Smarter thinking

According to a recent McKinsey report, the way financial institutions use and manage IT will continue to be a crucial factor in their performance. The study found that a small number of banks get more business value from information technology – including faster, more flexible support of business objectives – than do their peers, and at a far lower cost. How? By combining superior IT management with a tight focus on using IT to help improve business performance.

The survey found that IT spending varied widely, but that higher levels of IT spending didn’t necessarily increase the effectiveness or efficiency of the business. Indeed, the banks that appear to get the most business value from IT spend up to 40 percent less than the weakest performers. These top performers (dubbed ‘effective business enablers’) achieve the greatest business efficiency and effectiveness from a relatively low level of IT spending (eight percent of operating income, compared with an average of 12 percent for all other respondents).

The importance of IT management
The survey found that the effective business enablers have a distinctive way of managing IT operations. Most striking was the way these banks handled applications, infrastructure, outsourcing and vendor management.

Typically, the effective business enabler has a more centralized and consolidated application portfolio than the typical high IT spender, and spends less per application. Moreover, the applications associated with complicated business transactions are less fragmented at the top-performing banks than at others. “Take a typical mortgage transaction that consists of various stages, from submitting the application and pre-qualifying the borrower to underwriting and financing the loan,” says the report. “To complete such processes, banks lower down on the performance scale use numerous applications that draw on data from many different systems. Since these applications often require manual data transfers from system to system, they generate more errors and slow down processing. The best banks, by contrast, use fewer, more integrated applications.”

Effective business enablers also manage their IT infrastructure tightly. They have half as many data centers (one or two, on average) as the high IT spenders do, and spend less on each one. Top banks also keep a close grip on procurement contracts for hardware and services. As for desktops and helpdesks, effective business enablers have standardized these assets to reduce their cost and increase their scalability and to make it possible to manage them remotely.

Another way in which the report finds this group of banks differs from the rest is in its approach to outsourcing IT and managing vendors. Only 30 percent outsource at all, compared with 45 percent of the high IT spenders. Moreover, effective business enablers do so sparingly – outsourcing represents only seven percent of their IT spending, compared with 25 percent for high spenders. “In our experience, the reason for the difference is that the top banks have stronger in-house IT skills and can thus outsource more selectively than the others, carefully choosing those areas where third-party providers would add value rather than outsourcing to ‘fix’ IT management problems,” say the authors.

Finally, top banks negotiate flexible vendor contracts and monitor them continually to allow for timely renegotiation when opportunities arise. Other banks tend to be constrained by inflexible contract terms and conditions, which make renegotiation more difficult and less rewarding.

Greater business support
In addition, effective business enablers excel in the way they use IT to support the business. They make applications flexible, centralize important customer data and use IT to support core banking processes and business productivity.

McKinsey claims that because these banks use applications that are more standardized and fairly easily modified, they are better able to respond to changing business needs. By contrast, high IT spenders report that 40-60 percent of their applications have customized features that are difficult to change or enhance, as compared with less than 40 percent of those at the top banks. “The top performers tend to keep customer profiles in a centralized, integrated data file. As a result, back-office processes are more efficient and contact information about existing customers need not be reentered each time one of them applies for a new loan or opens an account.”

Another key difference is that the effective business enablers spend more of their application budgets on primary processes such as executing payments, processing mortgages or handling securities – applications that deliver direct value to the business. They spend only 13 percent on support processes such as HR, risk and finance. By contrast, the high IT spenders dedicate an average of 21 percent of their spending on applications to such support processes rather than to customer-facing or core-banking processes.

The report also finds that effective business enablers enhance their business productivity by spending more on workflow-management systems that automate a wider range of processes and ensure that the most appropriate people perform the right process steps in a timely fashion. “In addition, these companies provide customers with easier access by making all services available through all channels: branch offices, ATMs, the web and the telephone,” says the report. “Other banks offer only limited services on certain channels – for instance, by narrowing the customers’ telephone banking options to checking account balances.”

Strategies for improving performance
Taking the top performers’ practices as a starting point, any bank can improve its efficiency and effectiveness. Each, however, faces specific challenges. High IT spenders need to invest more selectively and to align their spending more closely with business aims. These banks lag well behind the effective business enablers on overall operating efficiency. Business as usual is not an option: the high IT spenders must fundamentally rethink how they manage and integrate IT into the business.

The top performers can make advances too. They have an opportunity to extend their advantage by further automating their already lean back-office processes. And when integrating a merger or acquisition, they can use their own tried and tested applications, data centers and capabilities as a starting point for the new IT organization.