Strategic Management of the IT Function
Most bankers would intuitively agree that information technology (IT) is a strategic function in the banking industry. It is increasingly important to interact with customers over the web and via mobile applications. The amount of technology needed to support even traditional banking functions like branching and lending is growing continuously. The chart to the right demonstrates that spending on data processing is a significant and rising component of the non-interest expense of Mid-Atlantic commercial banks. It’s unfortunate, then, that in strategic planning retreats, we see many institutions tackle the growing complexity and urgency of technological demands with tactical or piecemeal approaches. It need not be so and many banks could use IT to enhance their value and relevancy in a changing world.
Ron Shevlin of the bank research firm Aite Group addressed this particular issue in his 2011 book, Snarketing 2.0. His research concluded that the specific technologies a firm uses are less important than the manner in which the bank manages the IT function. His research identified high performing financial institutions and attempted to discover, through surveys, how those institutions managed their IT operations.
According to the research, there were three dimensions of IT management that high performing institutions shared:
- Tolerance of IT risk
- Senior management support of IT; and,
- Coordination between IT and business functions.
These three dimensions underscore the importance of considering IT as a strategic function. Shevlin’s research also reflects TKG’s experience. During a recent strategic planning engagement, the bank’s Chief Technology Officer indicated that he was less concerned with his current project list and more concerned with how he might build and support the Bank’s branch of the future. This is a much more strategic concept than making ATM’s conform to ADA requirements. Later, the CEO informed us that the CTO did not have an IT background prior to joining the bank.
Two observations can be made from the CEO’s statement: One, the CEO approved of the CTO’s performance and appreciated his foresightedness; Two, the CEO felt that a traditional IT background was a limitation for someone in the role of a Chief Technology Officer. The first observation is a positive example of someone managing IT in a strategic manner. The second observation displays an opinion of the CEO that, we feel, is common throughout the industry. IT managers are, speaking anecdotally, frequently preoccupied with their laundry list of projects and fail to integrate those items into a holistic plan that will ensure the long-term success of the institution. Focusing on tactical or defensive projects may indicate a fear of risk, as an IT manager may prefer to devote all available resources to projects that have been clearly sanctioned as critical by management or regulatory fiat.
TKG staff also has significant experience assisting banks in analyzing their usage of systems provided by vendors and outsourcers. A common result of our work in these types of engagements is the discovery that many banks pay for more services than they use or are paying for services using a contractually specified volume, either of accounts or transactions, significantly higher than the actual number.
While this seems like a basic observation, for even modestly sized community banks this has on multiple occasions added up to significant excess cost, draining resources from strategically important technology initiatives. It also indicates either that the bank is not regarding IT as a function worthy of high-level attention or that expertise for IT management rests solely in the hands of a limited number of managers.
Regarding IT as merely a source of substantial cost savings is also a false strategy. Many community banks mistakenly think they are unable to offer competitive technology when the reality is there are a number of vendors that can enable them to provide the majority of service offerings that large banks offer, from smartphone applications to web-based services. The important thing to realize is that carefully considering how and where IT expenditures are made will ensure the bank is both exercising prudent financial management and remaining strategically competitive.
The question then becomes, what is an institution to do? Shevlin offers the following advice:
- Senior managers must develop a commitment to understanding how technology impacts the success of their institutions and create a culture that understands and accepts risks in pursuit of value creation.
- IT managers must understand that the projects they support have a wider business purpose and reach out to business unit managers in order to ensure their joint success.
- Business coordination projects involving IT and sponsoring business units can build early successes that make culture shifts more palatable and understandable to the entire institution.
Understanding these key points will permit banks to serve their customers better and remain relevant in a complex world.