Remaking a Banking Technology Leader for the Era of Digital Disruption
Banking, like other industries, is feeling the impact of a digital tsunami – a disruptive, transformational force.
Entertainment and retailing may get the lion’s share of attention, as the tsunami collapses traditional distribution channels, wipes out brick-and-mortar stores and reshapes customer relationships.
But banking is subject to the same dynamics. Traditionally a slow-moving, siloed and heavily regulated industry, banking’s fundamental relevance had come into question as digital payment systems and nontraditional players like PayPal invaded its space. Customers in all demographics are used to the immediacy and convenience of internet and mobile platforms that increasingly have invaded every aspect of their lives. They increasingly don’t want to visit branches or interact with the bank via telephone call trees. Given the range of options available to them, many are wondering if they need a relationship with a bank at all.
To respond, banks need to transform. And they can’t do that successfully unless their technology supports the transformation.
Open Solutions was a leading provider of core banking software, the programs that drive a bank’s most essential functions. But to help itself – and its clients – survive, it had to build an entirely new offering. And that meant remaking the company itself. Led by Louis Hernandez Jr., the Founder, Managing Director and CEO of private equity firm Black Dragon Capital℠, Open Solutions created a new banking technology paradigm that helped banks and credit unions in the US and overseas reassert their central role. The strategy led to the successful sale of and exit from Open Solutions and ushered in the next generation of open-architected systems which continues to thrive today (though the future is, as always, unclear).
The ‘digital tsunami’ is disrupting banking, just as it has disrupted entertainment and retailing.
The digital tsunami represents a second wave of digital disruption. In the first wave, at the turn of the 21st Century, innovation destroyed the barriers between industries. Retailers found themselves threatened by Amazon, and traditional movie and TV studios were challenged by Netflix and other streaming options.
But now the pace of innovation has accelerated so radically that it’s destroying the barriers within industries. Technologies are being disrupted. The barriers between industry silos, and between tasks, are removed. Middlemen are eliminated, and the core business comes into direct contact with the customer. An entirely new business ecosystem is the result.
In the case of banking, this led to an identity crisis and a threat to the traditional business model. Regulated financial institutions such as banks and credit unions exist to facilitate commerce in a safe and sound way. Throughout history, community-based financial institutions played a central role in serving small businesses and communities, creating and then sustaining the “American Dream.” But now, thanks to the advent of internet-driven and mobile e-commerce, customer expectations have changed. A new kind of customer demand for easy access and seamlessly integrated service emerged, and financial institutions were ill-equipped to meet it.
The banking industry was constrained in its ability to innovate – thanks to a combination of its innate conservatism, the prevalence of legacy technology that kept functions walled off from each other and regulation – which made it difficult to introduce new technology solutions. The average customer and employee found themselves in a world of green-screen terminals and layers of technology as financial institutions attempted to adapt. But the adaptation created slower and more complex processing, where a customer’s data couldn’t be shared from one bank department to another, while they were able to enjoy the benefits of smartphones, app stores and easy access in the rest of their lives.
That was the critical business problem that Open Solutions set out to solve.
Built to meet banks’ core data processing needs but had to evolve beyond that.
Cliff Waggoner founded Open Solutions in 1992 to realize a simple concept: a more open banking system built on client-server applications, tied a relational data model around a person or an entity.
The company achieved early success by developing technology solutions for the banking industry’s critical and highly regulated core processing functions. The initial offering was a client-server-based, open-standards system built on a relational database model. There were two different applications – The Complete Banking Solution (TCBS) and The Complete Credit Union Solution (TCCUS).
But revenue growth proved elusive. It was costly and complex to service the two different product lines. Cash burn was an issue. To address these challenges, investors led by Axiom Ventures, Connecticut Innovations, and Menlo Ventures recruited Louis Hernandez Jr., Founder of Black Dragon Capital℠, to become Open Solutions’ Chairman and CEO.
Taking a systematic approach
Hernandez and his team took a systematic approach using The Black Dragon Playbook℠™ to analyze Open Solutions’ challenges and opportunities, and plot a new course.
To move Open Solutions forward, Hernandez took his customary systematic approach. He and his leadership team, comprised of both new hires skilled at efficient operations as well as Open Solutions industry veterans, developed a thesis about the current and future state of the market and applied The Black Dragon Playbook℠™, a framework for transformation.
The thesis was the result of insights into the current realities of the banking industry. Based on Open Solutions’ and Black Dragon’s deep industry experience, and an extensive series of customer interviews, it was clear that banks and credit unions in the U.S. and overseas would benefit from a solution that enabled them to strengthen their customer relationships and reassert their relevance in the face of disruptive competition, all while meeting regulatory requirements and reducing costs.
The question was how to achieve this. The Black Dragon Playbook℠™ provided an avenue to the answers. The playbook is an analytic framework for managing downside risk and realizing the upside possibility. It assesses a company’s current strengths and weaknesses, establishes a strategy for market leadership and generates operational changes, personnel realignments, and performance metrics. In combination with The Black Dragon Leadership Index℠™, a tool for evaluating current and future leadership, and The Black Dragon Way℠™, which defines the elements of a high-performance culture, the Playbook determines the path to transformation.
Seizing the opportunity
Hernandez and his team seized the opportunity to create a single global solution to meet the banking industry’s most fundamental needs.
Initially, Hernandez and his team of Open Solutions industry veterans and growth-oriented new hires focused on immediate opportunities, adding complementary products, controlling costs and improving the quality of service.
But the Playbook pointed at a bigger opportunity. The longer-term goal was to exploit the power of Open Solutions’ data model to create a single global system, one that could serve any customer in any language, regardless of charter type, regulatory requirements, currency or product. There was also the opportunity to take advantage of the open architecture of the original products to a much greater degree. Years of customizing solutions for a variety of clients had led to the creation of multiple separate code lines, which were difficult and expensive to service and maintain. A ground-up rethink of the offering could address this challenge as well.
The solution was an entirely new kind of product, called DNA. It was conceived to address clients’ most pressing needs. It was designed to provide for client growth and customer intimacy, while also lowering costs.
DNA was not a stand-alone core technology platform, but rather an open platform built on an industry-standard technology stack. In effect, it was an operating system that allowed a bank or credit union to serve the same customer anywhere in the world via a single platform. Clients that implemented DNA could then customize it to provide for regional differences, regulatory differences, language requirements, and their own proprietary banking products. Customization was possible because DNA allowed the client to add applications that offered a wide range of capabilities, with the result that each implementation was unique to the client. Applications were available for customer service (including mobile solutions), audit and compliance and robust analytics.
The unified architecture supporting the application layer, plus the applications themselves, made it possible to build banking services that focused on people rather than on transactions. Banks were thus able to break down silos and sharply improve the quality of the customer experience.
The flexibility of the DNA platform also made it possible to create bundled solutions that addressed the needs of different market segments. It also scaled efficiently for smaller institutions as well as larger organizations. The approach also allowed Open Solutions to tailor implementation for international clients operating under a wide variety of regulatory and compliance demands.
The new operating system model was accompanied by a new pricing structure. Instead of seat licenses, as had been the norm, DNA transformed into a hosted Software-as-a-Service (SaaS) subscription model, generating a steady, predictable revenue stream.
To support DNA, Open Solutions was itself reorganized. Hernandez and Black Dragon led the structural transformation of the company from a complex array of offices, geographies and financial systems into a single global platform, a unified organization operating on a single P&L and a single global accounting and billing system. In all, the company invested $100 million in DNA, other products and services, new internal systems and infrastructure and operational initiatives. Thanks to these major structural changes, Open Solutions was dramatically better able to respond quickly to market fluctuations and capitalize on strategic opportunities. Investors agreed. Hernandez, his team and his backers took the company public. A few years later, they were able to take it private at a higher valuation. Throughout, Open Solutions was able to raise multiple rounds of debt and equity.
Growth continued apace as Open Solutions added products and services won multiple awards and captured the imagination of the marketplace. Open Solutions took openness to the next level with DNA Creator, an application authoring tool available to third parties, whose applications were available through the DNA AppStore, the first AppStore ever built for regulated applications. Over 5,000 apps were posted, some of them created by clients. These apps accelerated the speed of development and the array of customized solutions, generating substantial revenue for financial institutions that shared their innovations. Revenue from the DNA AppStore augmented the revenue generated by DNA subscriptions. The two together greatly expanded Open Solutions’ revenue and stabilized the company’s economic model.
Customer enthusiasm and loyalty also led to the birth of the Open Solutions Client Association, created by and for clients. The association, known for its signature event, conducted an annual client vote for direct R&D dollars, a process that helped changed the landscape for industry collaboration. Clients engaged deeply with the company, voting on future releases, sharing app developer capabilities and promoting their own newly created apps.
Each of these phases of the transformation, while ultimately successful, carried its own set of challenges. Hernandez and his team had to manage the changing needs of Open Solutions’ leadership, keeping continuity while bringing in new talent. They had to deal with increased complexity as the customer base grew into the thousands, and as the organization transitioned from growth to hyper-growth.
But these challenges paled in comparison to what was to about to come.
The 2008 financial crisis
The 2008 financial crisis forces a change in direction. It was the most significant in a generation.
Sparked by the collapse of the subprime real estate market, it soon engulfed the entire financial services industry and then the economy as a whole.
The crisis drove the banking industry to consolidate. Several Open Solutions clients were taken over. Revenues declined, a number of banks and credit unions were taken over by regulators. For Open Solutions, new sales dried up as the entire client base went into preservation mode, focused on cost controls and little else. Some clients vanished, including major ones. Lehman Brothers, for example, had been a significant Open Solutions client. Others, looking for safety and viability, fled to large vendors.
For the first time in its history, the company faced a sharp downturn in revenue. This forced Open Solutions to shift its focus toward helping clients drive efficiency. Return on investment, as opposed to revenue expansion, became the key sales driver and the core element of the value proposition.
The aftermath of the crisis leads to a successful exit. To the surprise of many partners and investors, Open Solutions was able to navigate the crisis and come through in good shape.
The shift to an efficiency-focused, ROI-driven sales model recaptured revenue lost to client closures in the span of 24 months. That level of success in the face of these extreme challenges demonstrated that the flexibility of DNA made it an effective generator of savings as well as growth.
Given this success, and given the ongoing challenges in the financial services marketplace, which would last for years, investors decided the time was ripe to monetize the company. While it was clear that Open Solutions could gain share in good times and bad, the company’s market-leading EBITDA margins of over 30% and its advanced technology portfolio, coupled with concerns about an extended recession, convinced the investors it was time to sell.
In 2013, Open Solutions was acquired by financial services technology giant Fiserv. Open Solutions’ DNA, and the hundreds of apps it supported, live on today as part of Fiserv’s offering.
The sale to Fiserv
The industry embraces the transformed Open Solutions, and a sale to Fiserv completes the success story.
The sale to Fiserv was the final validation of the DNA platform that Hernandez and his team developed. A larger company with extensive resources and a great brand, combined with an award-winning platform, was the perfect combination. Seven years later, DNA continues to be one of the best-selling core suites in the industry.
It’s the latest chapter in an ongoing success story, one that began when Open Solutions created DNA, and when the industry recognized the achievement. Even as Open Solutions navigated the hazardous waters of the financial crisis, the product suite received high praise from American Banker. Bank Technology News named Open Solutions one of the “Top 10 Companies to Watch in 2012,” along with the likes of Google and PayPal. The company was recognized as an innovator by Forbes. The DNA app store won recognition as well.
And even in the face of those severe challenges, Open Solutions’ finances remained strong. Between 1999 and the sale to Fiserv in 2013, the customer base more than doubled in size, as 4,000 new institutions came on board globally. Revenue skyrocketed from its 1999 baseline of $12.9 million to over $400 million in 2013. Open Solutions’ organic growth was two to three times the industry average. The operating margins of 32 percent were industry-leading. Open Solutions’ valuation surged from its 1999 base of $40 million to over a billion dollars in 2013.
The story of Open Solutions illustrates the volatile environment that the digital tsunami has created. Industries like banking and financial services are undergoing severe change. The companies that serve them, such as Open Solutions, need to understand those dynamics in-depth, respond skillfully and in many cases transform themselves in order to meet the demands of industry transformation. Hernandez’ and Black Dragon’s approach helped Open Solutions’ clients meet their most pressing demands and helped the company itself re-establish market leadership and navigate to a successful conclusion.
Says Hernandez: “The success of Open Solutions, and of DNA under Fiserv’s stewardship, validates the hard work of those early days in Connecticut, all the sacrifices of partners and employees, and the faith and trust that our early clients placed in us. Today the industry’s competitive landscape is shifting again. But I’m confident that the agility we built into the DNA product suite will allow Fiserv’s clients to compete and win. A few of the early team members have sadly passed away, and there isn’t a day I don’t think about the strong relationships we formed in those early days of sacrifice, intense effort and the joy that came with building a market-leading company. The existing team stuck with us and worked with new members to create a market leader. The teams that helped us navigate each phase of Open Solutions burned into me a desire to create great companies because I knew our successes came at great personal sacrifice for the key group that really believed in our cause. The basis of the Black Dragon model was hardened during those years. All the key leaders involved will forever be considered my family and the clients who trusted it will forever be trusted friends.”
Hernandez has gone on to run or advise large global enterprises and founded other companies that continue to thrive, but he has said that nothing has had a greater impact on his strategy and leadership than the learnings from Open Solutions.