot be digitised.

Legacy modernisation framework
When selecting a next-generation core system, the important thing is not to depend on industry-specific differences or degrees of complexity, but to establish a methodology that is versatile. In other words, the essence of legacy modernisation means a comprehensive framework that prioritises top-priority business strategy challenges, includes architecture design, and fully reflects the scope definition in light of a firm's capabilities and strengths to assess the feasibility of the project, all while making sure that it is a good fit.

Scope definition
Factors that will be crucial to determine the success of system modernisation projects include firmly understanding your organisation's priority challenges and appetite for risk coupled with a good project scope definition. This involves determining priority areas, what to procure and build, and what to cut – all within the scope of your risk tolerance.

Maximising the use of limited business resources to respond to increasingly diverse and sophisticated digital users' needs cannot be achieved by simply letting things take their natural course; rather they require intent and taking the initiative.

We believe that the following three points are relevant for the financial services industry:
1. At the same time that the modernisation of legacy core systems increases the productivity, product quality, and efficiency of financial institutions' abilities to provide products and services, it will also create new customers, consumption patterns, and change people's way of life on the consumer (demand) side.
2. The advent of new financial products and services and resulting demand-side growth and needs are accelerating the transition from a single channel to an omnichannel approach. This is mandating that financial institutions (the supply side) act to revamp cost structures to a degree that was formerly believed to be impossible.
3. Core system modernisation is a prerequisite for the optimal offering of financial products and services in a coordinated manner with marketing activities, because this is not something that can be achieved merely by overhauling the sales channel.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.

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Eiichiro Yanagawa

Eiichiro Yanagawa

Eiichiro Yanagawa is a senior analyst with Celent's Asian Financial Services group and is based in the firm’s Tokyo office. His research focuses on IT strategy issues in the Japanese and Asian banking and financial industries.

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