How much now do we need to “Run the Bank” ?

Posted on : 27-03-2012 | By : jo.rose | In : Finance

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The economic challenges of recent years have brought with it an increased focus on efficiency. Indeed, since the early 2000’s, technology organisations within financial services have been delivering cost reduction programmes on behalf of their client business units. In the main these have been successful, certainly in terms of meeting short term objectives.

The criticism leveraged at banks from a front office perspective over recent years is well documented and accepted ( by most ), both internally and externally. What is less opined is that the phenomenal growth with the Financial Services ecosystem also had side effects both culturally and structurally – many developed complex, and sometimes cumbersome, technology services organisations, the legacy of which will take time to re-engineer.

Now, there will many in FS technology leadership roles that will disagree, but there is an argument that at some point CIO organisations became detached from their clients. Indeed, many claim this to be part of the strategy…i.e. an internal services function which operates on a commercial basis, with defined business services, billing engines, contracts etc… maybe also coupled with outsourcing, offshoring and managed services. However, was it completely business aligned ?

There are two main organisational and cultural issues:

  • Agility: Two of the common phrases in the FS technology vocabulary are “Run the Bank ( RTB )” to represent baseline activities and “Change the Bank ( CTB )” to represent project activities. All very well, and a good way of dividing baseline versus discretionary resources respectively. However, you rarely hear the words Demand and Supply, Consumption Based Delivery, Unit Pricing, Commoditisation or the like. That’s because the internal services function, even if acting as a conduit to vendor delivery, cannot flex in the appropriate way or in a timely manner ( nor do they really have the incentive to ). The result is a resource baseline provisioned for close to “peaks” of demand.
  • Market Value: This is a bit tricky ( and will upset a few ). Whilst internal technology organisations provide an undeniably valuable service, there is only a small percentage that provide real enhanced business functionality, real competitive advantage and real innovation. Most are in the engine room – Running The Bank. The measure of success here is stability, time to market and efficiency. So with Business revenues under pressure, margins being squeezed and new regulation to comply with, the Front Office should quite rightly be asking questions related to the value and cost of RTB services.

But really…there is a serious point here. For the majority of technology staff the intricacies of business process, underlying instruments, competitive advantage and what drives revenues passes them by. So why such a large compensation premium ? And whilst we’re at it, how many Managing Directors in IT do business clients actually need ? ( told you you’d be upset… ).

Another area that has driven technology costs is the sheer volume and complexity of applications and infrastructure. We talk to many FS clients and their portfolio ranges typically from 1000 up to 6000 applications!

There are many reasons for the growth in applications to support business processes. However, whilst the efficiency programmes we touched on earlier removed people, renegotiated contracts and consolidated infrastructure etc…success stories in application rationalisation are more difficult to unearth.

Granted, it’s not easy. Portfolio rationalisation requires both time and investment…and that’s the issue. Business cases without a short term return don’t get out of the starting blocks. Besides, with objectives being set on a yearly basis, who wants to put themselves in the frame to deliver a multi-year programme of change when all the main stakeholders are on a short term incentive programme. Again, the application costs only go one way…and this needs to change.

The other major point in the application domain is that there needs be stronger evaluation and alignment of exactly what functionality is required to meet the business needs. Often, vendors will bring new versions to market with a whole raft of enhancements, many of which are hardly either used ( or wanted ). Of course, from a support perspective it is difficult to lag behind. But what about alternatives that offer what is actually needed and ignores the “nice to haves” ? Are some upgrades and enhancements technology for technologies sake ? Same applies to infrastructure.

With technology commoditising and Software as a Service gaining more traction, this is a perfect opportunity for businesses to redress the balance. As the market matures we see a much more agile, on-demand delivery of applications and infrastructure which is better aligned functionally and more focused on delivering business value. Of course, there are also downsides…CIO’s will need to manage differently, as more of a broker to external services, with a strong focus on vendor / demand management and dealing with more rigidity in functional enhancements.

The result will be a much leaner technology organisation which can focus on delivering real business value in a more efficient way. Whether they continue to Run the Bank ? …Well that remains to be seen.