Financial services is the most technology-intensive industry in the United States today. The industry, including banks, brokerages and insurance firms, will spend nearly $50 billion on information technology (IT) in 1997 alone. Yet despite this level of investment, there is little understanding of how money is spent and even less agreement about the impact of this spending on the industry's profitability. It is universally agreed that without IT this industry would not survive. However, it is unclear how IT investments affect the ability of an institution to survive and prosper in an increasingly competitive marketplace. It is essential that financial services understand how IT affects both the industry as a whole and individual institutions in order to maximize the return on investments. Types of it investment
Our research has concluded that it is not the amount of IT spending that influences the success of the institution, but rather it is the type of spending. This further underlines the need to understand what types of IT investments are high impact, and which are simply undermining profitability by increasing capital expenditures. If institutions do not take steps to allocate IT investments to high impact, strategically advantageous efforts, they are likely to end up with nothing to show for their investments.
Looking more closely at IT investments within the industry, there are two distinct types of IT spending and investment: tactical and strategic. As with any industry, a vast majority of IT spending within financial services is done to support the routine processing of industry products and services. This spending can be considered tactical since it is required to do business on a daily basis. There are often benefits associated with this automation, such as reduced costs, that confer added advantages on the investor. However, tactical IT spending is required as a cost of doing business.
The second kind of IT investment is strategic in nature. It supports the strategic business initiatives of the institution. These are the investments that increase competitiveness, and help the institution to expand into new products and services or new markets. Since the strategic business initiatives will vary from institution to institution, strategic IT investments will also vary. What is strategic to one firm may not be strategic to another.
As a new product goes through the many stages from creation to sales and distribution and customer support, the level of investment varies, as does its impact. In the product design phase, very little money is spent on IT. Most of the creative work is done on white boards or legal pads, then translated to word processors and spreadsheets. Marketing and sales are also relatively low cost. As a percentage of overall IT spending, only a moderate amount is spent on distribution or customer service. Product processing is easily the largest area of ITspending. With mainframe computers still the dominant platform and large-scale data entry required in many product areas, this is the most IT intensive part of the development life cycle.
The strategic impact of the IT spending varies as well. Marketing and sales, distribution and customer service are the areas in which the impact of strategic spending on IT is highest. In these areas, ITinvestments have the highest potential to affect the actual business results. Conversely, the area with the highest level of current spending, processing, is one of the lowest areas of strategic impact. In addition, according to our research, while growth in investment in the distribution area has been relatively high, the two other areas-marketing and sales and customer service-are expected to be moderate. Therefore, the industry as a whole is underinvesting in at least two high impact strategic areas, marketing and sales and customer service.
defining strategic it spending
The American Banker/Meridien Research Report on Strategic IT Investments focuses on this second type of IT investment. The purpose of the research was to determine what strategic IT investments are being made to support the survival of financial institutions. In addition to defining strategic IT in general, the report describes the variations in investments that occur in the different industry subsegments and how they differ from institution to institution. How does senior industry management decide which strategic IT investments to pursue? The research also covered what is considered strategic from an information technology perspective, and what is the expected return on these investments.
To complete this report, a study of industry IT expenditures was conducted to determine the ratio of strategic spending to tactical spending. Meridien Research used its extensive database of global industry research, and also conducted interviews with chief information officers or their strategic planners at leading U.S. banks, insurers and broker- dealers. The CIOs were asked the following:
n Do you distinguish between strategic and non-strategic IT investments? How do you define strategic IT investments within your institution?
n What projects do you currently have underway that you consider strategic?
n How much does your institution spend annually on IT overall? How much of this total is dedicated to strategic IT investments?
n How is this spending changing from year to year?
n What areas of IT expenditure do you expect to be strategic over the next three to five years?
The answers to these questions are analyzed and summarized. In addition, Meridien draws on some of its most recent industry research to determine how the trends and issues illustrated in these interviews relate to IT spending in the industry segments in general, in the USA, and around the world.
In addition, the technology report describes the variety of strategic IT investments that are underway in the industry. IT projects in banking, securities and insurance firms are analyzed to determine patterns of IT investment, as well as the trends and issues that exist within this portion of the industry's IT budgets. It tests the theory that there is a correlation between strategic IT spending and profitability and explains the factors that influence this relationship.
Also included in the report are case studies and examples of IT projects in progress or recently completed at financial institutions. These help to illustrate the trends and issues discussed. MS
