Banks overspend by 40 percent on IT

Banks overspend by 40 percent on IT

High security requirements is not a good enough reason for the price premium

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UK banks spend up to 40 percent more than the market price for IT services, according to research from analyst and consultancy company Compass.

The spending gap was caused by outdated operating models and unsuitable contracts, the researchers said.

The study, which compared spending on active IT contracts in the UK financial services sector from 2009 to 2011, found that in the worst cases, companies spent up to 40 percent more than the market rate. The market rate includes the prices that companies in other sectors, including retail, manufacturing, utilities and central government, paid for a comparable set of IT services.

Even in the best cases, companies still overspent by 12 percent.

Companies could save millions of pounds by revisiting their contracts, Compass said.

It calculated that by increasing the use of standard services, taking advantage of the scale outsourcers can offer and bringing greater transparency to IT, financial services could reduce their overall operating expenses by as much as four percent.

For top UK banks, which spend as much as 10 percent of their whole budget on IT, this could equal savings of several hundred millions of pounds each.

Financial services organisations are likely to argue that their security requirements are what pushes up the price of their IT services. But Colin Craig, UK president at Compass, said that this is only true to an extent.

With the UK government moving more public services online and people filing sensitive information such as tax information online, for example, public sector organisations also face similar security issues.

“Their [financial services companies’] perception is the security drives up the price, but government, telecommunication companies, utilities [all face similar security requirements]. It shouldn’t drive it up that much,” Craig said.

Unsuitable contracts causing inefficient service delivery can be created in a number of ways, Craig said.

Examples include cases where a client has outsourced everything to a single supplier that is not the best provider of the required services, or if a client insists on micromanaging a supplier so that they lack the flexibility to adopt best practices.

Companies might also have inefficient contracts if they outsource to multiple suppliers, without clearly defining their roles and responsibilities, so that no one will take responsibility when things go wrong.

But problems also arise because of the highly bespoke nature of many financial services IT contracts, Craig said.

“They are often too bespoke. A lot of specific requirements aren’t individually priced and they get lumped into a single contract so that it is difficult to get clarity,” Craig said.

He suggested that it is up to the customer to clearly specify exactly what they want from the supplier, and to get the pricing for each individual requirement.

Expensive IT contracts also result from banks asking for unnecessarily high service level agreements, the Compass research revealed.

“For example, some clients had back office on 24/7 support cover, as part of a blanket provision, when they don’t need so much,” Craig said.

Compass looked at the whole range of available IT services, including the desktop environment, hosting, voice and data services and application development and support.

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