How to make technology move with the times

Banks, insurance companies, asset managers and other financial services firms are facing a range of economic, market, regulatory and technological changes like never before. These forces are compelling firms to adjust their business and operating models, and to review, update and transform their IT strategies, systems and software.

Technological change, whether it is evolutionary or revolutionary, is not restricted to an organisation’s IT department, rather it is an enterprise-wide issue. The wholesale overhaul and modernisation of an organisation’s IT systems is something that has to take place in close co-operation with every part of the organisation. It must meet the needs of the business lines and the support functions, such as finance, risk and human resources. 

So what are the powerful external forces affecting financial services institutions today? First, you have to look at what is happening in the macroeconomic environment. Global growth has slowed. The International Monetary Fund (IMF) in its October 2012 World Economic Outlook is forecasting growth of 3.3% in 2012 and 3.6% in 2013, weaker than in its July outlook.

“Output is expected to remain sluggish in advanced economies,” says the IMF. It points to two main difficulties: the sovereign debt crisis and other financial and economic problems afflicting the eurozone, and the drastic automatic tax increases and spending cutbacks (the 'fiscal cliff') facing the US in January 2013. More encouragingly, the IMF believes economic output will remain “relatively solid” in developing economies.

Regulatory concerns

Financial markets everywhere have a long way to go before they recover from the 2008 economic crisis. The IMF’s latest Global Financial Stability Report finds “increased risks to the global financial system, with the euro area crisis the principal source of concern”. The report also examines whether regulatory reforms are moving the financial system in the right direction, and notes that “progress has been limited”.

Not surprisingly, financial institutions themselves are publicly expressing doubt at their ability to ride the tidal wave of regulation: Basel III, the Dodd–Frank Act, the Foreign Account Tax Compliance Act, the Markets in Financial Instruments Directive II, the European Market Infrastructure Regulation, the Alternative Investment Fund Managers Directive, to name a few. Firms are worried in the short term about their ability to comply in time. And in the long term, they are concerned about the negative impact that over-regulation will have on their business strategies, profitability and return on equity.

Competitive and technological changes

As if that were not enough, financial services practitioners are having to cope with fundamental shifts in the competitive marketplace, changing customer attitudes and technological advances. Disruptive, non-traditional competitors and discriminating customers are squeezing banks’ profit margins. Although emerging markets are being tapped, those markets usually come with regulatory, reporting and operational complexities that are just as tough, if not tougher, than in advanced economies.

The rise of social computing, such as networking sites Facebook and Twitter, is providing huge opportunities to improve customer intimacy and loyalty, but requires more sophisticated tools for analysing large amounts of unstructured data. Meanwhile, the proliferation of mobile devices is changing the ways employees and customers interact with financial firms, and creating significant security risks and trust problems.

Cloud computing – public, private and hybrid – offers the elastic computing platforms required to provide new products and services, and to crunch the huge amounts of data associated with social networks. To make the most of cloud technologies however, new platforms and applications must be introduced, and legacy applications and databases migrated. These migrations must be managed carefully to avoid prohibitive costs and business disruption.

Powerful new tools are becoming available that combine and analyse data from social networks, customer profiles, transaction repositories and third parties to create insights into new product, service, customer and market opportunities, but those tools only work if they are used correctly and integrated into existing business processes.

IT transformation revisited

All the developments outlined – the economic trends, the risks to the financial system, over-regulation, new competitive threats, more discerning customers and technological advances – require financial institutions to transform their IT. To cope with the threats and take advantage of the opportunities, they must review every aspect of their IT and update it to ensure it is fit for purpose.

The concept of IT transformation is not new. Firms have transformed their IT before. But as times change, technology must change too. Even though every bank or insurance company will have modernised its IT in the past, it will eventually need to do so again if it is to move with the times. If you are a seasoned IT professional, you have probably already played a role in an original transformation programme; you now need to get ready for the sequel.

IT departments that do not step up to these challenges risk being displaced by a growing number of external service providers, such as 'software as a service' models, business-led shadow IT organisations and full outsourced service providers. The firm overall will suffer if the IT department does not keep up. Failure to transform IT will result in lost business opportunities, falling revenue, declining profits and reduced shareholder value.

Setting the goals

What should be the goals of a successful IT transformation programme? There are many, including:

• A strong alignment of IT with the needs of the business partners.
• The introduction of new technology to aid the development of new business models, products and services.
• Increased agility, efficiency and the ability to deliver solutions to the business faster.
• Cost transparency.
• Changing the operating model of the IT department so it is more like a standalone business than an internal cost centre.
• The evolution of IT processes and the supporting infrastructure to allow automation and self-provisioning of IT components.
• The modification of data warehouses to accommodate the increased requirements for better data analytics, for both structured and unstructured data.
• Better risk management.

The ultimate goals should be increased customer satisfaction and loyalty, enhanced revenues, higher profits and increased shareholder value.

Priority areas

EMC Consulting has extensive experience of running IT strategy and transformation programmes for banks and other financial services companies. We call it IT as a Service (ITaaS). We combine innovative ideas with a pragmatic approach to transformation, some of it delivered over the cloud, to help firms maximise their IT effectiveness and cost efficiency. ITaaS is tailored to each client’s particular circumstances, all within the context of the client’s marketplace and the broader economic environment.

We have identified three priority areas in financial services that require a transformational approach to technology. You can read about them on the following pages. The first is big data, by which we mean, of course, managing and analysing the huge amounts of information available to firms today, made available through better and cheaper processing and storage. To grasp the opportunities and cope with the problems big data presents, firms must invest in a new generation of platforms, tools, methodologies and skill sets.

The second priority is multichannel sales and service – delivering multiple products and services through branches, call centres, ATMs, the internet and mobile channels. Ensuring that all those channels are properly integrated, so that customer data originating in one channel can be accessed in all the others, requires a transformational approach.

The third area of focus is trust in IT. Banks, insurers and fund managers must be able to demonstrate that they can be trusted to look after customers' money, and to provide a reliable and good quality service. That is their fiduciary duty. They must be able to engender trust in staff, shareholders and other stakeholders too. Capable and dependable IT systems are central to winning and maintaining trust. 

These three priorities are interdependent. There is no point embarking on a transformational project in just one or two of them. You have to involve them all. And, as we said at the outset, radical change initiated by the IT department has to involve the business lines and support functions as well. Only an enterprise-wide approach will do.

Alexis Kane is senior director and Shailen Salvi is director, financial services consulting, EMC Consulting.