Financial services IT: coping with the costs

Financial institutions have been hit hard by the banking crisis and are faced with two seemly irreconcilable demands: To contain costs whilst at the same time implementing the technology needed to remain competitive in a rapidly changing world...

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Financial institutions have been hit hard by the banking crisis and are faced with two seemly irreconcilable demands: To contain costs whilst at the same time implementing the technology needed to remain competitive in a rapidly changing world and comply with an ever-escalating regulatory environment.

The solution? Seek ways to optimise cost and performance within the current IT environment and to implement system and service redesigns that can deliver greater efficiencies into the future.

All financial institutions have suffered to a greater or lesser extent as a result of the 2008 banking crisis. Four years later, however, most are slowly getting back on track, largely as a result of reducing their costs and increasing efficiencies across all aspects of their business. At the heart of these efficiencies is IT, with emerging technologies that can be disruptive to existing systems and future plans, opening up a plethora of new opportunities.

Emerging technology drives new services
Some financial institutions, for example, are expanding their web-based and mobile services for retail and corporate customers to broaden appeal, increase competitive edge and drive new revenue streams. These include a wide range of offerings from self-service customer account management applications to e-billing and payment portals and electronic trade finance - all accessible from a laptop or mobile device.

All of these innovations, however, are only as good as the technology that links back office data processing to the customer-facing front end. The more integrated and agile the enterprise architecture, the more cost efficient, productive and satisfying is the staff and customer experience.

Rising costs
While technology is clearly a crucial enabler and the means by which new services can be delivered, it is also a major cost centre. IT running costs are dependent on a range of factors from the integration and maintenance of legacy systems (which is typically expensive) to the capital and/or outsourcing costs of new infrastructure, applications and the IT support desk.

Beyond these outgoings, there are the high compliance costs of regulatory initiatives like SEPA (Single Euro Payments Area), Basel II, Sarbanes-Oxley and anti-money laundering/fraud protection, to name just a few - all of which involve extensive IT investment to ensure that systems are robust, flexible to change, auditable and optimised for increased operational demand.

Spend to save
To cope with all these demands - which have been exacerbated by a general climate of austerity - many organisations have been reducing the number of new projects and looking to manage their on-going costs more effectively. The great challenge for CxO’s is to ensure that their enterprise IT meets all the new business and regulatory demands whilst at the same time minimising cost, avoiding disruption to current processes and where possible improving efficiency and productivity. Then there is timing: when and where to introduce new technology and services to optimise customer retention and competitive advantage.

Clearly all this cannot be achieved by simply putting new IT investment on hold. There must be a willingness to consider a ‘spend to save’ strategy - whether that is implementing a new system, switching to high productivity desktop or mobile devices, or hiring an expert to base-line the current IT environment and suggest redesigns leading to greater cost and efficiency improvements.

Sourcing strategies
One of the key areas an IT business specialist can add value to an organisation is by reviewing their sourcing strategies. Financial institutions, like other businesses, typically outsource some or all of their IT services and all too frequently end up paying over the odds. Why? Often they are paying a premium rate for 24 x 7 and 99.999% uptime availability for non- mission critical services where office-hours only support is all that is needed.

In other instances, cost creep has occurred over the lifetime of a contract which has just been renewed automatically without a reviewing process. These uplifts are not always transparent and may require a specialist to identify where the creep has occurred and where negotiation could result in substantial savings.

A case by case analysis
Very often corporates hand over their entire IT environment to an external service provider lock, stock and barrel. However, the outsourced service delivery model may no longer be appropriate for the business, or if it is, not for all business units or for all types of IT applications. Major cost efficiency opportunities can be discovered by isolating the various components of an organisation’s enterprise architecture and identifying which elements - from the desktop to the data centre - that may be more cost-efficiently run in-house. The challenge is to know where real ‘value for money’ is being delivered by the outsourcer - and this may not be consistent across all components. Further, the question must be asked: ‘Has the value curve changed throughout the life-term of the contract and is the provider still competitive when measured against other suppliers?

A best practice culture
Perhaps the biggest challenge is whether this hunt for cost efficiency is going to deliver significant enough savings to offset the escalating demands of regulatory compliance, disruptive technologies and new customer services - all of which must be offered in order to remain competitive. Some impressively quick wins can be achieved simply by renegotiating an outsource provider’s service level agreement.

Most important, however, is to establish a culture whereby routine measurements are made of the ongoing cost/ performance of an organisation’s IT infrastructure and processing methodologies, together with regular reviews of its sourcing strategies and service provider contracts. This will not only avoid accumulated cost creep and performance drag, but will ensure that seeking best practice efficiencies become a way of life.

Posted by Robert Saxby, Director ImprovIT

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