There is always tension in the world of IT spend between, on the one hand, increasing the flexibility of service offerings and responsiveness to market change and, on the other, ensuring the robustness of existing systems. Often the two drivers are combined in unconvincing business cases to satisfy multiple stakeholders; sometimes projects even manage to deliver benefits in both categories.
The distribution of resources between these two goals at major banks and financial institutions over the past 12 months has seen a wide range of different approaches. An organisation's strategy will depend on its appetite for leading the market, its tolerance of risk, and its drive for lowering its cost-to-income ration. In the first of these categories there has been investment in the creation of 'agility' in delivering business change more quickly. There has also been targeted investment in mainframe infrastructure to ensure the robustness of existing systems.
The challenge of legacy
The problems with legacy systems are well known and much discussed, and fall into three broad categories: inflexibility, instability and maintenance cost.
With most banks, the complexity of their applications and systems inhibits their ability to make rapid changes to suit the business drivers. Even given the impact on timescales to effect change, there can still be a huge cost for even simple system upgrades. One of the hidden talents of large banks is their ability to handle operationally critical, complex applications that are undergoing a vast number of business and IT led changes. Typically this falls under 'service management' - and the IT infrastructure library (ITIL) process, 'change management'. Increasingly, the effective management of change is itself consuming a growing proportion of resources as the risk of change increases exponentially with a system's complexity.
Instability of legacy systems can add enormously to the operational risk of any organisation, especially one in which there is an expectation (and regulatory requirement) for a high proportion of up time. There has been a gradual reduction in investment in infrastructure over recent years, and the inevitable results are now beginning to show. Some have now reached a tipping point; in a recent example a 'top four' UK bank had an all day outage on one of its mainframes. This extremely unwelcome incident has led to a major investment being made to ensure this does not re-occur.
Maintaining and monitoring a complex IT infrastructure brings its own costs too. Most of the large UK banks have a number of different businesses all using the centralised IT functions in some way. The IT function then has to manage all of the different applications and systems to the levels of service agreed with each business unit. This provides for a complex set of processes when you consider the numbers and variety of systems and applications. When this situation arises and the IT function is faced with cutting costs year on year, the risk to stable services increases until at some point the business is adversely affected.
Out with the old
In creating the necessary value to secure ongoing investment, the IT functions have had to embrace existing thinking more fully to create cost reduction and enablement of business strategy. There are three core areas of spend.
Business process optimisation
In recent years the insurance industry has led the financial services sector in terms of business process optimisation via Lean and 6 Sigma. We now see banks actively adopting this thinking and methodology whilst driving the adoption of service oriented architectures (SOA) and business process management systems. This represents one of the most significant investment drivers that we have seen at a number of banks. Indeed some of the largest banks are spending in excess of £50m in this space with the view that major benefits will be realised in three to five years. The adoption of SOA is increasingly becoming the major drive for value pursued by most banks.
Second wave of offshoring
Some major banks have been amongst the trailblazers in outsourcing, BPO and offshoring/onshoring over the past 10-15 years. Now the case has been made, certain lessons learned and the potential benefits thoroughly digested a second wave of more cautious investors are getting interested. Some banks have only recently started to experiment with offshoring and are about to invest in doubling their offshore capacity. As always, the challenge remains around how to ensure that the risks and benefits of this endeavour are sufficiently understood at an organisational level.
ITIL process management
Although the ITIL process maps have been the global standard for providing IT service, some banks are still relatively immature in their adoption of the discipline required to deliver improvements in service quality to the business. We are seeing increasing investment in this space to reduce the aggregated risk of service impact on the business. The 'holy grail' of end-to-end measurement of systems from a business perspective continues to be the goal, with few having achieved it. This could be compared with the business driver to gain a single customer view that, again, few have achieved to date.
In with the new
The stream of investment is not purely restricted to maintaining existing systems. Money is still being invested in new functionality to enable improved services. We have identified three broad areas.
Product improvements
Investment in projects has never been higher; driven by a very competitive market banks constantly seek out operating efficiencies and product improvements. The challenge, however, is to ensure that projects within an organisation's portfolio are being prioritised for the right reasons. Often the outcome is heavily influenced by the style of the IT leadership team in terms of business influence and knowledge.
Regulatory compliance
The challenge of regulatory compliance is continuing to take up significant resources and investment, but mainly in the project delivery space where, for instance, UK Faster Payments has had some impact with programmes of work having to rapidly deliver. Within the exchanges market place the prevalence of MIFID is causing significant investment.
Technology led innovation
We have seen IT functions spending much more time and effort on creating conscious, sustainable innovation capability. This is leading to the creation of the need for further investment when senior stakeholders support a great new idea. What is fascinating is the degree to which organisations will invest in this area. Some large banks spend millions in whole tranches of management who busily create complex sets of new processes and governance. Others take a more pragmatic view and provide more operational level input to improve the business value of IT.
Future spending
The continued presence of many legacy systems provides challenges to any business when they are operating in a competitive market. A number of banks have invested heavily in investigating the feasibility of replacing some of their legacy systems. The risk, disruption, cost and potential impact on the banks' customer service reputation makes this a very challenging decision and consequently few have actually embarked on this journey with serious intent. The ones we are aware of that have are at the early stages of deployment and will no doubt suffer massive cost and time overruns due to the complexity of the task. Once they succeed, however, there will be even greater pressure on their competitors to address the challenge of legacy systems, and we can expect significant IT investment in this area over the next few years.
Service management
The drive for receiving better value from IT with a sustainable and reliable level of service to the business has increasingly focused banks on the subject of service management. Despite the fact that ITIL standards for IT process best practice have been well documented for over 10 years, some banks do not have mature capability in this space.
Process alignment
As the large banks exploit their various product markets (retail versus insurance, for instance) the opportunity for aligning processes that sit within different businesses is massive. The benefits include lower cost, better customer service, less IT complexity and greater visibility of end-to-end service. The major challenge to this will clearly be evolving the governance within the organisation to enable the natural competitiveness between parts of the organisation whilst co-operating at a process level.
Grow internal IT capability
Most banks require a wide set of capabilities (many of which have been alluded to in this article), however some struggle to attract or retain skill sets that are essential to the bank. These include: change agents, programme management, ITIL implementation, BPMS skills, SOA architects and people prepared to challenge the management hierarchy.
Conclusion
The banking industry is well known as one of the major players when it comes to IT spending. The recent regulatory and market changes have forced a number of major investments however the trend is towards answering the following questions (usually posed by the business leaders) and never fully answered:
- Why do we spend so much on IT?
- What value does IT bring to the table?
- Why does it take so long for IT to deliver simple changes?
Although there are no simple answers we do believe that most of the initiatives mentioned above will directly address all of these questions; however we fully expect a new set to appear on the business management agenda when they are.
