Is a Core Conversion a Waste of Time and Money?
Every year, many credit unions embark on the holy grail of projects, the core system conversion.
by. Kirk Drake, Ongoing Operations
Every year, many credit unions embark on the holy grail of projects, the core system conversion. Maybe it’s because your core provider has released a lousy set of patches and wasted everyone’s time for the umpteenth time. Maybe it’s because you feel “the technology” is holding back the credit union’s mission and vision. Or maybe it’s because you are simply sick of being relegated to problem child status and complaining about the same problems with the core software year after year after year. While there are some legitimate circumstances (such as mergers or major line of business changes) that may warrant a new core, I believe the core system problem is usually caused by two issues within most credit unions. First, cores have a huge financial interest in having credit unions run around in circles switching cores. Second, some credit unions can hold grudges a long time. Let’s start with the first problem.
Each time a credit union changes cores it can result in massive income from licensing fees for the new core; many times this amount reaches into the millions of dollars. The software business model is to build something once and sell it many times; but with the constant consolidation of credit unions, they have no pool of new customers…Unless they can convince the existing credit unions to change cores on a regular basis.
This “churn” is how these huge companies continue making software sized profits. The challenge for these traditional providers is that the annual maintenance and support fees from credit unions probably don’t pay the ongoing development costs on top of the daily operational costs. So, the core sells new products and services to fund new R&D. Aggravating the situation is that the funding invariably goes to new things, not to addressing things that don’t work very well. And, frankly, getting 300 or more credit unions to agree on the “right” way to do anything is impossible. Ultimately, the core relies on these conversions to fund new development and provide profits.
The second problem is the one that credit unions can do something about. Credit unions need to look at their core providers more as business partners and less as vendors. Business partners require more trust, more communication, more investment, more forgiveness, and more give and take than a vendor-client relationship. In a vendor-client relationship, the client demands the vendor know the market, adapt quickly, and offer relevant products. The problem with this type of relationship between credit unions and cores is that it takes years to develop the sophisticated and complex core systems; and the credit union market doesn’t move quickly. Without the partnership’s communication, trust, and forgiveness…A few bad moves by a core and a significant chunk of business walks out the door.
Having done a core system conversion from EDS World to a Fiserv XP Solution in my first two years as a credit union employee, I remember the excitement and challenges that came out of a core conversion. The big day came when everything magically went live, all of the hours, and all of the new technology. Ten years later as a CTO of a mid-sized credit union, I led another conversion myself. This time we spent several million dollars on software and several million dollars of staff and member time doing it. The credit union’s executive team firmly believed that the core was getting in the way of our business plans. Three months after doing the second conversion I realized we had hope again, but the same problems that prevented us from enacting change at the credit union still existed – Us. It wasn’t the technology after-all.
Fast forward 7 years -I have spent much of my time building a successful technology CUSO that works with over 400 credit unions…I have led a startup that began with 2 employees and is now around 40. In these past 7 years we have done 3 CRM conversions, 3 accounting system conversions and a handful of other projects. In each case things have gotten slightly better – we have added some functionality that made things a little more efficient. But ultimately, it is our use of the technology that was the real challenge. Getting staff to believe in the existing functionality and building support processes and systems that force their use is what has garnered the efficiency. Sadly, it never was the technology itself and it never will be. Today our philosophy is ‘show me a business process working manually and then we will consider buying technology to make it better’. If you can’t make it work manually –technology can’t fix it.
In credit union land we have a shrinking industry, where innovation can lead to fewer credit unions; and the burden to new entrants is too high. Consequently, cores must get more money from the same or fewer clients – unless those clients change the model. Credit unions need to embrace partnerships that incent the right performance from their partners. They have to stop thinking about cores as off-the-shelf software and instead as a business partner. There needs to be forgiveness for past mistakes and cooperation to establish a new partnership model where both partners participate and flourish.
If credit unions approached their core system as a partnership and without the baggage of prior failed efforts, I think they could really improve the broken system that exists today. Instead of dragging out the tired, old, failed issues with their core providers; credit unions could spend some time thinking about the ten things their partner could do to either A) bring more revenue and/or B) reduce expenses. Then calculate the value of what they think those changes would be and offer the core a portion of that to fix the things they dislike. For example, if changing the way relationship pricing works would allow you to better serve the top 10% of your members – then spend money on that. If making a change that allowed you to serve the bottom 20% of your members with half the staff – then do that. Investing in a partner in such a way that it grows their own business and improves profitability will ultimately improve the margin of both parties and help stabilize the dysfunctional credit union core provider shuffle.
In many cases, throwing out of 10, 20, or 30 years of system knowledge to get 1 or 2% improvements in very small areas of the credit union’s business with a new core is a waste – a waste of time, energy, and massive amounts of money. Whatever the reason, whatever you think you will get from doing a core conversion, consider the possibility that it might not be there and take a long, hard look at how well you’re using the technology you’ve got.
