In 1996, U.S. financial institutions, including banks, securities firms and insurance companies, spent a staggering $45 billion on information technology. This amount continues to grow at about seven percent annually, and in 1998, IT spending in the financial services industry is set to exceed $50 billion for the first time. Since technology investments began to accelerate in the 1960s and 1970s, a total of over half a trillion dollars has been spent by U.S. financial institutions on developing, maintaining and enhancing their computer systems.
focus on efficiency
Historically, only a small portion of these massive investments has been geared toward projects that advance the bank's or financial institution's strategic goals. The vast majority of spending centered on the automation of manually intensive tasks, such as check or claims processing. These investments had a positive impact on the financial services industry, greatly raising the efficiency of banks and insurers. These firms can now handle greater transaction volumes with fewer employees. These technologies have created more automated and efficient financial institutions, but have not allowed these firms to distinguish themselves from their competitors. In areas that IT has shown itself to be effective in automating manual tasks and reducing operating expenses, these approaches have been quickly emulated by most players in the industry. Few institutions have been able to use IT in this way to distinguish themselves from competition in the marketplace. In other words, using IT for automating routine tasks does not give the financial institution a competitive advantage, but failing to do so confers a clear, competitive disadvantage.
Historically, these "routine" investments have accounted for 90 percent or more of overall IT spending. In recent years, however, spending on strategic technologies, on systems that allow the financial institution to gain competitive advantages and distinguish itself from others, has started to account for a more significant portion of IT budgets. While in the past strategic IT spending only accounted for about five or or 10 percent of the typical budget, in 1997 strategic projects accounted for about 17 percent of total IT spending. A total of $5.1 billion was spent on strategic IT projects in 1996. In 1997, the number is expected to grow to $7.6 billion, which is still dwarfed by routine IT spending of over $40 billion in 1997. While most IT spending still focuses on staffing and routine expenses, such as maintenance, hardware replacement, upgrades of operating systems and other software licenses and minor enhancements to legacy systems, the portion allocated to strategic IT spending is growing much more rapidly. Routine IT expenditures are set to grow a modest 4.7 percent annually for the rest of the century, but strategic IT spending is growing at a more robust rate of 17.7 percent. By 2000, strategic projects will account for more than 20 percent of total IT spending.
This shift in focus for IT shows clearly how technology is no longer simply being used to cut costs. Rather, institutions are using technology to increase market share, acquire new customers, more effectively build on existing customer relationships and reach clients outside of the firm's geographic limits. While cost cutting and routine spending will remain an important component of overall spending for the foreseeable future, firms must learn to use technology in new ways. By 2000, more than $12 billion will be spent on strategic IT projects annually. This number will show strong growth well into the next century.
IT revenue tools
The transformation from spending on technologies chiefly focused on cost reduction to technologies whose primary focus is generating revenue will require careful management on the part of financial institutions. The need to coordinate business objectives with IT planning will become more crucial than ever. The sometimes precarious and difficult communication between business units and technology departments will have to work seamlessly. Those firms that will be able to make the most effective use of the $5 billion that is being invested in strategic IT projects this year will be the ones who have learned to use technology as a competitive business too and combine technology with their business strategies. This will require firms to carefully select technologies that are likely to have the greatest impact, to integrate technology into the firm's overall business strategy and to execute IT projects skillfully. This will be no small challenge. These IT projects are the ones most likely to fail and are most at risk; they frequently rely on technologies with limited track records and with which the firm's IT staff has the least experience.
Each of the largest U.S. financial institutions is spending hundreds of millions of dollars on strategic IT initiatives. As we shall see in the following sections, simply increasing the raw spending level on strategic, or even routine IT, will not necessarily translate into greater profitability. The firms that will make these considerable investments in IT pay off are the ones who invest in the emerging technologies that will have the greatest impact. MS