The results of our research into strategic technology investments indicate that there are major trends beginning to take shape in this area of IT spending. The spending patterns, drivers and impediments that relate to strategic IT can be described by way of a few overriding trends in the industry. In interview after interview, the same kinds of issues arose regardless of the size of the institution, where it was located or what industry subsegment it belonged to. This clearly indicates that not only has strategic IT spending become an important topic of consideration, but also that it is a point of similarity among all financial institutions.
Areas of Strategic Spending
Strategic IT investments take on many shapes and sizes. They are often based on newer technologies and are typically high risk, high impact projects. In nearly every case, these projects support efforts to increase or expand revenues or to reduce or more efficiently manage costs. The chart on this page illustrates how the current areas of strategic IT investments fall in terms of these two dimensions.
Despite the variety of individual projects underway throughout the industry, there are a remarkable number of similarities that exist. In fact, a great majority of the strategic IT investments can be grouped into four major categories.
n Self-service delivery platforms
n Internet/intranets for internal use
n Customer management
n Risk management
These areas of investment can be mapped out to show how they rank as cost-saving or revenue expansion efforts. If we do this, it becomes clear that a majority of these efforts are now moving toward revenue expansion, whereas in the past, cost savings were a higher priority. Customer management systems tend to provide a very high potential for expanded revenues due to the ability to cross-sell. These systems do not, however, typically provide for greater cost savings. On the other extreme, Internet/intranet usage for internal purposes can save an institution a great deal of money due to reduced manpower needs, reduced paper and streamlined processing, but is not likely to lead to greater revenues. Risk management projects, due to their ability to provide more efficient use of capital, can provide for both lower costs and greater revenue. Self-service delivery platforms also have the potential to moderately increase revenues and cost savings. Clearly each of these types of project can have a range of effects on the institution (see chart).
Each of these four major areas of strategic spending can be broken down into several different types of project and can be interpreted differently depending on the institution. What might represent, for example, a strategic delivery platform for one firm may not be the same for another. For some institutions, computer telephony is a critical investment that is now in progress. For others, the telephone is a thing of the past and Internet or intranet distribution is the critical path. This strategic platform may even vary within the same firm depending on the product or customer group that it services. Telephones may be a strategic delivery platform for a specific group of highly profitable retail customers, while young professionals may be better served, and more profitable, using the Internet or automated teller machines.
Not every institution will embark on a strategic project like those discussed above, while some, like the example below, will begin several concurrently. The number of large financial institutions beginning strategic IT investments is increasing year after year, and we expect that it will continue to do so at an increasing rate during the next three to five years.
One major U.S. insurance company is currently constructing a health care extranet that will allow customers to perform several functions through a single interface. In the past, performing all of these tasks would have required several phone calls and paper forms to accomplish. This system will enable corporate customers to follow progress on claims, communicate with the provider's offices in all locations, request services, and look up health care providers.
This project is currently in pilot with one corporate employee benefits administration customer and will be rolled out with other customers starting next year. Despite the effort on this Extranet project, this institution is still investing heavily in computer telephony integration and revamping its call centers to create a company standard.
primary investment drivers
In addition to similarities in the actual projects underway, there are common motivating factors which spur strategic IT investments. Some of these drivers are external to the institutions and affect the entire industry. Some are related to a specific aspect of the industry subsegment. And some are specific to the circumstances within individual institutions. There are three main drivers for strategic IT investments:
n Inadequate infrastructure
n Cost reduction through automation and consolidation
n Faster response to business needs, keeping pace with change.
In nearly every conversation with an industry CIO, the issue of infrastructure was raised. Some even went as far as to deem infrastructure the only true driver of strategic IT investments. If an institution has not thought through its internal infrastructure issues and consistently invested in maintenance and advances in technology to support its infrastructure, it will not be able to take advantage of any of the four major initiatives listed above. Some common infrastructure issues (center around) local and wide area network integration, middleware and desktop hardware platforms.
Each of the three drivers has the potential to lead to strategic IT investment. Sometimes they combine to work together. In some cases, they work against each other, making it difficult to begin or complete projects due to conflicting organizational goals. Nonetheless, in nearly every institution these factors are at work determining where IT dollars will be spent.
In addition to the motivation provided by industry, segment and individual drivers, there are at least three major impediments to strategic IT investments. The impact of these factors is clearly not limited to strategic IT investments, but these projects are often the most vulnerable. These include industry consolidation, integration of acquisitions, and Year 2000 projects draining valuable IT resources.
These impediments will affect different financial institutions in different ways. Larger institutions are likely to be both more affected and, at the same time, more able to get beyond these issues than medium- sized institutions. Smaller financial institutions are not likely to be affected by integration issues due to acquisitions or Year 2000 projects. Therefore, the financial institutions which are most affected by these impediments are the medium-sized institutions which are big enough to be investing in strategic IT projects but not big enough to have the resources to absorb these external issues in addition to moving ahead on internal projects. MS