Technology spend by financial institutions continues to rise despite an apparently poor track record of producing value for money. Parveen Bansal explains why success can only occur when technology, processes and people share the same goals and objectives.

When Albert Einstein was asked how his brain worked differently from the rest of us, he replied: “I just use more than the 10% that most people use”.

Homo sapiens may be the most intelligent creatures on earth but the majority still only realise a fraction of their intellectual capability. Unlock this potential and the world could be full of Mozarts and Picassos, all speaking a dozen languages while excelling in careers as rocket scientists or university professors.

Hardly surprising, then, given the laggardly nature of the human condition, that the technology we install in our banks and financial services institutions (FSIs) is as under exploited as our own brains.

Most banks have huge, unwieldy IT systems that function way below their capacity, with most of the IT budget being spent on maintaining these dinosaurs rather than investing in innovation. Huge gains could be made at much less expense with a proper cross-company IT strategy driven by business aims rather than allowing the technology to drive the business.

Says Lawrence J Ellison, CEO of Oracle, global provider of e-business solutions: “Most companies spend too much on IT and get very little in return. I believe by cutting IT budgets in half you can have better IT systems, as investment is then focused on clever IT projects.”

FSIs’ failure to effectively use their information systems is a major reason why they are struggling to significantly improve revenues even after – in many cases – they have installed the latest and greatest customer relationship management (CRM) systems. It is also why they frequently fail to spot impending disasters and operational risk problems.

With CRM huge amounts of relevant data on which to build sales remain lying around in banks’ IT systems completely untapped. The latest buzzword for this is unstructured data – information in e-mails, customer files, recorded telephone conversations – and IT consultants are going to make money showing banks how to pull it together.

Better use of data could also help banks avoid disasters. Says Mr Werner Sülzer, vice-president and executive managing director of NCR: “There would be no surprises about organisational failure such as Parmalat and Enron. There is so much data held within financial institutions that there is little excuse for not being able to detect these sorts of events.”

Good money after bad

Yet despite not reaping the full benefit of their existing information systems, the financial services sector continues to spend vast amounts of money on new systems. TowerGroup estimates that global financial services will spend $350bn on IT in 2004.

The question that arises is whether there really is a need for banks to invest in more IT, given the low success rate of such investments? Research shows that around 30% of projects are cancelled before they are completed while another 50% come in at double the original cost estimate, time and effort. Will more investment be worthwhile?

Not, it seems, unless banks can solve an array of problems associated with implementation, such as finding and keeping good IT people (too many have been cleared out in successive downsizings), gaining user acceptance of systems across institutions, finding the proper measures to assess IT performance (return on investment is a very blunt instrument) and emphasising innovation over maintenance.

A key difficulty arises from the lack of co-ordination between management and IT departments especially at chief information officer (CIO) level. This is a bit like the problems humans have in balancing the right and left side of their brains. Just as finding people who are both intuitive, creative and personable (right-sided) as well as logical and analytical (left-sided) is a challenge for human resource departments, so FSIs struggle to marry up new business initiatives and ideas with good IT delivery.

 “The IT product is pretty unique. It is one of the few capital investments that organisations make that arrives at the door half-finished. A lot of further work needs to be done to enable it to deliver value to the organisation,” says Will Cappelli, analyst at research company Meta Group.

The problem is that there is a complete lack of awareness of the complex relationship between a technical system, the business strategy and the business benefit. And this is often the direct result of executive management abdicating its responsibility to challenge technocrats on the business case for systems’ investments.

“The insidious reason that systems projects fail is that until today they are driven by technology people,” says Virginia Garcia, senior analyst, financial services strategies and investment at TowerGroup.

There is no such thing as an IT project unless you are an IT vendor; there are only business projects – as illustrated by the failure of CRM systems. These projects were generally sold to the organisation as technology solutions for a business problem, and championed by the IT professionals. Only after the boards had signed off on the projects did people start to properly think through their business benefits and objectives.

FSIs have generally taken a silo approach – without exploring the synergies between different areas of the business, without proper integration and consequently adding little value. “A lot has been spent without thinking outside the box – there is a lot of fragmentation,” says Mr Guillermo Kopp, director, financial services strategies and IT investments at TowerGroup.

Commitment at board level is important to ensure that IT projects are leveraged right across the organisation. Business managers must own IT projects and CIOs must be members of the corporate strategy team.

A key example of this is at India’s second largest bank, ICICI Bank, where chief executive K V Kamath has attracted 10 million customers to the institution, largely over the past four years. ICICI has no IT department. Key IT personnel are embedded in operational units and report to him as effective CIO.

Through this direct IT relationship Mr Kamath is able to control technology spending and is able to tell The Banker: “My total technology spend has been less than $200m and my operating expenses are less than 10% of the operating expenses of a global benchmarked bank.”

Innovation loses out to maintenance

Current investment is driven by a range of factors: regulation, competition, consolidation and cost management. However, the greater part (62% of total IT spending in 2003) of investment is spent on maintenance of existing systems. Meanwhile, spend on innovation is minimal.

In a research report titled IT spending outlook for global FSIs: Inflection point for the reinvention of the role of technology, Ms Garcia says: “In weathering the storm, large FSIs across the globe have been preoccupied with the tactical urgency of stripping away extraneous processes and people, as well as non-core lines of business, in an effort to protect and restore profitability. Now there is pent-up demand for technology investments.”

Says Christopher Gentle, director of research for Deloitte: “The question is not whether to spend more or less, but how to optimise existing technology systems.”

 Ellison: ‘Most firms spend too much on IT and get very little in return’ 

Regulatory considerations

Considering the expected increase (3% from last year) in investment on new and replacement technologies in 2004, it is vital that banks discover the key factors that will determine the difference between success and failure. With a host of hugely complex regulatory mandates, Ms Garcia suggests that spend on innovation will increase as forward thinking institutions look to leverage these compliance investments for other business objectives.

“As financial services consumers, both corporate and individual, are more and more demanding of superior customer service, innovation will shift dramatically from the vertically focused product dimension to the horizontally focused service dimension,” says Ms Garcia who is optimistic that FSIs are getting smarter about IT.

She believes that this will take the form of a forever-changed ethos of business transformation – an inflection point in the FSIs’ procurement and deployment of technology. “The cost containment mentality will move more and more into the realm of strategic cost management and operational excellence, which will promulgate the reduction of maintenance costs in order to free up capital to invest in strategic technologies.”

But before any of this can happen FSIs will have to establish a measure that determines the business benefits and success of IT investment as a majority (80%) of IT projects are deemed to be either complete failures or only partial successes. Neville Howard, technology strategy partner at Deloitte, says. “Other functional board directors are expected to demonstrate the value they add and the strategic benefit they are making. IT shouldn’t be treated any differently.”

Assessing success or failure

The first task is to define what constitutes a failure. Failure in its simplest sense suggests a lot of time, money and effort wasted, and a lack of return from the investment. Traditional models to measure the success or failure of a project have been based on the return on investment (ROI), mainly taking account of the cost of technology and the time taken for implementation. “The basic fact is that a lot of IT projects fail by some metric or another,” says Mr Cappelli.

Tom Roche, strategy and business development director at Fujitsu, says: “First of all, the statement that ‘most projects fail’ is quite a sweeping [one]. IT projects have traditionally been judged on whether they were completed to specification, timescale and budget – all good quantifiable measures – but not on whether they delivered business value.” The problems start, says Mr Roche, when expectations are unrealistic.

Mr Cappelli of Meta Group agrees: “Failure first and foremost stems from the misguided expectations of senior management.”

Research firm Gartner has found that in the case of CRM projects, not only were costs underestimated by 40%-75%, but also that technology accounted for failure in only 12%-15% of projects, while a massive 55% were deemed to have failed because they did not meet expectations. “We are very aware that the business benefits that drove the initial business case are often forgotten or at least not accurately measured, making it very hard to truly evaluate success or failure of a project,” says Mr Roche.

Today the simple ROI model is no longer relevant, as technology has matured to a level where failure of the technical aspect of the project is greatly reduced compared with the 1980s and early 1990s. “It is very hard to agree on what is ROI. It is very hard to calculate ROI, it is very difficult to come up with an algorithm for ROI,” says Mr Ellison of Oracle.

A more up-to-date view of failure is necessary – one that takes into account not only the lack of ROI, but also all the dis-benefits associated with this, such as distraction of management from core business, low organisational morale induced by the failure to deliver, disappointed customers and suppliers, and lost business opportunities. “There is the multiplier effect of failure – it is not just the IT expense, but also the resultant hand-offs and inefficiencies,” says Ms Garcia of TowerGroup.

Senior executives must start to recognise that an investment proposal based on technology-related success factors alone is not good enough. It is like judging the success of investing in a cruise liner based simply on the engine. CEOs must not be seduced by projects that simply offer lower cost and shorter timescales, they must consider the greater organisational impact of any investment.

This is especially important as information systems are highly dependent on existing infrastructure and co-operative systems, so that an information ecosystem is formed within any organisation, and failure in any part may have detrimental effects throughout.

Consider that an organisation is made up of the three elements of technology, and people linked by processes. Although technology is usually the first to be blamed for any failure, focusing purely on the implementation of the technology itself, without ensuring that it complements and enhances the processes, and without training users on its operation and the benefits, will result in ultimate failure, even though the investment viewed as a technology project may have met all its goals of cost and timescales.

To have only two elements, people and technology, or technology and processes, or people and processes, will deliver only partial success. In other words, technology, processes and people need to work together, with the same goals and objectives in order to provide benefit to the enterprise.

IT staff: the first to go

Organisations are very adept at kicking out the good with the bad when it comes to cuts in IT staff. The loss of key knowledge workers is a major reason why organisations are still struggling to capture the vast amount of information hidden inside them. “The cost-cutting and containment periods of the past three years have resulted in significant knowledge drain from organisations,” says Ms Garcia.

The drain is especially significant within the IT departments where much of the knowledge about how the systems work and what information exists within them is not formally recorded. “IT organisations are notoriously bad at recording the knowledge of systems that their employees might have,” says Meta Group’s Mr Cappelli.

Not only is the technical knowledge important, knowledge of the business rules and procedures are also necessary elements for successful investments. Mr Cappelli explains: “Project requirements are normally specified by business users and then left for the IT organisation to interpret. Thus delivery of the project is the result of the reasonable interpretation of the vague specifications delivered to IT by business in the first place. However, it is also frequently the case that IT departments will not spend time to solicit and understand specifications.”

To ensure acceptance of any project requires a holistic approach, understanding the key functions, business rules, supporting procedures and underlying principles. All these need to be pushed out into the wider organisation to get the greatest benefit and to ensure that all parts of a firm are expecting the same results.

The value of training is often underestimated, as is the importance of procedural training versus functional training. “It is not just about training people, any project imposes enormous cultural transformation,” says Juan Pi Llorens, vice-president, financial services sector EMEA at IBM.

Users won’t use the system effectively if they don’t understand the processes and the underlying business objectives. A key question that must be addressed is, why change? If those responsible for using the system understand the answer to this question then the battle is half won.

In all this the role of the CIO in guiding investments in technology is not always fully appreciated. Their responsibilities extend beyond simply planning technical investments to being the “translator” working between the technology department and the business side.

“IT is thought of as the plumbing, the mechanics in the organisation. It is not understood by the business side and they don’t want to know how it works,” says Mr Kopp of TowerGroup. Therefore, as Mr Gentle says: “It is for the CIO to be ‘bilingual’ in terms of his understanding of the business and the technology needed to support objectives.” To bridge this gap senior heads of IT need to rise from their lowly technology quarters to play a more active role in the business at board level.

The problem is well illustrated by a recent Deloitte survey of 300 CIOs across industry sectors. Only 25% of respondents (30% in financial services sector) agreed that their ability to measure and demonstrate IT value has a significant impact on their own success at work. And only 9% of respondents (a mere 6% in financial services) saw themselves as leading the development of business strategy.

Representing IT on the board

Neil Yeomans, enterprise risk services partner at Deloitte, says: “Measuring value must get higher priority. CIOs need to take a proactive approach. If value is not correctly determined, organisations get bogged down in measuring IT subjectively and treating infrastructure like a commodity. “

“CIOs must renew their focus on this if they are to succeed in communicating the strategic role of IT at board level and developing a balanced agenda,” comments Mr Yeomans.

Once senior business executives start to take ownership and accountability for IT investment as part of an overall business plan, then they might stand a better chance of improving the left-right balance within the organisation and consequently information will be more effectively used for the benefit of the business.

Ultimately, ensuring a closer link between IT value and business success demands closer attention to the process of measurement of benefits in relation to system investments. First step, send your CIO on a MBA course.

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