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.

Business IT Alignment and the 3 ‘R’s – Rationalisation, Regulation and Ring-Fencing

Posted on : 24-06-2011 | By : john.vincent | In : Innovation

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Delivering IT within Financial Services organisations doesn’t get any easier. Just as technology services look to simplify and commoditise through maturity and new innovation, along comes a whole bunch of hurdles to overcome driven by economic, social and political circumstance. For many years we have talked about the alignment of Business and IT but never before has it so been important to step up the engagement to a seamless, symbiotic relationship.

Organisational objectives such as Cost, Risk, Quality and Agility and the associated measurements thereof are scattered liberally in the SMART’s of support functions throughout the industry. And yet, couple that with what is often a disconnected business strategy and a culture of short-term meritocracy and it doesn’t take too much intellectual wisdom to realise that something needs to change. Sound familiar ?

So let’s look at some of the current challenges facing business and technology leadership.

1) Rationalisation – by definition “The process of reorganizing and overhauling a company’s operations, policies, and anything else needed to make the company more efficient”. Within FS we’ve been undertaking this for a number of years. Indeed, objectives have been set top down throughout the technology organisation with a year on year increase in weighting. Headcount has been reduced, delivery organisations merged, Capex spend limited, contracts renegotiated, services moved to “best shore” locations etc… However, this only goes so far before a new approach is required and of course, you can’t “shrink yourself to success”.

2) Regulation – as we meet with different organisations one thing is very clear – the increase in regulation and their impact on business and underlying technology services is a constant challenge for organisations. We’ve already been through numerous regulatory and compliance implementations in the past and it isn’t slowing down. We will need to understand the implications of Basel III, Dodd-Frank and FACTA ( Foreign Account Tax Compliance Act ), to name but a few. All of these are being introduced for good reasons and it is vital that the business and technology organisations are closely aligned to determine what are the key implications for systems and processes.

3) Ring-Fencing – it is a matter of opinion as to whether the Independent Banking Commission went far enough with its interim report around future requirements to segregate the business activities of investment and retail banking. What is clear is that again business and technology organisations need to jointly determine the impact now that it seems almost certain they will be endorsed later this year. In order to facilitate ‘retail ring fencing’ there will need to be significant operational and systems changes that would need to be undertaken by each individual bank. As the Commission sets out, there are some functions that should not be ring fenced (related to investment bank) and those that should (relating to retail banking) – the challenge is that there are many shared services across universal banks that service both these areas and would need to be separated if retail banking activities are to be ring fenced. The greater the costs and complexity of ring fencing operations, the longer such changes will take and the more potential for disruption to everyday banking services.

Many organisations will have advanced thinking on the 3 ‘R’s but it is worth taking time to consider certain aspects.

In terms of Operating Model, we feel that the following dimensions require special attention:

Business Alignment : is the model in terms of governance and process connected throughout the organisation to the business consumers of services ? Often we have committees for Run The Bank and Change The Bank investments, but do changes in business activities in terms of scope or volume have a predictability in terms of the associated changes ? Understandably there is a large amount of sunk or fixed cost but it is important that the actual “existence” of all technology assets is understood and coupled to business value.

Service Agility : how efficiently can services be reconfigured as a result of an external change in circumstance ? The focus around costs has led many Financial Services technology organisations to realign operational services from a vertical to horizontal model for internal synergies. Clearly some services are common and therefore this rationalisation move makes sense. However, there is also a risk of making any future Ring-Fencing requirements more complicated and costly. Considering the Business Alignment imperative in conjunction with Service Agility should be the cornerstones of future operating models.

Strategy and Architecture : all organisations have a strategic roadmap for technology and services. However, there are two important questions to ask. Firstly, how mature are we in terms of Enterprise Architecture and the governance thereof ? Often, EA is a pseudonym for Infrastructure or Application Architecture. True Enterprise Architecture considers all aspects of an organisations business activities and can drive innovation, reduce risk and deliver efficiencies if placed in close proximity to the strategic business model.

Secondly, how far out does the strategy look ? In a recent conversation a senior banking leader discussed the need for FS organisations to look much further ahead, akin to the way that Shell does it’s Scenario Planning. Is it feasible to look 5, 10, 25 years in advance ? Conventional wisdom says not in terms of technology… but by considering all environmental, political and economic influences and overlaying the technology aspects then the different paths can be drafted in terms of “Signals and Sign-Posts” for the future operating model.

Risk Management : Disaster Recovery and Business Continuity Planning are well embedded and typically mature with FS. The journey to Service Recovery is understood. However, similar to the Scenario Planning, an increased awareness and vision is required throughout the organisation in terms of the myriad of external impacts to the world we live in and subsequent organisational response. We don’t have to list the surprises of the past 5 years…can we predict what’s next ?

Sourcing : where are services sourced from, whether internal or external, is driven by a number of factors including culture, compliance, cost and innovation. As we think about a more long term and holistic operating model, not just about technology or operational services, how does the way we deliver services mirror the 3 ‘R’ influencers ? Shared Service models or Joint Ventures may be key providing they have the correct construct in terms of commercial, flexibility and partitioning of delivery. Technology advances can help in this, with cloud computing well on its journey along the “Gartner Hype Curve”. The ability to source services in a more on-demand / scalable way provide choices for application provisioning for business consumers, notwithstanding the well known attention areas.

In summary, perhaps it’s time to step back and think about the future. The 3 ‘R’s are, of course, only the basic foundations.