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The case for cloud: cut IT costs by 40% or else!

I met a large bank’s CIO the other day who was told to reduce his IT budget for 2016 by 40%.  He was a bit upset, and asked me if I had any ideas?

I had a few but it’s a tough ask, especially when most banks IT budgets are exploding.  According to Celent banks in North America, Europe and Asia-Pacific are expected to spend a whopping $196.7 billion on technology in 2015, up from $188.1 billion last year, so how do you spend less in a market that is spending more?  And why would you spend less in a market that is spending more?

Well, there’s possibly a good reason for setting every bank CIO this challenge, as most bank investment is in keeping the lights on.  It’s keeping the old systems going whilst investing in new systems.  McKinsey calculate that the average bank is spending 10% of its expense on just operational costs, and this is higher for banks that haven’t rationalised their technology.  These costs only get higher for banks that are layering new technologies on top of old. This harks back to my continual call to change old core systems, as many banks’ investments in digital are just layering legacy upon legacy.       The more legacy, the more cost.  The more legacy, the less flexibility.  The more legacy, the harder to change.

It all adds up and soon creates a desperate need to break out of this cycle.  Although that’s not easy, it can be done.  Again I’ve given many examples of banks that are doing this, but my favourite is Commonwealth Bank of Australia (CBA), mainly because they switched to Infrastructure-as-a-Service (IaaS) and saved 35% of their operational costs per annum as a result.  For those who haven’t heard that story before, the CIO presented to the Executive the idea of moving to Cloud services and had the plan rejected because “the regulator would never approve it”. 

At the next Executive Committee meeting the plan was presented again, and the Board rejected it again.  The CEO then asked the CIO why he brought the same plan back to the meeting, when they made it clear that they had to reject it because the regulator would reject it.  At this point, the CIO introduced his friend from the Reserve Bank of Australia, the regulator, who said that not only would they approve the plan, but that it was a great plan.

CBA moved all their internal mess of processors to IaaS and are now the most agile and innovative bank in Australia.  In fact, they’re one of the most innovative, respected and agile companies in Asia, winning awards here there and everywhere, and provide customers with leading-edge banking products like Kaching!, Tap&Pay, Pi, Albert, Lock Block Limit and more.

So if I meet a CIO who wonders how to save cost, I use this as my benchmark example.  Not only can you save cost through cloud, but you can become far more agile in doing so.  It just takes leadership, pragmatic change control management and guts to make it happen.

For these reasons, I would urge every CEO to challenge their CIO to cut IT costs by 40%.  After all, it might just be enough of a push to get that core system replaced and become far more agile in the process.

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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  • Super rallying cry. Practical, goal-based target.
    Do you have any case studies where the C-suite have successfully re-framed this discussion as a _shared_
    performance target, rather than a cost challenge to the infrastructure owners and a revenue challenge to the P&L owners?
    Since the targets are Cost/Income ratio plus – often – Return on RWA/RoE – shouldn’t the CIO hope to be held accountable for both sides of the jaws, not just costs?

  • Chris Skinner

    Conor
    Most banks only make decisions on a clear business case based on numbers. This is why banks will invest in cost reduction programs, because they can be parameterised. Making a decision on a revenue promise rarely happens, except where the decision is made without a CFO’s influence. So no, I have no case studies based on revenue uplift.

  • Dear Chris! 100% agree. Our Ukrainian PrivatBank is also the case. In 2014 we moved 30,000 processes existing in the bank to Corezoid cloud OS that we developed in-house (or IaaS solution in terms of Your article). It helped both reduce costs and drive revenue growth thanks to higher conversion rates in our marketing communication, increased speed of launching new products, better serving existing clients in real-time age. Will tell more while talking at The FSC on July, 7th.