Banks are constantly looking for ways to dramatically reduce their IT costs. According to the November 2007 Gartner report IT Mass and Complexity Drive Banks' IT Expense, some banks have already launched programs targeted at cost reductions in the range of 50 percent.
The timing couldn't be better.
U.S. financial institutions have been battling IT complexity and burgeoning costs for years. Saddled with monolithic systems and a horde of applications, banks have been forced to spend their investment dollars on technology that did little to help differentiate their offerings or improve customer experience. In fact, a majority of most IT budgets has been spent keeping the IT environment from failing, rather than advancing competitive advantage.
Efforts to reduce IT complexity with projects like platform consolidation and the implementation of newer technology like SOA and Web services have helped. However, with the rapid-fire pace of mergers and acquisitions, many institutions have struggled to simply maintain the status quo. Meanwhile, the internal demand for new functionality-to reduce time-to-market, enhance customer experience, power sophisticated analytics and address other high priority issues like fraud and security-has intensified.
In many cases, internal groups have implemented wrap applications to shore up legacy systems and enable functionality that hard-coded technology can't deliver. Still, wrap applications bring with them another set of risks, including the inability to communicate across silos, uneven compliance capabilities, increased cost of ownership and additional complexity.
Managing these challenges while significantly reducing IT costs will require an aggressive multi-approach strategy as well as high profile support from the chief executive officer. One approach that will likely be a part of any IT cost reduction program is to extract added value from core processors. More than just other software vendors, core processor partners often have unmatched domain and delivery expertise gained by touching all aspects of the backbone of a financial institution's business. Yet many institutions still leave this relationship untapped to its fullest potential. By leveraging the strategic and operational intelligence about the IT environment that core processors offer, banks can reduce IT complexity, offload risk, limit the number of vendor relationships and bring down the total cost of ownership.
IT and business process outsourcing along with software-as-a-service are two strategies where core processors can provide invaluable expertise. IT infrastructure outsourcing is taking on increasing importance, especially as banks act on the knowledge that core systems are not sources of competitive differentiation. According to Datamonitor's Outsourcing and IT Services in Financial Services-Infrastructure Outsourcing (Review Report), IT infrastructure outsourcing continues to enjoy healthy growth in the U.S. and around the world. Hosting and managed services outsourcing in North America is projected to grow 8.4 percent between 2006 and the end of 2008.
IT infrastructure outsourcing not only reduces the bank's operating expenses and protects them from cost spikes, but depending on how the outsource relationship is structured, it can also help institutions reduce their risk through service level agreements. This allows executives to focus their attention and resources on critical areas like customer experience and new product strategy to stay competitive and grow their businesses.
Institutions can often partner with their core processor to deploy IT infrastructure outsourcing as part of their overall IT plan. Core processor experts bring deep insight into the inner workings of the bank's IT environment, as well as an unmatched understanding of the banking business and the strategic implications of IT decisions.
For high volume processes like item capture, mortgage servicing and card processing, SaaS is emerging as another promising alternative to introducing more complexity and IT mass into the technology environment. SaaS eliminates the need to purchase and maintain high-dollar infrastructure components-one of the largest items in any institution's IT budget-and expensive technical talent while still achieving the benefits of industry-leading applications.
Given today's market challenges and the intensified focus on operating efficiency and cost reduction, financial institutions are re-thinking their approach to IT and considering their core processor relationship to be one that offers tremendous opportunity. They are looking at the IT environment holistically and finding that dramatic cost reductions are possible without sacrificing functionality or performance. Perhaps most importantly, the risk of the changes that are necessary to take advantage of these benefits can be minimized and effectively managed by proven partners with strong domain expertise and an end-to-end understanding of the business.
The financial institution of the future will invest the majority of its resources on differentiation and innovation-through market-leading customer experience and new product development. It will be focused on accessing the customer intelligence that is embedded within the organization and leveraging it to increase wallet share and minimize customer defection.
While IT spending will always be a part of the equation, it will not be the colossal drain on intellectual and investment capital that it is today. In fact, in order to remain competitive and keep pace with the rapidly changing industry, financial institutions must evolve to embrace a new IT equation-one that will cost far less and deliver far better performance than has ever been available.
Anthony Jabbour is evp for Fidelity National Information Services. (c) 2008 Bank Technology News and SourceMedia, Inc. All Rights Reserved. http://www.americanbanker.com/btn.html/ http://www.sourcemedia.com/