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Why most banks’ technology fails to meet the business needs

Just enjoyed another great conference where one manager presented their IT strategy and operations.

Amazingly the old nugget of the language of IT and business came up again, where she opined that IT doesn’t speak the language of business.

She illustrated this issue with this amusing video from the BBC’s comedy series Big Train:

IT is broken, according to this manager, and needs to be fixed.

So how their company fixed IT was based upon research from 2007 published by McKinsey: Better IT Management for Banks”.

McKinsey “studied the financial performance and underlying IT practices of 105 of (banks) in Europe, Asia, and Latin America. Our research examined many facets of the banks’ IT performance, including governance and organization, outsourcing and offshoring practices, the complexity of the application architecture, and the utilization rate of hardware. We then looked at the key financial metrics of the banks, cross-referencing their operational effectiveness. These metrics helped us identify a set of leading banks that spend carefully on IT and successfully apply those investments to the business. Examining the IT practices of banks in the top quartile highlights the link between certain IT practices and financial results, strongly confirming our experience that operational and other practices can substantially affect the performance of financial institutions.”

Some of their findings are obvious:

“Top-performing banks tend to form their IT strategies in close cooperation with the business by using formal governance processes and engaging the business to focus on value creation levers that are influenced by IT. What’s more, high-performing banks see IT as more strategic, and they drive more of their IT agenda directly; that is, they outsource less.”

Some maybe surprising:

“Top performers spend 45 percent of their IT budgets on innovation (new services or capabilities); lower-ranked banks only 29 percent. Best-practice banks also introduce new products in only three to six months, compared with six to nine for less well-run banks.”

And some just operational:

“Leading performers standardize their IT operations on a limited set of platforms and use infrastructure such as machines more effectively than others do. In Asia, for example, leading banks achieve utilization rates of 30 to 40 percent on their Unix servers, compared with less than 30 percent for lower achievers.”

It’s an interesting piece of research – along with many others that McKinsey produce - and is worth a read, but I have a more basic view of business and technology.

Technologists are a blockage for most businesses because any change to the technology can create huge amounts of change to their organisation, resources, budgets and capabilities.

As a result, most technologists resist change, adaptations and implementations of new infrastructure.

This is why the discussion of IT being unaligned with business is about as old as Men being from Mars and Women from Venus.

Bankers are from Mercury and Technologists from Uranus.

Meanwhile, there are some fundamentals at play that most firms, in the words of George W, misunderestimate.

A key one is the role of technology in banking.

Banking is a technology business, as underscored by bankers over and over again.

Banks must therefore clearly align technology with their business goals, and work as a cohesive council of governance between the business heads and the technologists to ensure achievement of delivery to buisness needs, on time and to budget.

This is why governance is such a critical factor. 

And how do you achieve good governance?

You put a business person in charge of technology.

Not a CFO or CIO, but a CBO – a Chief Business Officer.

A CIO will be too blinkered because, coming from a technology background means that they will be too encumbered by the technology limitations to see the potential for innovation; a CFO comes from a numbers background, and is too handcuffed by the numbers to see the potential; a CBO comes from the business view and will see the potential.

Whoever a bank puts in charge of technology must see the potential.

Unfortunately many financial firms put someone in charge of technology who does not see the potential for technology to differentiate the organisation.  As a result, the technology becomes subservient to the business needs rather than strategically innovating for the business.

Simple.

 

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • Melissa

    Great post. Nucleus put out a report a few months ago that said over 40% of companies not using a good infrastructure planning tool made unnecessary IT purchases, based on data that was at least 14 months old. They gave an example of Credit Suisse saving around $11 million a year by implementing an infrastructure tool that could help them avoid unnecessary projects, cut redundant apps and better align their IT with business needs. I like your idea of the CBO, but I do think a CIO is capable of making IT decisions that are aligned with the overall business as long as they have the tools to see how IT is impacting (or how IT changes will impact) the entire organization.

  • Jacques Bayens

    Believe me, you don’t want a Banker anywhere near Uranus.

  • Alex Wulms

    I don’t know what title the head of IT should have but in my opinion it should be somebody with on the one hand strong business and strategic thinking skills and on the other hand with very good insights into what technology can do, where technology is evolving to and how it can be leveraged in order to drive the business forward. So it should be a multi-talented person. Another key talent of the person should be to bring the different people of the organization together (e.g. the pure business thinkers versus the pure technology thinkers). A strong governance process like mentioned in the blog is indeed key and this head of IT should be the one chairing that board I suppose.

  • If banking is a technology business, doesn’t this make the CEO the CBO? Why have a separate business unit that deals primarily with technology at all?

  • JohnB

    To echo PaulP’s point re the role of a CEO vis a vis a CBO- Why do we refer to Transaction Banking…? Surely what we really mean is Transaction Management…of which the bits and bytes representing money flowing from A to B are simply the final piece of the transaction… Transaction Mgt organizations known as banks just happen to be very good/very well placed at knowing A and knowing B (not least because their License depends upon it)- they should build upon this.

  • Great article, and it sounds like an interesting conference. I agree that the gap is significant, but it sounds like the McKinsey report took an typically IT approach to a business problem. While technology is critical for banks to succeed and differentiate, banks are not and should not be technology companies. The core competency of a bank is to manage risk. IT can be an invaluable enabler in that, but the strategic direction must come from business. Even at Microsoft, it is the business folks that define the strategy. Yes, IT should “strategically innovate for the business”, but if that effort is not driven by business needs, the innovations are worthless.
    To that point, McKinsey said top international performers focused on innovation and speed to market. American bankers frequently tell me their IT teams are overworked (70% legacy maintenance and 30%+ compliance) and unable to support business needs. Even the IT execs admit there just aren’t enough resources to meet the business needs. As a result, the bank has three choices, outsource some functions, increase IT budget significantly, or shake up the IT team enough to increase productivity. It is no wonder that many American bankers focus on outsourcing as the only realistic option available.Outsourcing to technology providers that understand the bank’s business needs and give control to business users to support their strategic goals let’s banks focus on their core competencies. The tech company handles the rest.