Surveys indicate that banks pay billions of dollars each year to maintain and improve their technology.
Estimates vary from $14 billion to $26 billion, depending on whether costs such as salaries and benefits are included. For some banks, technology expense may represent 25% of total non-interest costs and exceed 5% of total revenues.
Most of this sum appears to be spent in service of day-to-day operations. In the classic backroom information processing shop of a full-service bank, powerful mainframe computers process literally millions of transactions every day.
These operations generally run smoothly and, on a per-unit basis, cheaply. It is impossible to imagine contemporary banking without them.
As we move up the organization chart, the scene changes. Highly paid managers and analysts struggle to crank data into spreadsheet programs on personal computers. Critical information may be incomplete or unavailable. Financial managers can spend endless hours estimating missing elements and even more time justifying their estimates.
At every level of management, reviews produce changes that must be manually reentered and reevaluated.
Executives may budget millions of dollars on the basis of multiyear forecasts, yet they are often unable to tell what products or customer relationships are actually profitable. They are also frequently "flying blind" with respect to major sources of financial risk.
Little Spent on Analysis
With information technology that can effectively process every penny in a $100 billion institution, banks still lack the timely and accurate information necessary to guide their most critical management processes.
As a result, some banks fail. Many others are gobbled up by rival institutions at bargain-basement prices. What's wrong with this picture?
The problem may be that while banks spend a great deal of money on automating and maintaining their processing operations, they invest relatively little in analytical and managerial systems that can inform such essential management processes as planning, performance measurement, risk measurement, and decision-making.
Little Data for the Dollar
Nearly half the money banks spend on information technology goes for personnel, overhead, and associated services. Hardware accounts for another quarter. Software accounts for only about 16% of this multi-billion-dollar investment.
Within software, nearly all of the money goes to maintain and improve transaction processing operating systems and programs.
The smaller remainder includes, among other things, the money spent for the financial management and analysis systems that can help senior management with critical strategic decisions.
It represents only a tiny fraction of the total spent on information systems. It would appear that bank executives are getting relatively little information for their technology dollar.
Technology Not the Danger
This fact should startle us more than it does. Neither of us can think of one bank that has gotten into really serious trouble because its transaction processing costs were too high or its accounting systems too inaccurate.
Banks get into trouble because they make bad decisions at high levels. They lend too much money in one vulnerable industry (real estate, for example, or defense); they don't introduce the right products, or they misprice them, or they market them ineffectively.
They can't generate enough revenues to match rising costs, including the costs of new transaction processing systems needed to match competition.
They don't position themselves properly to adapt to sudden shifts in interest rates. They cut costs too aggressively in service-intensive products and lose highly profitable relationships without knowing it.
A favorable environment can temporarily reduce the penalties for bad decisions, but the increasing competitive pressures of the American financial industry will not let poorly informed decisions go unpunished for long.
The wave of acquisition and consolidation shows little sign of abating. By the end of the decade, only 8,000 of our current 12,000 banks will survey as independent entities. And competition with other, nonbank institutions will become ferocious.
Processing transactions swiftly and accurately is important. And improvements in processing operations can make real contributions to a bank's profitability and competitiveness. New processing technologies like check imaging and optical storage represent important advances in the way banks can do business.
However, the imbalance in technology focus is painfully evident in the fact that several banks have spent more effort scrutinizing a decision of less than $500,000 to install a new management system to measure profit and risk than they spent evaluating a more than $30 million commitment to image processing.
But the real improvements that information technology can make in a bank's balance sheet lie somewhere else. They lie in "smart" systems that can guide bank managers in essential functions such as profit performance measurement, asset/liability management, marketing, planning, and credit risk management.
Missing the Point
These systems can make effective use of the vast quantities of data already captured and paid for in a bank's information technology systems.
As more banks have begun to invest in systems to provide management information and decision support, an unfortunate number seem to be addressing the problem with the same approaches and techniques that are used for operational systems.
Missing the point that management systems are dramatically different from operational systems usually leads to much higher cost of development, longer lead times, and unacceptable risk of failure.
The real irony is that the most successful examples of financial management systems we're describing are very inexpensive compared with major transaction processing systems. They can be installed on existing hardware and operate with existing data bases.
They offer tremendous benefits for very small, risk-free investments. The vital information you need is probably sitting in your information system.
A small but rapidly growing number of leading-edge financial institutions is proving that effective investment in management systems leads directly to dramatic improvements in earnings and stock price.
As these institutions become stronger through the power of information, banks that focus most of their technology investment on streamlining operational systems will increasingly wake up to find that they have been merely arranging deck chairs on the Titanic.
Mr. Dorman is president of Treasury Services Corp., Santa Monica, Calif. Ms. Gentry-Buswell is practice manager for Systematics Financial Services Inc., Little Rock, Ark.