Pressure from Investors Puts a Crimp in Spending Plans
Banks are walking a tightrope as they search for technology savings: They are trying to keep service quality high while restraining costs enough to satisfy Wall Street.
The cost restraint is illustrated by results from the American Banker Fifth Annual Technology Survey, which was conducted with the accounting and consulting firm of Ernst & Young.
The study found that banks plan to raise technology spending only 2.25% next year and in 1993.
That rise, basically a cost-of-living increase for technology budgets, is far below the double-digit jumps that were common in the early to mid-1980s.
According to the survey, the banking industry spent about $11.3 billion on information technology in 1990. Those expenses are projected to rise to $11.6 billion in 1991 and $12.1 billion by 1993.
But this modest growth may not be enough to regain the confidence of Wall Street, according to some consultants.
"The risk for all institutions is that even slow growth in spending will be unacceptable for the analyst community," said Robert B. Hedges Jr., vice president of MAC Group, a Boston-based consulting firm.
"If they don't constrain it enough, they may be forced to take a meat cleaver to customer service areas."
The survey polled technology managers at 150 of the nation's largest banks as measured by noninterest expenditures. Fifty-seven responded.
Where the Cuts Will Come
Their answers showed that banks plan to reduce spending in several areas.
The biggest savings are expected from consolidating data centers and eliminating some of the software they support.
Banks are also focusing on fewer new projects and spending big dollars on such technologies as image processing, which promises the biggest cost reductions.
But just cutting costs is not enough to increase competitiveness, the technology managers said; banks should invest savings to improve back-office efficiency and customer service.
Nearly three quarters of the respondents said that to save money they would reduce technology staff, hire fewer consultants, reduce the number of applications systems used, and cut maintenance costs, possibly by shifting to another vendor.
Also, several said they would fund fewer data processing projects this year than in the past.
The industry as a whole plans to eliminate about 7,000 information technology jobs by 1993, according the survey.
However, since the research was completed in June, before the recent spate of bank megamergers, back office jobs cuts are likely to be deeper, observers say.
Cutting Isn't Easy
Despite these cuts, most banks that responded to the survey find it difficult to reduce overall technology costs. Only a quarter said they would reduce spending, and 27% said their automation budgets would stay the same.
Almost half said they would have to increase spending, but only a few plan jumps of 10% to 20% a year. Of the rest, most plan increases of just 1% to 4% a year, and nearly as many are shooting only slightly higher, at 5% to 7% increases.
Huntington Service Co., the data processing arm of Huntington Bancshares in Columbus, Ohio, plans its lowest budget increase in five years. "We're up 6% from last year, but five years ago we were up 30% from the year before," said Rick Sellers, the unit's new president.
Some banks are plowing savings back into projects to improve efficiency. But bankers are more conservative about how they will invest, choosing the projects they deem most essential.
CoreStates Financial Corp., which expects to keep spending growth under 5%, plans to plow the savings back into projects to streamline back-office procedures and put paper files onto optical disks for easier access and cheaper storage.
"We've generally looked at expense reduction as a way of funding new growth," said George F. Hall, executive vice president of CoreStates.
Huntington also has cut half of the major systems-development projects for the coming year. But the remaining projects are ambitious ones, including a check imaging project and an alliance with American Telephone and Telegraph Co. Huntington plans to offer a "smart phone," developed by AT&T, that allows customers to review their accounts, pay bills, and transfer money between accounts from home.
Other banks have dropped out of costly technology projects. Charlotte, N.C.-based NCNB Corp., for example, left a highly publicized joint project with International Business Machines on check imaging because delays were raising costs.
Fine-Tuning the Staff
Bankers also said they will reallocate back-office resources. They will put fewer people into data center operations -- 33% in 1993, as opposed to 36% this year -- and more staff members into user support areas -- 9% as opposed 7%.
The proportion of staff in other areas, including data administration, systems software, and applications development, will remain constant or rise slightly.
Huntington is holding its staff levels flat. Also, it is trying to keep a lid on salary expenses by replacing senior applications programmers with entry-level programmers when possible; Mr. Sellers said this is less risky than it might seem, because the bank maintains a ratio of one senior-level programmer for every three entry-level programmers.
Saving on Maintenance
About 73% of the survey respondents said they would cut back on spending for hardware and software maintenance.
Some will wring savings from moving to a single hardware architecture, which reduces the number of operating systems and hardware types that need to be supported.
And traditional users of IBM's maintenance services are now shopping around for bargains from competitors such as Bell Atlantic Corp., Philadelphia, which offers prices 30% to 35% lower. (The bankers can then go back to IBM to bargain its price down.)
Some bankers said cost cutting does not provide the long-term payback of well-managed investments in areas such as branch automation or image processing. But analysts and stockholders say expense reduction has a unique benefit: credibility with investors. [Graph Omitted]