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Click here for "Part II of feature"

Budgeting for E-banking (Part-1)

[ R P Singh, the author is a specialist in Banking IT systems & is contributing a special series of features on Banking Technology]

One of the problems that afflict any information technology project is the cost escalation. When you are planning to implement an IT project you must take a detailed look at the costs involved. If not calculated properly, the cost calculation can overshoot by 100 to 200 percent. And if the project is in crores of rupees, one can not overemphasise the consequences. Important banking projects these days -such as centralised core banking, Internet Banking, Treasury etc. easily come in this price range.

In this article I will discuss some of the areas that cause cost surprises in major IT project implementation.

Product SW Cost Structure: The cost structure in any proposal from a vendor, will have three components. There will be a one time license fee which the vendor will charge you. Another, major component is the annual maintenance charge or the Annual License Fee. This can vary from 10 to 20 percent of the software cost. This usually includes all the enhancements of the product that the vendor will release from time to time. And the third will be the professional service charges. Service charges will be applicable to all activities in which the professional of the vendor will be working on your project. The last component is most prone to cost surprises.

Professional Service Charges: In the contract of implementation and support this rate will be marked as per-day fee for vendor professionals, allowance and hotel charges (if applicable). Whenever you want to implement a core banking system, treasury system or internet banking system, it will have to be approved by your Board of Directors, simply because of the financial implication. And imagine the impact when you find that your entire budget is over and the project is only 50 percent complete.

The main culprit here is the professional fee for consultants. It is not always necessary that the vendor engineers are the most proficient ones. In fact most of the vendors send only the second or third line of consultants / engineers for implementation projects. This means that while the vendor consultants are refining their skills on their product, you keep paying more and more. Or you become their training ground. Besides, the professional service effort is always an estimated effort, you can not bind the vendor once the work agreement is signed off.

In situations where the system integration has to be done between two different systems, such as in the case of Internet banking or treasury systems, which have to be connected to the core banking system using APIs (Application Programming Interface), the risk of cost escalation on this account increases many folds.

The one way out seems to be to provide for a fixed charge for professional services. Most probably you will have selected the product through a quotation process form a number of vendors. And you can insist on a fixed charge for the professional services, else the quotation has no meaning. Another alternative is to have a man-days budget with a variation cap incorporated in the contract.

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