IT's flexible strategy

25 June 2012

The eurozone crisis and a shortage of hard-disk drives are slowing annual growth in worldwide IT spending. As a result, the banking sector may have to refocus its spending on technology. Jim Banks asks Gartner’s Peter Redshaw how to balance long-term strategic goals with the need to be more agile in an uncertain market.

It's hard to imagine a time when IT was not fundamental to the banking sector's delivery of products and services. Technology underpins every activity in which a bank engages and in many ways defines its ability to compete in the market. Yet the industry's approach to IT spending seems rigid.

In an environment where the rate of growth in IT spending is slowing, banks may have to reassess where they invest. Gartner analysts predict that global IT spending will total $3.8trn in 2012, which represents a rise of 3.7% on 2011 figures, but is lower than the 6.9% rise from 2010 to 2011.

"Global IT spending will total $3.8trn in 2012, which represents a rise of 3.7% on 2011 figures."

The slowdown in growth is expected to be seen across all four major technology sectors - computing hardware, enterprise software, IT services and telecommunications equipment and services - largely because of faltering economic growth, the ongoing crisis in the eurozone and floods in Thailand that have held back the production of hard-disk drives. This trend suggests that companies in all sectors, not least financial services, will have to be wiser about how they target IT budgets.

Banks must also consider the lessons of the last five years, which show that they need to react quickly to potentially dramatic change in a climate that is hard to predict.

"The world is still seeing economic problems in the West while consumption of Western goods in the East is falling," says Peter Redshaw, Gartner's managing vice-president of banking and investment services research. "The situation in Western Europe is very gloomy and in the financial sector some banks are still at risk of disappearing. The problem is particularly acute in financial services in Western Europe. The effect of the eurozone crisis on IT spend is strong across many industries, but financial services is very prominent."

"There are many different scenarios, the worst including there being a few eurozone defaults, Northern European countries abandoning Southern European countries, or complete meltdown and anarchy. Oddly, some of these could see IT spend grow, as all accounting systems might need to change to accommodate reinstated currencies, but these would be forced changes, not driven by the execution of strategy."

Even if these worst-case scenarios do not come true, the overriding theme is one of uncertainty. It is hard to predict how the economic environment will develop. There is an urgent need for banks to become more agile in determining many operational factors, not least how they allocate their IT budgets.

"IT budgets must be done more regularly, perhaps every three months rather than annually, to respond to the changing environment, and banks should develop numerous contingency plans," says Redshaw. "The allocation of IT spend could be changing very regularly, so banks should build dashboards to look at it at least every month."

Carry on regardless

The events of the financial crisis and the economic downturn suggest that it is crucial to be more agile in terms of IT spend, but it is taking a long time for the industry to embrace this message. For many banks, the focus remains firmly on large, long-term projects.

" The allocation of IT spend could be changing very regularly."

Admittedly, it is difficult to bring big programmes of fundamental IT change to a halt; nevertheless, Redshaw believes that pushing ahead with these schemes may limit a bank's ability to be flexible in response to changing circumstances.

"Many banks are continuing with programmes of core systems replacement regardless of the crisis," he says. "They are so many years in that they feel they must continue, but they need the agility that spend could bring. The question is whether some of them will have to change that approach.

"A survey at the end of 2011 showed that the biggest spend is still on core banking, which is the main priority and an area of increasing investment, though security and ERM are also high priorities. Is it a 'head in the sand' mentality? It may well be naive or optimistic, but the issue is not about optimism vs pessimism on how the market will develop, it's about being able to move quickly."

IT spend

Historically, the banking industry has not focused heavily on increasing agility in its IT spending. IT budgets tend to be relatively static, and when they do change it is only very gradually. They are like the proverbial supertankers turning very slowly towards a new heading.

"The biggest spend is still on core banking. Is it a ‘head in the sand’ mentality?"

"The attitude among banks is that they are all in the same boat and that what hits them will hit their rivals just as badly," explains Redshaw. "In the past, banks have been protected because of operating in a closed market, such as the UK with its big four banks. But now, there are new entrants that could disintermediate banks, like PayPal, or peer-to-peer lending, which is a disruptor. Operators like PayPal are potentially much more agile than the big banks."

As it stands, slowing growth in IT spend in the financial services industry will probably have its greatest impact on new strategies like social media or internet banking.

"These are the things that are likely to be put on ice," says Redshaw. "They are 'nice to have' rather than 'must have'. Social media is at the bottom of the list of priorities at the moment, and mobile banking is only a mid-level priority. At the top of the list are core banking systems, risk management and trading systems, which are not big differentiators."

It seems that the current focus on IT spending in the banking industry is not directed towards competitive differentiation but rather at efficiency. Whether this is the wise choice in the long run remains to be seen, but the current situation suggests that there is a disconnect between the strategic thinking that goes on in banks and the efforts of IT to deliver on strategic goals.

Closing the gap

Redshaw certainly believes that the gap between strategic planning and IT implementation is one that must be closed. His advice for banks and their CIOs centres on prioritising the review process for technology investment and making sure that the CIO has more of a voice in the strategic planning process.

"CIOs are not often on the board, so they are late in on strategic planning," he says. "They need to be involved in that to help plan for any change, such as the impact of a bank's geographical refocusing. Banks need to close the disconnect between strategy and IT.

"Slowing growth in IT spend will probably have its greatest impact on new strategies like social media or internet banking."

"IT is not just about service delivery and it is not just an overhead - it is how banks can innovate. Banking products can be copied easily, but slicker processes and straight-through processing can make a difference to a bank's competitiveness. That kind of differentiation, like risk management, is all about IT."

If banks were to consider the many divergent scenarios that could develop from the current economic uncertainty, Redshaw believes that they would soon realise the importance of having a more agile IT strategy.

Problems in Europe, for example, could lead to a situation where they have to deal with the re-emergence of many different currencies, which would have an enormous impact on their IT infrastructure.

"There is a lot of work to do on application portfolios to prepare for different scenarios like the possible reversal of European integration," says Redshaw. "Were that to happen, contracts with vendors would be affected, not least with BPO vendors. The profitability of relationships with BPO service providers could be greatly affected, particularly if a more protectionist attitude arises in some European states."

IT meets strategy

If banks were to accept the need for much greater agility in their systems architecture, then the obvious challenge would be around what steps to take to integrate IT planning more closely with strategic thinking. It is one thing to recognise a problem and another to find a solution.

"Problems in Europe could lead to the re-emergence of many different currencies."

For Redshaw, the first step is to create a better understanding of how IT impacts a bank's performance. Forging a clearer link between IT spend and performance would make it easier to see where changes in IT investment could yield the biggest benefit, and would inevitably push IT closer to the heart of strategic planning.

"What would be really useful is to equate profit margin to IT spend," he explains. "It can sometimes be hard to strip out the individual elements, but we have done work on the kind of metrics that can be used. For instance, you can look at IT spend per person, as well as factors like efficiency and profitability. This could be done relatively quickly and make a real difference. "There is a danger of complacency when it comes to IT spending, so banks need to be aware of the potential dangers."

IT is not just about service delivery and it is not just an overhead – it is how banks can innovate, according to Peter Redshaw, Gartner.
Peter Redshaw is managing vice-president of banking and investment services research at Gartner, where he focuses on outsourcing for banks and investment services firms, such as stock exchanges, investment banks and wealth managers. He joined Gartner in 2000 from Capgemini.