Yuval D. Bar-Or

April 30, 2008

The decision to switch provider(s) of credit risk management tool(s) can be challenging. The most common reasons for contemplating such a change include:

• The existing tool has proven to be flawed, inaccurate, or unreliable.
• The tool’s subscription price or maintenance cost may be seen as too high to justify the benefits.
• The tool may require an unacceptable ongoing commitment of personnel.
• It may be difficult to train new generations of staff members in use of the tool.
• The tool may not link easily to other critical systems.
• There may be concern that the vendor’s commitment to support the tool is declining, raising issues about potential future quality and reliability.
• The tool may rely on economic theories that are falling out of favor.

The main challenge when faced with “switch versus retain” is that there are no guarantees that new tool(s) will lead to a better outcome in the long term.  This often leads to retention because “the devil you know is better than the devil you don't know.” Most firms prefer to keep the tool they are familiar with rather than take a chance on something new and relatively unknown. Other concerns and issues include:

• Does another vendor have a legitimate replacement? Will it perform all the functions of the replaced tool? Will it introduce more uncertainty and model risk?
• There is a significant downside to making the switch (at significant cost), only to discover glitches or inferior performance.
• Few people are comfortable taking on such risk due to reputation and career risk.

Complicating the decision, or more accurately the debate around the decision, are the reasons why insiders may argue for or against the switch:

• Cultural preferences for or against a switch
• There may well be internal resistance by people who have built a career around a particular solution, fearing that a different solution will endanger their internal standing and importance.

The switch decision typically is easiest to justify if there is reason to believe the existing solution is flawed, since logic dictates that a poorly performing tool must be replaced. A decision to retain is more likely when the product or tool in question is part of workflow that has already met with regulatory approval. No one wants to make a change that will add to regulatory scrutiny.

The bottom line is that a switch is only appropriate when there is solid reason to believe that such a move will lead to tangible benefits. Some relevant benefits are: cost savings, greater accuracy, or better workflow integration.

Top

© 2008 Yuval Bar-Or and The Light Brigade LLC. All rights reserved.