As the year-2000 problem grabs many of the technology headlines, a quieter and more dangerous crisis is looming: Most technology investments are not paying off.
The banking industry spent about $20 billion on technology in 1998, yet statistics for corporate America indicate that 80% of technology projects will come in late and over budget and 70% of new software will fail in some way upon deployment.
As the economist Robert Solow put it, "We see computers everywhere but in the productivity statistics."
The major problem in evaluating technology investments is that executives lack the information needed to answer crucial questions. These answers require good, objective information about a bank's spending, technology development, staffing, and productivity.
Michael Patterson, chief executive officer of Triangle Bank in Raleigh, N.C., is typical of the CEO struggling to get a grip on how technology pays off. "It's like a bowl of Jell-O," he said. "You can't get your hands around it, and when you do grab onto it, it squeezes out all over."
A great analogy. One technology investment may only increase the need for additional costly purchases.
David Payne, CEO of Westamerica Bancorp. in San Rafael, Calif., categorizes technology investments as strategic. "We do an economic analysis that is associated with our investments," he said, but "sometimes technology investments must be based on other than economic criteria. Sometimes technology is needed to deliver a product that our research uncovers as an unmet customer need." In those instances, an investment case frequently falls short.
"Some investments are made to be defensive," Mr. Patterson said, referring to Triangle's foray into Internet banking, "We know we won't get a payback for a couple of years, but we have to offer it."
Jack Meckler, product and channel manager at Centura Bank in Rocky Mount, N.C., said that before the bank makes any significant investment in technology it puts together a business case that calculates the value added and projects returns.
After the fact, he said, "we go back and look at what we decided up- front to measure. If we set goals of attracting new customers, reducing head count, and speeding up processing, we measure backward.
"Although it's easier to measure these types of concrete payoff milestones, we don't always look to hard dollars. Part of good management judgment is valuing the soft-cost impact."
Robert Horsman, president of San Diego National Bank, said that to make an investment in technology, "you have to do your homework. We evaluate costs and see what difference it makes to the bottom line.
"Bankers historically have had difficulty putting a value on each product and service we offer, and it can be especially hard to put your finger on a technology evaluation since there is little peer data available."
Mr. Payne of Westamerica agreed that statistically valid data are "hard to find for the midsize bank."
Mr. Patterson commented that he has not seen "any data that break out technology spending from other noninterest expenses." However, like many CEOs, he said he feels that "the immediate payoff could be an improvement in customer service, with improvement in efficiency coming along some time later."
In an industry where technology spending is the fastest-growing noninterest expense, this imprecision of measurement is no longer acceptable. Executives and boards of directors should be able to ask and get answers to the following questions:
How much is the bank spending on technology, and how does this compare with peers' spending?
How do you compare with competitors in the deployment of technologies and delivery channels?
How does the bank assess the current level of user satisfaction with systems and the technology skill levels in the organization?
Who has formal accountability for realizing a tangible payoff from technology investments?
How do you measure whether you are realizing that payoff?
How do you evaluate the quality and performance of internal information technology staff and external technology providers?
Is there a current list of every technology project under way or proposed? How do you know if they are on track?
A disciplined process would offer a unique tool for measuring the impact of costly decisions and how technology strategy is linked to productivity, service delivery, and shareholder value.
To enhance the discipline, banks will need to share more data among peers regarding both technology spending and performance benchmarks, with which they can develop scorecards to track technology payoff in each area of the bank.
For instance, a loan servicing group may set a goal of improving productivity from a weak 600 loans serviced per employee to a benchmark of 1,000-plus. The scorecard would track each department's progress on a monthly basis and hold managers accountable for real results. Each year, the bank should also compare its processes and technology to best practices from within and outside the banking industry.
Without such a formal discipline, executives will find it very difficult to close the gap between the promise and reality of technology. The Jell-O will keep on spilling over without real management focus.
***
M One Inc., in collaboration with American Banker, is conducting its second annual performance-benchmarking survey of banks with assets of $1 billion to $30 billion. The study focuses on technology investment, deployment, and performance-improvement analysis, and results will be reported in the newspaper this year. Ms. Seymann is president and chief executive officer of M One Inc., a Phoenix consulting firm.
