Five Reasons You Might Be Underspending on IT

Today’s new competitive and regulatory environment may require a rethink of old standards for IT spending growth.

BAI Banking Strategies - August 9, 2013

By Bill Stuart

Budget season is near and budgets are tight. This year, you need to be extra vigilant about Information Technology (IT) spending, hewing carefully to that tried and true metric of 6-8% of your annual revenue. Right?

But what if that metric is no longer valid? What if the nature of banking and technology has changed so much that 6- 8% means you are failing to reap your IT opportunities? That you are severely underspending on IT? According to our own informal study, as much as 20% of the IT spending of many banks already occurs outside of the IT group, especially where the cultural gap between the lines of business and IT yawns widest.

There are at least five good reasons you should question the traditional 6-8% metric:

 
Your revenue opportunity. Banks have spent the last few years paying down what some call the “IT debt,” that backlog of unfilled requirements and maintenance. Last year, Celent reported that 78% of tech spending went toward maintenance. Now, these same banks are more than ready to tilt their IT budgets toward revenue-producing investments and improved customer-centric IT that will help them gain market share. Mobile ranks high, and so do myriad improvements to their online banking processes and products, along with data analytics to target the right customers for their new services.

 
The promise of these customer-centric technologies is enormous. If you can double your online banking revenue with technology enhancements and virtually lock in a desirable demographic of targeted customers, who cares if your spending spikes for the purpose, or that revenue from certain other sources stays flat? Likewise an investment in analytics. Without good analytics, you may not notice the revenue drain immediately, but the lack of IT spending in key areas can mean ceding future revenues to more foresighted spenders.
Your risk management needs. When 6-8% became an industry standard, Google was still spelled googol, a hacker was a weekend tennis player and risk management was just a simple, under-the-radar function. But today, postcrisis, your board of directors is responsible for understanding and monitoring risk. It’s not just the audit committee signing off on what’s been presented to them but all board members proactively asking tough questions and demanding more information at their fingertips. When was the last time you asked your board for system requirements?
Risk management will look different at every level of the bank, and in every case, information – timely, accurate, well-organized information – will be at a premium. Most banks we talk to expect their risk management IT needs to swell. According to IDC Financial Insights, bank spending on risk management is outpacing overall IT spending.
Your ramped-up compliance spend. Precious little of the ballooning category of compliance IT brings in new customers or revenue. Two years ago, before most of Dodd-Frank’s rules were even written, the 100 largest banks in the U.S. were already spending more than $1 billion annually on compliance, according to Aite Group. As a large- bank CIO recently said, “All of these regulations generate the need for compliance or proof of compliance, so you have to implement changes to systems.”
Your need for speed-to-market. We know of one leading Australian bank that seven years ago was introducing 1,200 new services and enhancements every month and by last year had more than doubled that output to 3,000. What’s your output? How quickly can you respond to customer and market needs with quick fixes and enhancements, to say nothing of new technology-based products?
It’s not enough to be able to go to the drawing board, design your innovations, test them carefully and offer them to a hungry marketplace. These days, you have to be able to do that fast, which means having the IT talent and systems in place for speedy innovation. Consider any of the latest customer-pleasing technology innovations announced recently. How long would it take you to imitate them and would your customers wait that long?

 
Your true “core” systems. According to The Economist, “No industry spends more on IT than financial services: about $500 billion globally, more than a fifth of the total IT spend.” Every year, technology accounts for more of your service delivery, more of your marketing and more of your strategy – more of your business purpose.
These days, your true “core” systems aren’t the mainframes but those systems that let you differentiate your service. For example, how can technology extend your brand to your electronic channels, making customers feel as comfortable and welcome as if they’d been greeted by their branch manager? Or vice versa: Now that mobile and online customers enjoy accessing their information remotely through their own apps, how can you deploy technology tools at the branch to match that experience?
Forget whether the popularity of remote channels will drive branches into irrelevancy. The fact is that technology will certainly change the experience inside your walls as much as it will continue to drive it outside of your walls. These spiraling demands make it increasingly likely that adhering to the 6-8% metrics could leave you competitively disadvantaged and even at risk with regulators.

 

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